Tillys Inc (TLYS) 2024 Q1 法說會逐字稿

Good day and welcome to the Tilly's Inc. first-quarter 2024 earnings call. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Gar Jackson, IR Please go ahead.

Good afternoon, and welcome to the Tilly's fiscal 2024 first quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results. Then he and Hezy Shaked, Executive Chairman, and Interim President, and Chief Executive Officer, will 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 will 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, June 6, 2024, and actual results may differ materially from current expectations 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 see the disclaimer regarding forward-looking statements that is included in our F2024 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.

This call may also contain certain references to certain non-GAAP measures. Reconciliations of those measures to their most directly comparable corresponding GAAP measure can be found in our earnings press release on our website.

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

Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our first quarter net sales and pretax operating results were both within our estimated outlook ranges provided during our March earnings call.

After a tough start to the first quarter, our comp sales results remain negative each month, but improved on a relative basis in both March and April, with March being the stronger of the two benefiting from the earlier Easter this year.

Like certain others in our competitive space, we continue to face headwinds from macro consumer environment, yet we were able to generate 130 basis points of product margin improvement relative to last year's first quarter despite our decline in net sales.

As we discussed during our last earnings call, we have been challenging every aspect of our business as we work toward improving our operating results. For example, we continue to evaluate initial pricing decisions to better align ourselves with our competition in certain product categories. We have reconsidered certain of our promotional pricing and markdown practices to drive improved average unit retail values.

We believe that we are beginning to see the impact of these efforts based on the improvement in our first quarter product margins compared to last year's first quarter. However, while we believe our efforts have the right focus to lead us toward making more meaningful improvements over the longer term, in light of the current environment, we caution that there can be no guarantee that we can continue to produce this kind of improvement in the short term.

From a marketing perspective, we have been testing new ideas to focus on creating greater connectivity with our existing customer base and to attract new customers. We believe these new efforts give us a chance to build greater customer following and generate a positive business impact over time.

We believe that it may take six to nine months before we are able to truly see and understand how these new efforts are impacting our business, but we believe they are the right efforts to help us improve over the longer term.

Despite short-term challenges, we continue to invest in our business for the longer term. We implemented a new merchandise planning and allocation tool in early April, followed by the implementation of our new warehouse management software for our stores' distribution center in early May.

We experienced some complications in the immediate aftermath of these implementations that slowed product replenishment to stores during May, but we believe we are now starting to get back towards the normal level of distribution productivity for our stores, we plan to complete the implementation of the same warehouse management software in our e-com distribution center this month.

Additionally, we plan to implement new markdown optimization software and improved search engine optimization capabilities ahead of the holiday season. We believe these new tools are important to help generate greater operational efficiencies and improve our business over time.

Over the short term, we continue to believe it will be challenging for us to improve our sales results amid the reported weakening consumer environment. It will likely take time for this cycle to pass before we see a bounce-back in consumer activity among our core customer demographic.

In the meantime, we continue to make every effort to seek improvements in our business and make changes that we believe can lead to better results. Our focus remains steadfast on improving our business for the long term.

Now turning to our operating results for the first quarter of F2024 compared to last year's first quarter, results were as follows. Total net sales were $115.9 million, a decrease of 6.3%. Total comparable net sales, including e-commerce, decreased by 9.4%, with an 8.6% decrease from physical stores, and a 10.8% decrease from e-commerce relative to the comparable 13-week period last year.

Net sales from physical stores represented 80.1% of total net sales compared to 79.1% last year, while e-commerce net sales represented 19.9% of total net sales compared to 20.9% last year. We ended the first quarter with 246 total stores, a net decrease of two stores compared to last year. Gross margin, including buying distribution and occupancy expenses, was flat to last year at 21% of net sales.

Product margins improved by 130 basis points compared to last year, primarily due to the combination of a lower total markdown rate and improved initial markups. This improvement was offset by deleverage of buying distribution and occupancy costs despite these costs being $800,000 below last year in the aggregate due to carrying these costs against lower total net sales.

Total SG&A expenses were $45.1 million, an increase of $1.9 million, primarily due to increased non-cash store asset impairment charges of $1.5 million, and increased store payroll and related benefits costs of $1 million.

Our average hourly rate for store payroll rose 5% over last year and was 31% higher than in pre-pandemic 2019. A variety of smaller expense reductions partially offset these two primary expense increases. SG&A deleveraged by 400 basis points as a result of carrying these costs against lower total net sales.

Pretax loss was $19.6 million or 16.9% of net sales compared to $16.2 million or 13.1% of net sales last year as a result of the combined factors just noted. Income tax benefit was negligible at $13,000, essentially a zero tax rate due to the continuing impact of a full non-cash deferred tax asset valuation allowance. This compares to income tax benefit of $4.2 million or 26.1% of pretax loss last year.

On a non-GAAP basis, in the absence of the valuation allowance, our income tax benefit would otherwise have been approximately $5.2 million. Net loss was $19.6 million or $0.65 per share compared to $12 million or $0.40 per share last year. On a non-GAAP basis, assuming a normalized effective income tax rate of 26.3%. In the absence of the valuation allowance, net loss would have been $14.5 million or $0.48 per share, the exact middle of our original outlook range for the first quarter.

Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $68 million and no debt outstanding under our $65 million asset-backed credit facility compared to $93 million and no debt at the end of the first quarter last year. Total inventories were up 1.8% at the end of the first quarter this year compared to the end of the first quarter last year.

We entered this week with total inventories down 3% versus the comparable week last year. Turning to our outlook for the second quarter of F2024, total comparable net sales for fiscal May ended June 1, 2024, decreased by 8.4% relative to the comparable four-week period last year.

Based on current and historical trends, we currently estimate that our total net sales for the second quarter of F2024 will be in the range of approximately $160 million to $165 million, translating to a comparable net sales decline in the range of approximately 10% to 7% respectively for the comparable 13-week period last year.

We expect our SG&A to be in the range of approximately $48 million to $49 million in the absence of any non-cash store asset impairment charges, and our effective income tax rate to be near zero due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets.

We estimate our after-tax results to be in the range of a net loss of approximately $3.9 million to $0.9 million respectively, and per share results to be in the range of a net loss of $0.13 to $0.03 respectively. We currently expect to have 247 total stores at the end of the second quarter compared to 246 at the end of last year's second quarter.

One additional note, while we are not providing any specific outlook for the third quarter today, it should be noted, as I mentioned during our last earnings call, that due to the impact of the 53rd week in F2023, there will be a meaningful shift in net sales into the second quarter from the third quarter when comparing to last year.

Using last year's weekly net sales results, what was a $26.2 million back-to-school net sales week for the first week of last year's third quarter will now become the comparable week for the final week of this year's second quarter. The first week of last year's fourth quarter, which was a $7.8 million net sales week, becomes the final comparable week of the third quarter this year, creating an $18.4 million net sales decline for the third quarter of this year, relative to last year's third quarter before consideration of any comp sales assumption.

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

(Operator Instructions)

Our first question comes from Marni Shapiro with The Retail Tracker. Please go ahead.

Hey, guys, thanks for taking my question. I'm curious, I know sales are going to be challenged, and you had some issues with the distribution centers in this quarter, but as somebody spends a lot of time in your stores, there are definitely some noticeable changes on the front of store, particularly on the junior side.

And I'm curious if you are seeing any green shoots at this point, and how, because what I'm seeing is is selling quickly, it's very on trend, it is a small part of the inventory, but I'm curious if you are able to impact a more significant percentage of the inventory for the back half of the year, and what this can look like?

I'm not just going to get ahead of myself, but just trying to see where this is going.

It's fine. Short of telling you exactly what's going on, I'll try to [address it.] So what you're seeing is part of the initiatives that we started back in the beginning of February. It's going to get more and more meaningful, obviously, as some of the decisions are already filtered in.

I can tell you that we see positive signs, but we cannot expand too much on it, because we don't want to get ahead of ourself. Overall, you'll see more and more of the right trend in our inventory.

Thank you. I mean, it feels great. And can you just also talk about as things begin to improve, because you guys have a long history, your customer -- when they're in the fold -- they're very loyal to you. How are you thinking about sort of bringing in lapsed shoppers, or more importantly, bringing in younger shoppers?

Will you start to drive marketing as things improve? Kind of hold back until until you can drive traffic into something that you feel really proud of? Is that how we should think about marketing?

No, not at all. We started our new campaign the way we believe we should be presenting ourselves a couple of months ago. As we grow, it's going to be more and more meaningful, and more and more things will be seen in the public.

You know, we are still at the exploration stage of exactly what is the age of our customer. What the age of the customer we want to have is. Remember, we started all this process February, and we're in June now.

So we're getting toward the end of figuring out what we need to do, and we start implementing a lot of it, but you'll see the results third and fourth quarter.

Fantastic. I would tell you the funding your stores already looks so much better. The merchandise is turning so fast. I wish I could just bring it in myself. It looks great. So best of luck guys.

You actually -- I don't know how you know it -- but you're absolutely spot on. We increased several categories and we're chasing it constantly.

It looks fantastic.

Thank you.

Thank you.

Thanks, Marni.

Jeff Van Sinderen, B. Riley FBR.

Hi, everyone. So I guess my first question, just to follow up on a lot of the thinking on merchandise performance there, I don't know if you gave the relative or spoke to the relative performance of the guy's side of the business versus the growth side of the business, men's or women's. Any color you can add there? Just wondering kind of relative performance between the two genders.

Yes, I can give you a little bit. So one of the question that we faced right is what is the balance between men and women, male and female, what it is today, what it is we want to have. I think we're in the right spots right now.

So the balance we have today, which I'm not going to quote exactly how much it is, is where we're going to go forward for the remainder of the year. There's always a discussion internally, you know, do you lead with men, do you lead with ladies, obviously, there's many different opinions.

I believe that we lead with men's, and you know, Mike, my line is always the same. Guys won't shop in girl's store, but girls will shop in guy's store. Now granted in the last five years, it's changing a little bit, but this is where our head is.

So, okay, on And then any update you can give us on the plans for the CEO search? Where that stands, and then any changes to the merchant team?

No changes are planned in either positions.

Okay. And then one more if I could squeeze it in. Just wondering where you stand on lease negotiations for 2024, and how many stores you might end up closing this year?

I don't think we have an update that we can give you right now. As you know, we're both renegotiating leases and hoping to shut down any losing locations. We don't have a lot of them, but we still have some. there's no update on that yet.

Okay.

Yes, Jeff. It's hard to pin down to a specific number when we have so much still in play to negotiate, but what I can tell you at the moment is we have two remaining new stores to open. One in July, one in mid-November.

And then we have four to five known store closures at this point that'll happen towards the end of the year, but those numbers can change, obviously, as a result of we have dozens and dozens of leases left to deal with for this year. So that's the best we can tell you at this moment.

Okay. And I'm sorry, the total that you still have to deal with is roughly what?

I don't have a specific number in front of me.

Okay. All right. Thanks for taking my questions.

Thank you.

Mitch Kummetz, Seaport Research.

Yes, excuse me, thanks for taking my questions on Mike, you mentioned the $18.4 million hit to the third quarter on sales. Can you say or maybe what you think that might translate from an earnings standpoint?

I can't until we figure out how back-to-school starts and what comp assumption I might think we're headed for in 3Q. I don't know what that's going to look like. The start of the back-to-school season is going to be in the last three weeks of July.

The last three weeks of the second quarter is when we're going to start to see the early reads on the back-to-school season. The three largest sales weeks of the second quarter, or actually, the final three weeks of the second quarter for that reason. And as I mentioned, that very final week last year was the start of the third quarter, and shifted forward because of the impact of that 53rd week in F2023.

So until I have a prelim read on what back-to-school means and what direction we're headed, I can't be any more specific at this time, but it certainly is going to create something of an earnings hit when you're starting from an $18 million hole compared to last year's fiscal third quarter.

And how much of a sales benefit are you anticipating in the second quarter given that shift?

It's approximately a $15 million benefit to the second quarter because just as I noted for the third quarter, you have the same dynamic from last year's started second quarter, end of second quarter shifting. So on the one hand, when you look at our outlook of a total sales number of $160 million to $165 million, last year's second quarter was $160 millon.

So round number, you say, oh, that's growth. Isn't that positive comp. But as we noted, it's actually not it's a negative comp in our outlook range of 7% to 10%. But because of the impact of that back-to-school week shifting into the second quarter, it adds a significant amount of sales.

Yes, and then I noticed that you're on your quarter-to-date comp minus 8.4% is pretty much right in the middle of your quarterly range. And I'm just curious how you think about back-to-school. It seems like over the last, I don't know, maybe a year, that the consumer is showing up for events more than they are in between events, and obviously back-to-school is an event.

Are you essentially assuming that your comp on back-to-school is kind of within that down 7% to 10% range, or is there a reason to believe that it could be better than that, given that that's an event period?

It could end up being better than what we're suggesting. You know, I'm sitting here, I have no visibility to what back-to-school behavior is going to be like. So we're not counting on something that we can't see. What we have is May is down 8.4%. That's consistent with our comp run rate of the last four quarters.

If you look back, our comp has been in this minus 8% to 9% range. This is now starting the fifth quarter in that in that realm. So our range contemplates that it could get a little better, particularly towards the end.

I do not expect it to deteriorate back into negative double digits. I do think there's opportunities for us to potentially outperform this negative 7% to negative 10% range, but that would require back-to-school getting off to a good start, and I just don't know what that's going to look like, as I sit here, right, I'd love to think that I can predict the future, but I darn sure I cannot.

Okay. All right. Thanks, guys. Good luck.

Matt Koranda, Roth Capital.

Hey guys. Maybe just following up on the second quarter outlook and the May to date comps. Anything you can call out, Mike, in terms of weekly cadence that you saw that was notable? Any help there in terms of just -- anything you saw around the Memorial Day holiday, if that's that was notable at all?

Sure. So I noted in our prepared remarks that upon the implementation of our new merch allocation tool and the new warehouse management system. We did have some complications in the immediate aftermath of that, so May bounced around quite a bit the first week in the last week of May were both negative single digits, and the in-between weeks were negative low double digits, as we are having some some complications with replenishment to stores with the new systems communicating with each other properly.

So we did experience some slowdown in the middle two weeks of the month, but believe we're back on track. We did see better results in the final week of fiscal May, and have seen a little bit better results of this week, starting off June, now that product has started to reflow back out the stores and get out there. So we'd like to think the worst of it's behind us in terms of any of the implementation impacts, and that if anything, we should stay consistent to potentially having an opportunity to see some better results going forward.

But again, with those large three weeks at the end of the quarter, basically a third of the quarter's sales volume is going to be in those last three weeks of the quarter. So really difficult to know, sitting here as far away from that as we are, what exactly that's going to look like.

But we're cautiously optimistic, as you noted earlier, that we'll continue to see better and better things out of our assortment as we go forward.

Okay. That's fair. But I guess we're also not counting on necessarily a pickup relative to what we saw in aggregate in May in terms of the comps, not much of one at least some.

Okay. And then in terms of some inventory, I'm curious, was the was the warehouse management system, one of the reasons for the slightly heavier inventory per store that we're seeing on a year-over-year basis? Or is there something else going on in terms of inventory that you can call out, and then maybe just as a where we heavier than we want to be. I was curious, based on one of the earlier questions, just what are you chasing in particular that's really moving for you, that's working? It would be helpful to get a lift from those.

Yes, yes. Yes, we're chasing the best sellers. So let me also address the inventory for a second. There's two things here. As far as the merchandise, we change a little bit on how we look at things and how we do it. I can give you a little bit.

We are bringing inventory a little earlier, and instead of spreading it, let's say, over three or four months, we're bringing a larger portion earlier. So we're never out of sizes. That's one of the things we do, and that's maybe part of the reason you'll see more inventory in the store.

The inventory thing will actually be something that we're focusing on this coming week, which is as we changed the way we look at gross margins -- we looked at two things or three things, as I told you guys before. We looked at the initial cost and the negotiation there. We looked at the initial IMUs, and then how do markdowns in the past, unfortunately, we gave the merchandise away at way under cost.

There was no reason for that, but it happened. We're looking at it differently today. It's not necessary at all times to sell things at a fire sale. Due to that, there'll be some changes and some fluctuation in the inventory until we fine-tune it, but that will produce better margins.

Okay. That's helpful. I --

The only other thing I'd add to that, Matt, is some of it was a little bit of timing difference, too, because when you're looking purely at the balance sheet, again, because of that weird 53rd week that happens every six to seven years, you're comparing two offset weeks. They're not comparable weeks.

And so it was a temporary timing difference. It's why I added to the notation that as we entered this week, our inventories were actually down 3% on a like for like week. So was just a little bit of a timing difference there, especially ahead of the implementations that we knew were coming. We did consciously tried to help offset any potential risk as we went through those. So it's just a temporary condition. Nothing of significant concern.

Okay, fair enough. Maybe I'll just ask one more on what the what I guess are imputing in the outlook from a gross margin standpoint. It almost seems like we might see flat to up gross margins in the second quarter, based on my math, at least, maybe just talk about what you're seeing on sort of the margin front and product markdowns, it sounds like maybe we got a little bit better there. So that's a good guy offsetting some of the BD&O deleverage that we may still experience, but maybe just if you could elaborate a little bit more about that?

Mike, let me answer that. So we do expect gross margin improvement. This is exactly what we're working on. We can't estimate yet what it will be for second quarter, and everything is up in the air right now. We are working on so many different things that it will be very hard to predict until the future. So you can expect that it will be flat to up. I just can't tell you much how much would it be up.

Okay. Great. Appreciate it, guys. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Mike Henry for any closing remarks.

Thank you all for joining us today. We appreciate your interest, and we look forward to sharing our second quarter results with you in early September. Thanks and have a good evening.

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