Tilly’s(TLYS) - 2022 Q2 - Quarterly Report

Forward-Looking Statements This section identifies forward-looking statements and lists risk factors that could cause actual results to differ - Forward-looking statements are identified by terms like "anticipate," "estimate," "expect," and "project," relating to financial condition, operations, and future performance[9] - Key risks include the ongoing impacts of the COVID-19 pandemic, changes in store traffic and purchasing patterns, ability to open and operate stores profitably, e-commerce effectiveness, brand image, cash generation, fashion trend identification, intense competition, mall success, consumer confidence, seasonality, social media marketing, inventory management, natural disasters, supply chain dependence, cost increases (energy, transportation, labor), balance of proprietary vs. third-party brands, mailing costs, international trade conditions, vendor practices, executive management dependence, expansion adaptation, IT system failures, supply chain disruptions, indebtedness, transportation reliance, comparable store sales volatility, information system disruptions, intellectual property protection, governmental laws, data security, internal control maintenance, and public company costs[10][15] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Tilly's unaudited consolidated financial statements, providing a snapshot of financial health and performance Consolidated Balance Sheets | Metric (in thousands) | July 31, 2021 | January 30, 2021 | August 1, 2020 | | :-------------------- | :------------ | :--------------- | :------------- | | Cash and cash equivalents | $81,894 | $76,184 | $132,955 | | Marketable securities | $66,644 | $64,955 | $15,939 | | Merchandise inventories | $86,853 | $55,698 | $68,067 | | Total current assets | $256,344 | $212,156 | $234,204 | | Total assets | $535,163 | $507,456 | $544,471 | | Accounts payable | $59,053 | $24,983 | $48,710 | | Total current liabilities | $166,528 | $134,191 | $172,944 | | Total liabilities | $363,931 | $346,834 | $395,903 | | Total stockholders' equity | $171,232 | $160,622 | $148,568 | Consolidated Statements of Operations | Metric (in thousands, except per share) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :------------------------------------ | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Net sales | $201,952 | $135,845 | $365,109 | $213,134 | | Gross profit | $74,727 | $41,674 | $129,566 | $43,268 | | Operating income (loss) | $26,427 | $7,709 | $41,301 | $(20,692) | | Net income (loss) | $20,398 | $5,266 | $31,357 | $(12,129) | | Basic EPS | $0.67 | $0.18 | $1.04 | $(0.41) | | Diluted EPS | $0.66 | $0.18 | $1.02 | $(0.41) | Consolidated Statements of Comprehensive Income (Loss) | Metric (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :-------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Net income (loss) | $20,398 | $5,266 | $31,357 | $(12,129) | | Other comprehensive (loss) income, net of tax | $(11) | $(200) | $(8) | $(213) | | Comprehensive income (loss) | $20,387 | $5,066 | $31,349 | $(12,342) | Consolidated Statement of Stockholders' Equity | Metric (in thousands) | Balance at January 30, 2021 | Net income | Dividends paid | Share-based compensation expense | Exercises of stock options | Net change in unrealized gain on available-for-sale securities | Balance at July 31, 2021 | | :-------------------- | :-------------------------- | :--------- | :------------- | :------------------------------- | :------------------------- | :----------------------------------------------------------- | :----------------------- | | Total Stockholders' Equity | $160,622 | $31,357 | $(30,710) | $896 | $9,075 | $(8) | $171,232 | - Tilly's paid a one-time special cash dividend of $1.00 per share, totaling $30.7 million, on July 9, 2021[25][28] Consolidated Statements of Cash Flows | Metric (in thousands) | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :-------------------- | :--------------------------- | :---------------------------- | | Net cash provided by operating activities | $37,442 | $18,843 | | Net cash (used in) provided by investing activities | $(10,097) | $49,977 | | Net cash used in financing activities | $(21,635) | $(6,002) | | Change in cash and cash equivalents | $5,710 | $62,818 | | Cash and cash equivalents, end of period | $81,894 | $132,955 | Notes to the Consolidated Financial Statements This section provides detailed explanations and disclosures for the consolidated financial statements Note 1: Description of the Company and Basis of Presentation - Tillys is a specialty retailer of casual apparel, footwear, and accessories for young men, women, boys, and girls, offering iconic global, emerging, and proprietary brands[33] - As of July 31, 2021, Tillys operated 244 stores in 33 states and also sells products through its e-commerce website[33] - The COVID-19 pandemic continues to create uncertainties and has impacted consumer behavior, store traffic, operations, supply chains, and overall economic stability, making future business trends difficult to predict[40][41] Note 2: Summary of Significant Accounting Policies - Revenue from store sales is recognized when the customer receives and pays for merchandise, net of estimated returns. E-commerce revenue is recognized upon shipment, net of sales taxes and estimated returns[43] | Sales Channel (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :--------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Retail stores | $164,626 | $83,858 | $292,302 | $130,811 | | E-commerce | $37,326 | $51,987 | $72,807 | $82,323 | | Total net sales | $201,952 | $135,845 | $365,109 | $213,134 | | Department | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :--------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Mens | 36% | 35% | 36% | 35% | | Womens | 28% | 27% | 28% | 27% | | Accessories | 17% | 16% | 16% | 16% | | Footwear | 10% | 13% | 11% | 13% | | Boys | 4% | 5% | 4% | 5% | | Girls | 4% | 4% | 4% | 4% | | Hardgoods | 1% | —% | 1% | —% | | Brand Type | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :--------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Third-party | 70% | 77% | 71% | 77% | | Proprietary | 30% | 23% | 29% | 23% | - The company accrues for estimated sales returns, with reserves of $3.9 million as of July 31, 2021, up from $1.4 million at January 30, 2021, and $2.1 million at August 1, 2020[44] - Tilly's recognizes gift card revenue upon redemption and loyalty program awards as an increase to net sales, with deferred revenue for the loyalty program at $5.1 million as of July 31, 2021[45][47] - The company leases all retail and corporate facilities, with lease terms generally for ten years. COVID-19 related lease concessions have been substantially negotiated for most stores[48][50] | Lease Expense (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :--------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Fixed operating lease expense | $15,257 | $15,288 | $30,882 | $31,203 | | Variable lease expense | $4,846 | $4,453 | $8,736 | $8,294 | | Total lease expense | $20,103 | $19,741 | $39,618 | $39,497 | - Income tax expense for the twenty-six weeks ended July 31, 2021, was $9.7 million (23.7% of pre-tax income), compared to a benefit of $(7.8) million (39.3% of pre-tax loss) in the prior year, primarily due to deferred income tax benefits from stock option exercises and the prior year's CARES Act impact[59] - The company adopted ASU 2019-12 (Simplifying the Accounting of Income Taxes) in Q1 fiscal 2021 with an immaterial impact and expects ASU 2016-13 (Credit Losses) to be effective in Q1 fiscal 2023, also with an immaterial impact[60][61] Note 3: Marketable Securities - Marketable securities include commercial paper (available-for-sale) and fixed income securities (held-to-maturity), all with maturities less than one year[63] | Marketable Securities (in thousands) | July 31, 2021 Fair Value | January 30, 2021 Fair Value | August 1, 2020 Fair Value | | :----------------------------------- | :----------------------- | :-------------------------- | :------------------------ | | Commercial paper | $59,978 | $64,955 | $9,974 | | Fixed income securities | $6,666 | N/A | $5,965 | | Total marketable securities | $66,644 | $64,955 | $15,939 | | Gains on Investments (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :---------------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Gains on investments | $43 | $302 | $72 | $554 | Note 4: Asset-Backed Credit Facility - Tilly's entered into a new asset-backed credit agreement on November 9, 2020, providing a senior secured revolving credit facility of up to $65.0 million, maturing on November 9, 2023[66][67] - The borrowing base is determined by eligible credit card receivables and inventory. As of July 31, 2021, the company was eligible to borrow up to $63.0 million and had no outstanding borrowings[68][73] - On June 8, 2021, a Consent Agreement authorized the payment of up to $31 million in cash dividends, leading to a $30.7 million special cash dividend on July 9, 2021[71] Note 5: Commitments and Contingencies - The company is involved in lawsuits and claims in the ordinary course of business, including a putative class action (Juan Carlos Gonzales) and a PAGA case, for which a loss is currently not probable or estimable[75][76] - Another putative class action (Skylar Ward) alleging wage and hour violations was denied class certification in October 2020, with the plaintiff appealing this decision[77] Note 6: Fair Value Measurements - Fair value is determined using a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs)[78][79] - Financial assets measured at fair value on a recurring basis include marketable securities (available-for-sale) and certain cash equivalents (money market securities, commercial paper)[78] | Financial Assets (in thousands) | July 31, 2021 (Level 1) | July 31, 2021 (Level 2) | January 30, 2021 (Level 1) | January 30, 2021 (Level 2) | August 1, 2020 (Level 1) | August 1, 2020 (Level 2) | | :------------------------------ | :---------------------- | :---------------------- | :------------------------- | :------------------------- | :----------------------- | :----------------------- | | Money market securities | $63,097 | $— | $67,115 | $— | $128,036 | $— | | Commercial paper | $— | $59,978 | $— | $64,955 | $— | $9,974 | - During the twenty-six weeks ended July 31, 2021, the company recorded $0.1 million in impairment charges for one store's long-lived assets, writing down its carrying value to estimated fair value[84] Note 7: Share-Based Compensation - The 2012 Plan authorizes up to 6,613,900 shares for issuance of options, shares, or rights, with 2,272,522 shares available for future issuance as of July 31, 2021[86] | Stock Option Activity (26 Weeks Ended July 31, 2021) | Number of Stock Options | Weighted Average Exercise Price | | :--------------------------------------------------- | :---------------------- | :------------------------------ | | Outstanding at January 31, 2021 | 2,602,212 | $8.19 | | Granted | 508,700 | $10.79 | | Exercised | (1,154,258) | $7.86 | | Forfeited | (258,886) | $9.31 | | Expired | (32,000) | $16.26 | | Outstanding at July 31, 2021 | 1,665,768 | $8.88 | - Restricted Stock Awards (RSAs) are granted to independent Board members, vesting 50% on each of the first two anniversaries of the grant date[92] | Share-Based Compensation Expense (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :---------------------------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Cost of goods sold | $82 | $141 | $43 | $287 | | Selling, general and administrative expenses | $449 | $367 | $853 | $722 | | Total share-based compensation expense | $531 | $508 | $896 | $1,009 | - As of July 31, 2021, there was $4.9 million of total unrecognized share-based compensation expense with a weighted average remaining recognition period of 2.9 years[94] Note 8: Earnings (Loss) Per Share - Basic EPS is calculated based on weighted average common shares outstanding, while diluted EPS includes the effect of dilutive potential common shares (stock options and RSAs) using the treasury stock method[95] | EPS Data (in thousands, except per share) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :---------------------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Net income (loss) | $20,398 | $5,266 | $31,357 | $(12,129) | | Weighted average basic shares outstanding | 30,500 | 29,694 | 30,189 | 29,686 | | Dilutive effect of stock options and restricted stock | 613 | 6 | 648 | — | | Weighted average shares for diluted EPS | 31,113 | 29,700 | 30,837 | 29,686 | | Basic EPS | $0.67 | $0.18 | $1.04 | $(0.41) | | Diluted EPS | $0.66 | $0.18 | $1.02 | $(0.41) | | Anti-Dilutive Stock Options (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :----------------------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Stock options | 659 | 2,593 | 803 | 2,593 | | Restricted stock | 20 | 51 | 20 | 72 | | Total | 679 | 2,644 | 823 | 2,665 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Tilly's financial condition and operational results, focusing on key performance indicators and liquidity Overview - Tillys is a specialty retailer of casual apparel, footwear, accessories, and hardgoods for young men, women, boys, and girls, operating 244 stores in 33 states as of July 31, 2021, and an e-commerce website[100] - The COVID-19 pandemic continues to cause significant uncertainties and impacts on consumer behavior, store traffic, supply chains, and overall operations, making future business trends unpredictable[101] How We Assess the Performance of Our Business - Key performance indicators include net sales, comparable store sales, gross profit, selling, general and administrative expenses, and operating income[102] - Net sales include revenue from store and e-commerce sales, net of returns, shipping/handling fees, gift card redemptions, and loyalty program awards[103] - The business is seasonal, with the third and fourth quarters historically generating stronger sales and operating results due to back-to-school and holiday seasons[104] - Comparable store sales are defined as sales from the e-commerce platform and stores open daily compared to the same fiscal dates last year, excluding gift card breakage and e-commerce shipping/handling fees[105] - Gross profit is net sales less cost of goods sold, which includes direct merchandise costs, buying, distribution, and occupancy costs. It is impacted by initial markups, markdowns, shrinkage, and sales mix shifts[106][108] - SG&A expenses comprise store selling expenses (personnel, advertising, card processing) and corporate general and administrative expenses (payroll, legal, IT, HR). SG&A as a percentage of net sales is typically higher in lower volume periods[109] - Operating income (loss) equals gross profit less SG&A expenses, excluding interest and income taxes[110] - Drawing conclusions from comparative financial performance against fiscal 2020 is challenging due to the varying impacts of the COVID-19 pandemic, including consumer habits, stimulus payments, store reopening timings, e-commerce performance, and back-to-school season dynamics[111][112] Results of Operations | Metric (in thousands) | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :-------------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Net sales | $201,952 | $135,845 | $365,109 | $213,134 | | Gross profit | $74,727 | $41,674 | $129,566 | $43,268 | | Operating income (loss) | $26,427 | $7,709 | $41,301 | $(20,692) | | Net income (loss) | $20,398 | $5,266 | $31,357 | $(12,129) | | Basic EPS | $0.67 | $0.18 | $1.04 | $(0.41) | | Diluted EPS | $0.66 | $0.18 | $1.02 | $(0.41) | | Operating Data | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :------------- | :--------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | | Stores operating at end of period | 244 | 238 | 244 | 238 | | Comparable store sales change | 10.6% | 8.3% | 9.5% | 8.6% | | E-commerce revenues as a percentage of net sales | 18.5% | 38.3% | 19.9% | 38.6% | Second Quarter (13 Weeks) Ended July 31, 2021 Compared to Second Quarter (13 Weeks) Ended August 1, 2020 - Net sales increased by $66.1 million (48.7%) to $202.0 million, driven by a 96.3% increase in physical store sales to $164.6 million due to fewer COVID-19 related closures, partially offset by a 28.2% decrease in e-commerce sales to $37.3 million[115][120] - Gross profit rose to $74.7 million (37.0% of net sales) from $41.7 million (30.7% of net sales) last year, benefiting from 800 basis points leverage in buying, distribution, and occupancy costs, despite a 170 basis point decrease in product margins[116] - SG&A expenses increased to $48.3 million (23.9% of net sales) from $34.0 million (25.0% of net sales), primarily due to higher store payroll and corporate bonus accruals[117] - Operating income increased significantly to $26.4 million (13.1% of net sales) from $7.7 million (5.7% of net sales)[118] - Net income reached a record $20.4 million ($0.66 per diluted share), up from $5.3 million ($0.18 per diluted share) in the prior year[120] First Half (26 Weeks) Ended July 31, 2021 Compared to First Half (26 Weeks) Ended August 1, 2020 - Total net sales increased by $152.0 million (71.3%) to $365.1 million, with physical store sales up 123.5% to $292.3 million and e-commerce sales down 11.6% to $72.8 million[121][128] - Gross profit improved to $129.6 million (35.5% of net sales) from $43.3 million (20.3% of net sales), driven by 1300 basis points leverage in buying, distribution, and occupancy costs and 220 basis points improvement in product margins[122] - SG&A expenses increased to $88.3 million (24.2% of net sales) from $64.0 million (30.0% of net sales), primarily due to higher store payroll, corporate bonus accruals, and increased corporate staffing[123] - Operating income improved significantly to $41.3 million (11.3% of net sales) from an operating loss of $(20.7) million (9.7% of net sales) in the prior year[124] - Net income improved to $31.4 million ($1.02 per diluted share) from a net loss of $(12.1) million ($(0.41) per share) in the prior year[126] Liquidity and Capital Resources - The company relies on cash flows from operating activities, cash on hand, and marketable securities for liquidity, expecting these to be sufficient for working capital and capital expenditures for the next 12 months[127][128] | Working Capital (in millions) | Amount | Description | | :---------------------------- | :----- | :---------- | | Working capital at January 30, 2021 | $78.0 | | | Increase in cash, cash equivalents, and marketable securities | $38.1 | Primarily due to higher net income. | | Increase primarily due to timing of income tax payments | $9.5 | | | Payment of special cash dividend | $(30.7) | | | Decrease primarily due to corporate bonus accruals and timing of accrued compensation and benefits | $(6.7) | | | Other net increases | $1.7 | | | Working capital at July 31, 2021 | $89.9 | | - The asset-backed credit facility provides up to $65.0 million, with $63.0 million available for borrowing as of July 31, 2021, and had no outstanding borrowings[132][139] - The CARES Act has allowed the company to defer payroll taxes, apply for tax credits, and accelerate depreciation, impacting liquidity[140] Cash Flow Analysis | Cash Flow Activity (in thousands) | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 | | :-------------------------------- | :--------------------------- | :---------------------------- | | Net cash provided by operating activities | $37,442 | $18,843 | | Net cash (used in) provided by investing activities | $(10,097) | $49,977 | | Net cash used in financing activities | $(21,635) | $(6,002) | | Net increase in cash and cash equivalents | $5,710 | $62,818 | - Net cash from operating activities increased by $18.6 million to $37.4 million, primarily due to higher net sales in fiscal 2021 compared to store closures in the prior year[143] - Net cash used in investing activities was $10.1 million, a shift from $50.0 million provided last year, mainly due to higher purchases of marketable securities ($66.6 million) and capital expenditures ($8.5 million), partially offset by maturities ($65.0 million)[145] - Net cash used in financing activities was $21.6 million, up from $6.0 million last year, primarily due to $30.7 million in dividends paid, partially offset by $9.1 million from stock option exercises[147] Contractual Obligations - No material changes to contractual obligations were reported as of July 31, 2021, compared to the Annual Report on Form 10-K for fiscal year ended January 30, 2021[148] Off-Balance Sheet Arrangements - The company has no off-balance sheet arrangements other than purchase obligations and its revolving credit facility[149] Critical Accounting Policies and Estimates - The preparation of financial statements requires estimates and assumptions, which are made more difficult by the significant, adverse impacts of the COVID-19 pandemic[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risks were reported as of July 31, 2021, compared to the prior Annual Report - No material changes in market risks were reported as of July 31, 2021, compared to the Annual Report on Form 10-K for fiscal year ended January 30, 2021[151] Item 4. Controls and Procedures Management concluded disclosure controls were effective with no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of July 31, 2021[152] - No material changes in internal control over financial reporting occurred during the period covered by this report[153] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and have inherent limitations, including potential for errors, fraud, or management override[154][155] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates legal proceedings information by reference from Note 5 of the financial statements - Information on legal proceedings is incorporated by reference from Note 5: Commitments and Contingencies[158] Item 1A. Risk Factors This section refers readers to the Annual Report on Form 10-K for a detailed discussion of business risks - Readers are referred to the "Risk Factors" section in the Annual Report on Form 10-K for a detailed discussion of business risks[159] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including a Consent Agreement and certifications - Exhibits include a Consent Agreement dated June 8, 2021, CEO and CFO certifications (Rule 13a-14(a) and 18 U.S.C. Section 1350), and interactive data files (iXBRL) for the financial statements and notes[161] Signatures This section contains the signatures of the company's President, CEO, and CFO, certifying the report - The report is signed by Edmond Thomas (President, CEO, and Director) and Michael Henry (EVP, CFO) on September 8, 2021[166]