Tilly’s(TLYS) - 2022 Q4 - Annual Report

PART I Item 1. Business Tillys is a specialty retailer of casual apparel and accessories for young demographics, operating 241 stores and e-commerce Company Overview and History - Tillys is a leading destination specialty retailer of casual apparel, footwear, accessories, and hardgoods for young men, young women, boys, and girls[24] Company Operations as of January 29, 2022 | Metric | Value | | :--- | :--- | | Stores Operated | 241 | | States Present | 33 | | Headquarters | Irvine, California | - The company was founded in 1982 by Hezy Shaked and Tilly Levine, with the business conducted through World of Jeans & Tops (WOJT) since 1984, which became a wholly owned subsidiary of Tilly's, Inc. in May 2012[25] Our Strengths - Tillys is a destination retailer offering a broad and differentiated assortment of iconic global, emerging, and proprietary brands, exceeding the selection of many other specialty retailers[27] - The company employs a dynamic merchandise model, allowing for quick adjustments to merchandise mix based on trends, store size, and location, with multiple weekly product shipments[27] - Tillys utilizes a flexible real estate strategy, successfully operating stores in various retail centers (malls, lifestyle centers, power centers, etc.) across 87 markets in 33 states[27] - A multi-pronged marketing approach, including an integrated digital platform, vendor collaborations, a loyalty program ('Tilly's Rewards'), catalogs, social media, and influencer partnerships, drives customer engagement and traffic[27][28] Growth Strategy - The company plans to open approximately 15 to 20 new stores during fiscal 2022, primarily in California, Texas, and the Northeast, maintaining a disciplined approach to growth[32] - E-commerce net sales represented approximately 21% of total net sales in fiscal 2021, down from 33% in fiscal 2020 due to a resurgence in in-store shopping, but significant growth opportunities are expected[29] - Tillys aims to drive operating margin expansion through scaled efficiencies, process improvements, and leveraging previous infrastructure investments, including its dedicated e-commerce fulfillment center and upgraded e-commerce platform[29] - The company is enhancing omni-channel capabilities, including fulfilling online orders from stores, in-store/curbside pickup, and ship-to-store options, with planned upgrades to its mobile application and website platform in fiscal 2022[32] Merchandising, Purchasing, and Planning and Allocation Merchandising - Tillys offers a mix of third-party and proprietary merchandise across apparel, footwear, accessories, and hardgoods for various demographics[31] Merchandise Mix by Brand Type (Fiscal Years) | Brand Type | Fiscal 2021 | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | :--- | | Third-party | 70% | 74% | 75% | | Proprietary | 30% | 26% | 25% | - In fiscal 2021, the proprietary RSQ brand was the top-selling brand, accounting for approximately 16% of total net sales, followed by proprietary Full Tilt (9%) and third-party Vans (7%)[32][33] Merchandise Purchasing - The merchandising team focuses on product relevance, quality, fit, availability, cost, and speed of production, maintaining strong relationships with third-party vendors and identifying emerging brands[37][38] - Proprietary brand merchandise is sourced both domestically and internationally, offering flexibility in lead times and costs[38] Planning and Allocation - Inventory planning and allocation processes involve continuous analysis of inventory levels and sell-through data to adjust assortments based on store size, season, and regional consumer preferences[39] - The broad vendor base and proprietary product capabilities allow for quick reactions to changing consumer preferences and market conditions, with merchandise shipped multiple times per week[39] Stores Store Operations and Locations Store Operating Data (Fiscal 2021) | Metric | Value | | :--- | :--- | | Stores Operated (Jan 29, 2022) | 241 | | Average Square Feet per Store | 7,300 | | Average Net Sales per Store | $2.5 million | | Average Net Sales per Square Foot | $342 | Number of Stores by Retail Center Type (Fiscal Years) | Retail Center Type | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Regional Mall | 137 | 136 | 139 | | Off-Mall | 90 | 87 | 86 | | Outlet | 14 | 15 | 15 | | Total | 241 | 238 | 240 | Number of Stores by State (as of Jan 29, 2022) | State | Stores | State | Stores | | :--- | :--- | :--- | :--- | | Arizona | 18 | New Jersey | 7 | | California | 97 | New Mexico | 1 | | Colorado | 5 | New York | 4 | | Delaware | 1 | North Carolina | 2 | | Florida | 19 | Ohio | 3 | | Georgia | 2 | Oklahoma | 2 | | Illinois | 7 | Oregon | 3 | | Indiana | 5 | Pennsylvania | 4 | | Kansas | 1 | Rhode Island | 2 | | Maryland | 1 | South Dakota | 1 | | Massachusetts | 4 | Tennessee | 3 | | Michigan | 3 | Texas | 16 | | Minnesota | 2 | Utah | 5 | | Missouri | 1 | Virginia | 3 | | Nebraska | 1 | Washington | 6 | | New Hampshire | 2 | Wisconsin | 3 | | Nevada | 7 | | | Store Expansion Opportunities and Site Selection Store Openings and Closures (Fiscal Years) | Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Period | | :--- | :--- | :--- | :--- | | 2017 | 2 | 6 | 219 | | 2018 | 16 | 6 | 229 | | 2019 | 14 | 3 | 240 | | 2020 | 2 | 4 | 238 | | 2021 | 9 | 6 | 241 | - Tillys expects to open approximately 15 to 20 new stores in fiscal 2022, focusing on existing markets like California, Texas, and the Northeast, while maintaining a disciplined approach to store growth and profitability[32][43] Store Management, Culture and Training - The company emphasizes attracting, training, retaining, and motivating qualified employees, with a corporate culture that empowers store managers and rewards sales performance[44][45] - Comprehensive training programs are provided at store, district, and regional levels, focusing on operational expertise and supervisory skills[46] - In response to the pandemic, health and safety measures, including safety protocols, daily wellness screenings, and personal protective equipment, have been implemented for employees and customers[48] E-Commerce E-commerce Net Sales (Fiscal Years) | Fiscal Year | Net Sales (Millions) | % of Total Net Sales | | :--- | :--- | :--- | | 2021 | $166 | 21.4% | | 2020 | $173.4 | 32.6% | | 2019 | $98.5 | 15.9% | - The e-commerce platform serves as both a sales channel and a marketing tool, reaching customers in all 50 states and D.C., even with physical stores in only 33 states[49] - Planned enhancements for fiscal 2022 include upgrading the website platform to a more mobile-responsive version, improving the mobile application, and increasing online personalization[49] Marketing and Advertising - Tillys employs a multi-pronged marketing strategy including a customer loyalty program ('Tilly's Rewards'), email marketing, digital advertising, social media engagement, brand partnerships, catalogs, and community outreach[50][51][55] - The loyalty program aims to interact with customers directly, provide insights into shopping behaviors, and offer early access to product launches and promotions[51] - Digital marketing efforts include pay-per-click, display, retargeting, paid social, affiliate marketing, and co-op marketing with brands to drive online and in-store traffic[55] Distribution - The company operates a 126,000 square foot distribution facility for store merchandise and an 81,000 square foot e-commerce fulfillment center, both in Irvine, California[52][53] - Merchandise is shipped to stores multiple times per week in a floor-ready format, utilizing both the company's own truck fleet for local stores and third-party distributors for others[52] - While current infrastructure supports growth for the next few years, Tillys is exploring additional distribution investments for longer-term anticipated growth[54] Information Technology - Information technology systems provide comprehensive business process support, enabling dynamic merchandise models, operational efficiencies, and scalability[56] - Recent implementations include new point-of-sale, order management, and customer relationship management systems, along with a re-platforming of the e-commerce website to a cloud-based solution[57] - Planned upgrades for fiscal 2022 include further enhancements to the e-commerce platform and mobile application[57] Competition - The teenage and young adult retail apparel, accessories, and footwear industry is highly competitive, with numerous publicly-traded and privately-held specialty retailers, department stores, off-price retailers, and online marketplaces[58] - Tillys competes based on merchandise offerings, store location, price, and customer identification, believing its differentiated merchandising strategy, store environment, flexible real estate, and company culture provide advantages[59] - Many competitors are larger with greater financial and marketing resources, and the company acknowledges that its in-store experience and product offerings are not exclusive, posing a risk of competitive emulation[59] Trademarks - Tillys owns several registered trademarks, including 'Ambitious', 'Blue Crown', 'Full Tilt', 'RSQ', 'Sky and Sparrow', and 'Tilly's', which are considered valuable assets[60] - The company actively protects its trademarks and is not aware of any infringement claims or challenges in the United States[60] Employees Employee Count (as of January 29, 2022) | Employee Type | Count | | :--- | :--- | | Full-time | 1,450 | | Part-time | 4,250 | | Corporate & Distribution | 475 | | Store Locations | 5,225 | | Total (fluctuates seasonally) | 4,800 - 7,400 | - None of Tillys' employees are represented by a labor union, and the company considers its relationship with employees to be good[61] Government Regulation - Tillys is subject to various government regulations, including labor and employment laws, advertising and promotions, privacy, safety, consumer protection, intellectual property, and accessibility laws[62] - The company monitors changes in these laws and believes it is in material compliance with applicable regulations[62] Insurance - Tillys uses insurance to mitigate exposure to enterprise risks, including workers' compensation, property damage, directors' and officers' liability, cyber/data security, and general liability[63] - Insurance requirements are evaluated ongoing to maintain adequate coverage levels[64] Seasonality - Tillys' business is seasonal, with revenues and net income typically smallest in the first quarter and largest in the fourth quarter, driven by back-to-school and winter holiday shopping seasons[65] - Inventory levels, accounts payable, and accrued expenses generally peak in anticipation of increased revenues during these periods[65] Environmental, Social, Governance (ESG) Matters Environmental Matters - In fiscal 2021, Tillys launched an online sustainability program featuring over 1,600 eco-friendly product choices from third-party and proprietary brands, comprising approximately 6% of total inventory[66] - The company joined the Better Cotton Initiative (BCI) in early 2022, committing to source at least 10% Better Cotton for proprietary products in fiscal 2022[66] - Distribution centers and stores utilize recycled materials for packaging, LED lighting for energy efficiency, and water-conserving fixtures in restrooms[67][68] - Corporate offices are equipped with lighting sensors and exterior LED lighting for energy savings, and the data center migrated to a 100% renewable energy-operated facility[69][70] Social Matters - Tillys supports the Tilly's Life Center Foundation (TLC) with financial aid, office space, and staff assistance, and is a member of the Orange County Racial Justice Group[75] - The company provides direct financial support to school-based programs, donates end-of-season products to charities, and offers health and wellness programs for corporate employees[75] - Periodic diversity and anti-harassment training is provided to all employees, and one paid day off per year is offered for volunteer work[75] Governance Matters - Despite being a controlled company, six of eight Board members are independent, and all Board committees are chaired by and comprised solely of independent directors[72] - The company maintains a Code of Ethical Business Conduct, a whistleblower hotline, an Insider Trading Policy, and a Regulation FD-compliant Investor Relations policy[73][74][75] Additional Information - Tillys makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments available free of charge on its website (www.tillys.com) and the SEC's website (www.sec.gov)[76](index=76&type=chunk) Item 1A. Risk Factors This section outlines significant risks and uncertainties impacting Tillys' business, financial condition, and operations Risks Related to Our Business - The COVID-19 pandemic has materially disrupted operations, impacting consumer behavior, store traffic, supply chains, and inventory management, with ongoing uncertainties about future effects[78][80] - Decreases in consumer spending due to economic conditions (e.g., inflation, employment levels) or non-economic factors (geopolitical issues, unseasonable weather) could severely impact sales[81][82] - Significant lease payments for stores, corporate offices, and distribution centers strain cash flow, and future actions regarding leases (e.g., rent abatement, termination) due to disruptions could create legal and financial risks[83][84] - Intense competition from various retailers, including larger competitors with greater resources, could require price reductions or impact operating cash flow[86][88] - Failure to identify and respond to rapidly changing customer fashion preferences and trends could lead to decreased sales, excess inventory, and lower profit margins[90] - Dependence on third-party suppliers for merchandise, with no long-term contracts, exposes the company to risks of refusal to sell, quantity limits, price increases, and supply chain disruptions[99] - The majority of stores are concentrated in the southwestern and northeastern United States and Florida, making the business susceptible to region-specific disruptions like economic downturns, weather conditions, and natural disasters[107] Risks Related to Information Technology, Data Privacy and Intellectual Property - Failure of information technology systems or inability to support growth could disrupt operations, including merchandise ordering, sales transactions, and e-commerce[113] - Compliance with evolving data protection laws (e.g., CCPA) could result in substantial costs, enforcement actions, litigation, and negative publicity[114][116] - System security or operational failures, or intentional attacks (e.g., hacking), could disrupt internal operations, lead to data breaches, and harm reputation and financial results[117][118] - Inability to protect trademarks and other intellectual property rights could damage brand identity and goodwill, leading to declining sales and costly litigation[119] Risks Related to Our Ownership Structure and Ownership of Our Common Stock - The company's co-founders, Hezy Shaked and Tilly Levine, control a substantial majority of the total voting power, potentially preventing other stockholders from influencing corporate decisions and creating conflicts of interest[123][124] - As a controlled company under NYSE rules, Tillys may rely on exemptions from certain corporate governance requirements, potentially reducing protections for Class A common stockholders[125] - The price of Class A common stock has been and may continue to be volatile, influenced by analyst research, financial forecasts, and the company's small public float[126][127][128][131] - Anti-takeover provisions in corporate documents and Delaware law, combined with concentrated ownership, may inhibit or prohibit a takeover and limit the price investors would pay for common stock[134][135] General Risks - Epidemics, pandemics (like COVID-19), war, terrorism, civil unrest, or other public disruptions could negatively affect business by reducing store traffic and disrupting merchandise acquisition[138] - The company may be subject to unionization, work stoppages, slowdowns, or increased labor costs, which could adversely impact profitability[139] - Violations of or changes in laws, including employment laws and merchandise-related regulations, could increase operating costs, lead to fines, or harm the company's reputation[140] Item 1B. Unresolved Staff Comments The company reports that there are no unresolved staff comments - There are no unresolved staff comments[146] Item 2. Properties Tillys leases all operational properties, including headquarters, distribution centers, and 241 retail stores Key Leased Properties | Property | Location | Size (sq ft) | Lease Term | | :--- | :--- | :--- | :--- | | Corporate HQ & Retail Support/Distribution | 10 & 12 Whatney, Irvine, CA | 172,000 | Jan 1, 2003 - Dec 31, 2027 | | Office & Warehouse | 11 Whatney, Irvine, CA | 26,000 | June 29, 2012 - June 30, 2022 (renewal expected) | | E-commerce Fulfillment Center | 17 Pasteur, Irvine, CA | 81,000 | Nov 1, 2021 - Oct 31, 2031 | - As of January 29, 2022, all 241 stores, totaling approximately 1.8 million square feet, are occupied under operating leases, typically with 10-year base terms and renewal options[149] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 to the consolidated financial statements - Legal proceedings information is incorporated by reference from Note 10: Commitments and Contingencies[150] Item 4. Mine Safety Disclosures This item is not applicable to Tillys, Inc - Mine Safety Disclosures are not applicable[151] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Tillys' Class A common stock trades on NYSE, with information on stockholders, dividends, and equity security transactions Common Stock Market and Holders - Tillys' Class A common stock is traded on the NYSE under the symbol 'TLYS'[154] Stockholders of Record (as of April 12, 2022) | Class | Stockholders of Record | | :--- | :--- | | Class A Common Stock | 5 | | Class B Common Stock | 2 | | Total | 7 | Dividends on Common Stock - Tillys paid special cash dividends of $1.00 per share in July and December 2021, and in February of 2020, 2019, and 2018, and $0.70 per share in February 2017[155] - There is no assurance of additional cash dividends in the future, and no formal plans are currently in place[155] Securities Authorized for Issuance under Equity Compensation Plans - Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to the 2022 Proxy Statement[156] Stock Performance Graph - A graph compares the five-year cumulative stockholder return of Tillys' Class A common stock to the S&P Midcap 400 Index and the S&P 400 Apparel Retail Index[157][158] Recent Sales of Unregistered Securities - Tillys did not sell any unregistered equity securities or purchase any of its securities during the fiscal year ended January 29, 2022[159] Item 6. [Reserved.] This item is reserved and contains no information - Item 6 is reserved[160] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Tillys' financial condition and operational results, covering key trends, performance indicators, liquidity, and accounting policies Overview - Tillys is a leading destination specialty retailer of casual apparel, footwear, accessories, and hardgoods for young men, young women, boys, and girls[164] Company Operations (as of January 29, 2022) | Metric | Value | | :--- | :--- | | Stores Operated | 241 | | States Present | 33 | | Average Store Size | 7,300 sq ft | Known or Anticipated Trends COVID-19 Pandemic - The COVID-19 pandemic continues to adversely impact business, with uncertainties regarding its duration and severity, affecting consumer behavior, store traffic, supply chains, and operational capabilities[165] - Fiscal 2021 operating results were significantly aided by pent-up consumer demand and federal stimulus payments, making future business trends relative to fiscal 2021 difficult to predict[165] Supply Chain Disruptions - Widespread pandemic issues in manufacturing countries and global transportation network disruptions, particularly in Southern California ports, are causing shipping delays and increased costs[166] - These issues have led to adjustments in merchandise planning, allocation, and pricing strategies, with unpredictable effects on fiscal 2022 net sales, results of operations, and inventory[166][167] Inflationary Cost Pressures - Geo-political matters and supply chain disruptions have resulted in significant price increases for gasoline, food, and other consumables in early 2022[168] - While not materially impacting the business to date, these price increases may negatively affect consumer behavior and, by extension, the company's results of operations and financial condition in fiscal 2022[168] Preliminary Fiscal 2022 New Store Openings and Capital Expenditure Plans - Tillys plans to open approximately 15 to 20 new stores in fiscal 2022, primarily in California, Texas, and the Northeast[169] Fiscal 2022 Capital Expenditure Plans | Category | Estimated Range | | :--- | :--- | | Total Capital Expenditures | $25 million to $30 million | | Includes | New stores, website/mobile app upgrades, distribution efficiencies, IT infrastructure | - Additional potential investments in distribution capacity are being explored for longer-term growth but are not yet included in the capital expenditure range[169] How We Assess the Performance of Our Business - Key indicators for assessing financial condition and operating performance include net sales, comparable store sales, gross profit, selling, general and administrative expenses (SG&A), and operating income[170] - Comparable store sales are defined as sales from the e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates of the prior year, excluding gift card breakage and e-commerce shipping fees[174] - Gross profit is net sales less cost of goods sold, which includes direct merchandise costs, buying, distribution, and occupancy costs[175] - SG&A expenses comprise store selling expenses and corporate-level general and administrative expenses, with store selling expenses generally varying proportionately with net sales and store growth[178] Results of Operations Summary of Operations Data Consolidated Statements of Operations Data (in thousands) | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net sales | $775,694 | $531,329 | $619,300 | | Cost of goods sold | $499,031 | $389,139 | $432,592 | | Gross profit | $276,663 | $142,190 | $186,708 | | Total selling, general and administrative expenses | $189,068 | $145,230 | $158,253 | | Operating income (loss) | $87,595 | $(3,040) | $28,455 | | Income (loss) before income taxes | $87,001 | $(2,459) | $31,356 | | Income tax expense (benefit) | $22,752 | $(1,314) | $8,734 | | Net income (loss) | $64,249 | $(1,145) | $22,622 | Percentage of Net Sales | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net sales | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 64.3 % | 73.2 % | 69.9 % | | Gross profit | 35.7 % | 26.8 % | 30.1 % | | Total selling, general and administrative expenses | 24.4 % | 27.3 % | 25.6 % | | Operating income (loss) | 11.3 % | (0.6)% | 4.6 % | | Income (loss) before income taxes | 11.2 % | (0.5)% | 5.1 % | | Income tax expense (benefit) | 2.9 % | (0.3)% | 1.4 % | | Net income (loss) | 8.3 % | (0.2)% | 3.7 % | Store Operating Data Store Operating Data (Fiscal Years) | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Stores operating at end of period | 241 | 238 | 240 | | Comparable store sales change | 16.3% | 3.7% | 0.8% | | Total square feet at end of period (in thousands) | 1,764 | 1,751 | 1,776 | | Average net sales per brick-and-mortar store (in thousands) | $2,511 | $1,494 | $2,240 | | Average net sales per square foot | $342 | $202 | $301 | | E-commerce revenues (in thousands) | $165,950 | $173,433 | $98,457 | | E-commerce revenues as a percentage of net sales | 21.4% | 32.6% | 15.9% | Fiscal Year 2021 Compared to Fiscal Year 2020 Net Sales Net Sales Comparison (Fiscal 2021 vs. Fiscal 2020) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Change (Millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $775.7 | $531.3 | $244.4 | 46.0% | | Physical Store Net Sales | $609.7 | $357.9 | $251.8 | 70.4% | | E-commerce Net Sales | $165.9 | $173.4 | $(7.5) | (4.3)% | - The significant increase in total net sales was primarily due to pent-up consumer demand and federal stimulus payments in fiscal 2021, and the impact of pandemic-related store closures and restrictions in fiscal 2020[183] - E-commerce net sales decreased as a percentage of total net sales (from 32.6% to 21.4%) due to a shift in consumer preference back to physical stores after pandemic restrictions eased[186] Gross Profit Gross Profit Comparison (Fiscal 2021 vs. Fiscal 2020) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Change (Millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $276.7 | $142.2 | $134.5 | 94.6% | | Gross Margin | 35.7% | 26.8% | 8.9 percentage points | | - Product margins improved by 130 basis points due to reduced total markdowns[184] - Buying, distribution, and occupancy costs collectively improved by 760 basis points as a percentage of net sales, primarily due to leveraging these costs against higher total net sales[184] Selling, General and Administrative Expenses ("SG&A") SG&A Comparison (Fiscal 2021 vs. Fiscal 2020) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Change (Millions) | % of Net Sales (2021) | % of Net Sales (2020) | Change in % of Net Sales | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | SG&A | $189.1 | $145.2 | $43.8 | 24.4% | 27.3% | (2.9)% | - The decrease in SG&A as a percentage of net sales was primarily due to leveraging these expenses against higher total net sales[185] - Key drivers of SG&A changes included increases in store payroll ($28.5M), corporate bonus accruals ($6.6M), marketing expenses ($3.9M), and credit card fees ($2.7M), partially offset by a net decrease from a resolved California sales tax assessment[185] Operating Income (Loss) Operating Income (Loss) Comparison (Fiscal 2021 vs. Fiscal 2020) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Improvement (Millions) | | :--- | :--- | :--- | :--- | | Operating Income (Loss) | $87.6 | $(3.0) | $90.6 | | Operating Income (Loss) % of Net Sales | 11.3% | (0.6)% | | Income Tax Expense (Benefit) Income Tax Expense (Benefit) and Effective Tax Rate (Fiscal Years) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Effective Tax Rate (2021) | Effective Tax Rate (2020) | | :--- | :--- | :--- | :--- | :--- | | Income Tax Expense (Benefit) | $22.8 | $(1.3) | 26.2% | 53.5% (of pre-tax loss) | - The decrease in the effective income tax rate was primarily due to a normalization of the tax rate after fiscal 2020's rate was distorted by low pre-tax losses[188] Net Income (Loss) and Earnings (Loss) Per Share Net Income (Loss) and EPS (Fiscal Years) | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Net Income (Loss) | $64.2 | $(1.1) | $65.4 | | Diluted EPS | $2.06 | $(0.04) | | Liquidity and Capital Resources Overview - Primary liquidity sources are cash flows from operating activities and cash on hand[190] - Existing cash, marketable securities, and operating cash flows are expected to cover working capital and anticipated capital expenditures for the next 12 months[191] Working Capital Working Capital (Fiscal Years) | Metric | January 29, 2022 (Millions) | January 30, 2021 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Working Capital | $91.8 | $77.5 | $14.3 | - The increase in working capital was primarily driven by higher net income, increases in cash, cash equivalents, marketable securities, and merchandise inventories, partially offset by special cash dividend payments[192] Cash Flow Analysis Summary of Cash Flow Activities (in thousands) | Activity | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $63,402 | $38,897 | $36,434 | | Net cash used in investing activities | $(45,328) | $(3,197) | $(6,509) | | Net cash used in financing activities | $(52,057) | $(29,653) | $(27,948) | Net Cash Provided by Operating Activities - Net cash provided by operating activities increased in fiscal 2021 compared to fiscal 2020, primarily due to higher net sales in fiscal 2021, which benefited from fewer pandemic-related store closures[195] Net Cash Used in Investing Activities Investing Activities (Fiscal Years, in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Net cash used in investing activities | $(45,328) | $(3,197) | | Capital expenditures | $13,425 | $8,471 | | Purchases of marketable securities | $162,321 | $80,896 | | Proceeds from maturities of marketable securities | $130,352 | $86,170 | Net Cash Used in Financing Activities Financing Activities (Fiscal Years, in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Net cash used in financing activities | $(52,057) | $(29,653) | | Cash dividends paid | $61,630 | $29,677 | | Proceeds from exercise of stock options | $9,573 | $24 | Line of Credit - On January 20, 2022, Tillys entered into a new senior unsecured credit agreement providing a $25.0 million revolving credit facility, maturing on January 20, 2024[201][202] - Borrowings under the new facility bear interest at SOFR plus 0.75%, with a 1.00% per annum fee on outstanding letters of credit[204] - The credit agreement includes financial covenants requiring maintenance of a total funded debt to EBITDA ratio no greater than 4.00 to 1.00 and a fixed charge coverage ratio of not less than 1.25 to 1.00[205] - As of January 29, 2022, Tillys was in compliance with all covenants and had no outstanding borrowings under the new credit agreement[208] Contractual Obligations - Tillys has long-term contractual obligations primarily related to non-cancellable operating leases for its corporate headquarters, distribution centers, and retail stores[212][215] - Leases for corporate headquarters and distribution centers are with companies owned by co-founders, expiring between June 2022 and October 2031[212][213][214] Critical Accounting Policies and Estimates Overview - The preparation of financial statements requires significant management judgment and estimates, which are reevaluated on an ongoing basis[216][217] - Key accounting policies requiring significant judgment include revenue recognition, loyalty program, merchandise inventories, long-lived assets, operating leases, share-based compensation, and income taxes[219] Revenue Recognition - Revenue from store sales is recognized when merchandise is received and paid for by the customer, net of estimated returns[220] - For e-commerce sales, revenue is recognized when merchandise is shipped to the customer, net of sales taxes and estimated returns[220] - Revenues fluctuate seasonally, with the third and fourth fiscal quarters historically producing stronger sales due to back-to-school and holiday seasons[221] Loyalty Program - Unredeemed awards and accumulated partial points from the customer loyalty program are accrued as deferred revenue, with a liability estimated based on expected redemptions and standalone selling price[223] Merchandise Inventories - Merchandise inventories are valued at the lower of cost or net realizable value using the retail inventory method, which involves management judgments and estimates for markdowns[224] - Markdowns are recorded when the sales value of inventory diminishes, based on factors like demand, customer preferences, age, and fashion trends[225] - An inventory shrinkage reserve is calculated as a percentage of net sales for estimated merchandise losses between physical counts, based on historical percentages and trends[227] Long-Lived Assets - The carrying value of long-lived assets (leasehold improvements, furniture, fixtures, equipment) is evaluated for impairment when events or changes in circumstances indicate non-recoverability[228] - Impairment review is based on estimated undiscounted future cash flows from operating activities compared to carrying value; if lower, an impairment loss is recognized based on estimated fair value[228] Operating Leases - Upon adoption of ASC 842, operating leases are recorded on the balance sheet as operating lease assets and liabilities, with liabilities based on the net present value of fixed lease components[230][231] - The incremental borrowing rate (IBR) is used to calculate net present value, requiring complex judgment based on synthetic credit ratings and market interest rates[231] Share-based Compensation - Share-based compensation expense is measured at grant date fair value and recognized straight-line over the employee's service period[232] - The Black-Scholes option-pricing model is used to determine fair value of stock options, relying on assumptions such as expected option term, volatility, risk-free interest rates, and expected dividends[233] Accounting for Income Taxes - Income taxes are accounted for under ASC Topic 740, accruing taxes payable/refundable and recognizing deferred tax assets/liabilities based on GAAP and tax basis differences[235] - Net deferred tax assets are recorded if realization is more likely than not, considering future taxable income and tax planning strategies[236] Recent Accounting Pronouncements - ASU No. 2016-13 (Measurement of Credit Losses on Financial Instruments) will be effective in fiscal 2023, modifying models for impairment of receivables and debt securities, with no material impact expected[302] - ASU No. 2020-04 (Reference Rate Reform) provides optional expedients for contracts affected by LIBOR discontinuation, effective through December 31, 2022, with impact currently being evaluated[303] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section addresses Tillys' exposure to market risks, including interest rate, inflation, and foreign exchange rate risks Interest Rate Risk - Tillys is subject to interest rate risk on borrowings under its credit facility, which bears variable rates[239] - As of January 29, 2022, and January 30, 2021, there were no outstanding borrowings under the credit facility[239] Impact of Inflation - Historically, the effects of inflation on operations and financial condition have been immaterial[240] - However, inflationary cost pressures on gasoline, food, and other consumables in early fiscal 2022 may materially impact consumer behavior and, consequently, the company's results of operations and financial condition[240] Foreign Exchange Rate Risk - Tillys sources all merchandise through domestic vendors and purchases certain fixtures and materials from foreign suppliers, but all purchases are denominated in U.S. dollars[241] - The company does not hedge using derivative instruments and has not historically been impacted by changes in exchange rates[241] Item 8. Financial Statements and Supplementary Data This section presents Tillys' audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed notes Index to Consolidated Financial Statements - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[243] Report of Independent Registered Public Accounting Firm - BDO USA, LLP issued an unqualified opinion on Tillys' consolidated financial statements for the period ended January 29, 2022, in conformity with GAAP[244] - The firm also expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of January 29, 2022[245] - A critical audit matter identified was the determination of incremental borrowing rates for leases, which involves complex judgment in developing synthetic credit ratings and identifying market interest rates[250][251] Consolidated Balance Sheets Consolidated Balance Sheets (in thousands) | ASSETS | January 29, 2022 | January 30, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $42,201 | $76,184 | | Marketable securities | $97,027 | $64,955 | | Merchandise inventories | $65,645 | $55,698 | | Total current assets | $227,978 | $211,731 | | Operating lease assets | $216,508 | $229,864 | | Property and equipment, net | $47,530 | $52,639 | | Total assets | $504,823 | $507,456 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $28,144 | $24,983 | | Accrued expenses | $19,073 | $30,682 | | Current portion of operating lease liabilities | $51,504 | $51,879 | | Total current liabilities | $136,167 | $134,191 | | Noncurrent portion of operating lease liabilities | $171,965 | $199,503 | | Total liabilities | $330,110 | $346,834 | | Total stockholders' equity | $174,713 | $160,622 | Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share data) | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net sales | $775,694 | $531,329 | $619,300 | | Gross profit | $276,663 | $142,190 | $186,708 | | Operating income (loss) | $87,595 | $(3,040) | $28,455 | | Net income (loss) | $64,249 | $(1,145) | $22,622 | | Basic earnings (loss) per share | $2.10 | $(0.04) | $0.77 | | Diluted earnings (loss) per share | $2.06 | $(0.04) | $0.76 | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) | $64,249 | $(1,145) | $22,622 | | Net change in unrealized losses on available-for-sale securities | $(21) | $(194) | $(12) | | Comprehensive income (loss) | $64,228 | $(1,339) | $22,610 | Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance at Feb 2, 2019 | Balance at Feb 1, 2020 | Balance at Jan 30, 2021 | Balance at Jan 29, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $163,327 | $159,901 | $160,622 | $174,713 | | Net income (loss) | | $22,622 | $(1,145) | $64,249 | | Dividends declared/paid | $(29,677) | $(29,677) | $(61,630) | | Share-based compensation expense | $2,136 | $2,036 | $1,920 | | Exercise of stock options | $1,590 | $24 | $9,573 | | Net change in unrealized losses on available-for-sale securities | $(12) | $(194) | $(21) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Activity | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $63,402 | $38,897 | $36,434 | | Net cash used in investing activities | $(45,328) | $(3,197) | $(6,509) | | Net cash used in financing activities | $(52,057) | $(29,653) | $(27,948) | | Change in cash and cash equivalents | $(33,983) | $6,047 | $1,977 | | Cash and cash equivalents, end of period | $42,201 | $76,184 | $70,137 | Notes to Consolidated Financial Statements Note 1: Description of the Company and Basis of Presentation - Tillys is a specialty retailer of casual apparel, footwear, accessories, and hardgoods, operating 241 stores in 33 states and an e-commerce website[268] - The fiscal year ends on the Saturday closest to January 31; fiscal years 2021, 2020, and 2019 each consisted of 52 weeks[271] - The ongoing COVID-19 pandemic continues to adversely impact the business, affecting consumer behavior, store traffic, supply chains, and operational capabilities, with future impacts remaining uncertain[273] Note 2: Summary of Significant Accounting Policies - Key accounting policies include cash and cash equivalents (short-term investments with initial maturity of 90 days or less), marketable securities (classified as available-for-sale or held-to-maturity), and merchandise inventories (lower of cost or net realizable value using retail inventory method)[274][275][276] - Property and equipment are stated at cost less accumulated depreciation, with impairment evaluated when carrying value may not be recoverable[279][281] - Revenue recognition for store sales is at customer receipt, and for e-commerce sales, at shipment, net of estimated returns and taxes[285] - Share-based compensation is measured at grant date fair value and recognized over the service period, while income taxes are accrued based on GAAP and tax basis differences[295][296] Net Sales by Channel (in thousands) | Channel | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Retail stores | $609,744 | $357,896 | $520,843 | | E-commerce | $165,950 | $173,433 | $98,457 | | Total net sales | $775,694 | $531,329 | $619,300 | Net Sales by Brand Type | Brand Type | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Third-party | 70% | 74% | 75% | | Proprietary | 30% | 26% | 25% | | Total net sales | 100% | 100% | 100% | Note 3: Marketable Securities - Marketable securities as of January 29, 2022, consisted of commercial paper (available-for-sale) and fixed income securities (held-to-maturity), all less than one year from maturity[304] Marketable Securities (in thousands) | Category | Cost or Amortized Cost (Jan 29, 2022) | Estimated Fair Value (Jan 29, 2022) | Cost or Amortized Cost (Jan 30, 2021) | Estimated Fair Value (Jan 30, 2021) | | :--- | :--- | :--- | :--- | :--- | | Commercial paper | $64,235 | $64,233 | $64,928 | $64,955 | | Fixed income securities | $32,794 | $32,794 | — | — | | Total marketable securities | $97,029 | $97,027 | $64,928 | $64,955 | Note 4: Receivables Receivables (in thousands) | Category | January 29, 2022 | January 30, 2021 | | :--- | :--- | :--- | | Credit and debit card receivables | $2,692 | $2,816 | | Tenant allowances due from landlords | $1,367 | $3,854 | | CARES Act employee retention credit | $1,313 | $1,239 | | Other | $1,333 | $815 | | Total receivables | $6,705 | $8,724 | - The allowance for doubtful accounts was zero for fiscal years 2021 and 2020, with year-end receivables primarily collected within the following fiscal quarter[307] Note 5: Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Current Assets (in thousands) | Category | January 29, 2022 | January 30, 2021 | | :--- | :--- | :--- | | Prepaid income taxes | $9,756 | — | | Prepaid insurance | $2,585 | $1,984 | | Prepaid maintenance | $1,896 | $1,366 | | Prepaid rent | $1,406 | $2,015 | | Other | $757 | $805 | | Total prepaid expenses and other current assets | $16,400 | $6,170 | Note 6: Property and Equipment Property and Equipment, Net (in thousands) | Category | January 29, 2022 | January 30, 2021 | | :--- | :--- | :--- | | Leasehold improvements | $150,239 | $146,565 | | Furniture and fixtures | $46,397 | $46,239 | | Computer hardware and software | $41,414 | $38,286 | | Machinery and equipment | $33,550 | $32,634 | | Vehicles | $2,187 | $2,394 | | Construction in progress | $3,615 | $4,805 | | Property and equipment, gross | $277,402 | $270,923 | | Accumulated depreciation | $(229,872) | $(218,284) | | Property and equipment, net | $47,530 | $52,639 | Depreciation Expense and Capital Expenditures (in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | :--- | | Depreciation expense | $16,836 | $19,100 | $20,900 | | Cash paid for capital expenditures | $13,425 | $8,471 | $14,299 | - Non-cash impairment charges of $0.1 million, $1.0 million, and $0.3 million were recorded in fiscal years 2021, 2020, and 2019, respectively, to write down long-lived assets to their estimated fair values[311] Note 7: Accrued Expenses Accrued Expenses (in thousands) | Category | January 29, 2022 | January 30, 2021 | | :--- | :--- | :--- | | Accrued freight | $3,924 | $4,752 | | Sales and use taxes payable | $2,650 | $5,901 | | Merchandise returns | $1,852 | $1,371 | | Accrued construction | $1,080 | $2,495 | | Income taxes payable | — | $6,526 | | Other | $9,567 | $9,637 | | Total accrued expenses | $19,073 | $30,682 | Note 8: Line of Credit - A new senior unsecured credit agreement was entered into on January 20, 2022, providing a $25.0 million revolving credit facility maturing on January 20, 2024, replacing a prior asset-backed agreement[313][314] - The new facility bears interest at SOFR plus 0.75% and includes financial covenants such as a total funded debt to EBITDA ratio (max 4.00:1.00) and a fixed charge coverage ratio (min 1.25:1.00)[316][317] - As of January 29, 2022, Tillys was in compliance with all covenants and had no outstanding borrowings under the new credit agreement, with only a $2.025 million standby letter of credit utilized[320][322] Note 9: Leases - Tillys leases all retail and corporate operations facilities, with store lease terms generally up to ten years and provisions for rent escalations and contingent rent[325][326] - Related party leases include office and warehouse space from companies owned by co-founders, with rent expenses of $2.0 million, $0.4 million, and $1.1 million for fiscal 2021 for the respective facilities[327][328][329] Maturity of Operating Lease Liabilities (as of January 29, 2022, in thousands) | Fiscal Year | Related Party | Other | Total | | :--- | :--- | :--- | :--- | | 2022 | $3,434 | $64,112 | $67,546 | | 2023 | $3,416 | $53,668 | $57,084 | | 2024 | $3,543 | $43,297 | $46,840 | | 2025 | $3,676 | $34,136 | $37,812 | | 2026 | $3,814 | $22,698 | $26,512 | | Thereafter | $9,768 | $46,818 | $56,586 | | Total minimum lease payments | $27,651 | $264,729 | $292,380 | | Less: Interest | $4,118 | $41,260 | $45,378 | | Present value of operating lease liabilities | $23,533 | $223,469 | $247,002 | Total Lease Expense (in thousands) | Metric | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Fixed operating lease expense | $62,003 | $62,089 | $63,707 | | Variable lease expense | $18,106 | $16,302 | $16,684 | | Total lease expense | $80,109 | $78,391 | $80,391 | Note 10: Commitments and Contingencies - Tillys has made indemnifications, commitments, and guarantees in the normal course of business, primarily for facility leases and directors/officers, with no recorded liability for these as their maximum potential future payments are often unlimited[333] Future Minimum Payments for Purchase Obligations (in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2022 | $3,200 | | 2023 | $800 | | 2024 | $500 | | 2025 | $200 | | 2026 | $100 | | Total | $4,700 | - The company is involved in legal proceedings, including a class action lawsuit regarding California wage and hour laws, for which a loss provision of $0.2 million was established in March 2022 for a settlement agreement[335][336][338] Note 11: Fair Value Measurements - Fair value is determined using a three-level hierarchy (Level 1: quoted active markets, Level 2: observable inputs, Level 3: unobservable inputs)[339][340][341] - Financial assets measured at fair value on a recurring basis include marketable securities (commercial paper, fixed income securities) and certain cash equivalents (money market securities)[342] Financial Assets by Fair Value Hierarchy (in thousands) | Category | Level 1 (Jan 29, 2022) | Level 2 (Jan 29, 2022) | Level 1 (Jan 30, 2021) | Level 2 (Jan 30, 2021) | | :--- | :--- | :--- | :--- | :--- | | Money market securities | $32,764 | — | $67,115 | — | | Commercial paper (cash equivalents) | — | $4,999 | — | — | | Commercial paper (marketable securities) | — | $64,233 | — | $64,955 | - Non-recurring impairment charges for long-lived assets were $0.1 million (1 store), $1.0 million (12 stores), and $0.3 million (1 store) in fiscal years 2021, 2020, and 2019, respectively[346][348] Note 12: Share-Based Compensation - The 2012 Equity and Incentive Award Plan authorizes up to 6,613,900 shares for issuance, with 2,300,365 shares available for future issuance as of January 29, 2022[349] Stock Option Activity (Fiscal 2021) | Metric | Stock Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at Jan 30, 2021 | 2,602,212 | $8.19 | | Granted | 523,700 | $10.94 | | Exercised | (1,221,972) | $7.83 | | Forfeited | (301,729) | $9.19 | | Expired | (32,000) | $16.26 | | Outstanding at Jan 29, 2022 | 1,570,211 | $9.02 | | Exercisable at Jan 29, 2022 | 430,141 | $10.94 | Share-Based Compensation Expense (in thousands) | Category | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Cost of goods sold | $193 | $584 | $482 | | Selling, general and administrative expenses | $1,727 | $1,452 | $1,654 | | Total share-based compensation | $1,920 | $2,036 | $2,136 | | Less: Income tax expense benefit | $(239) | $(537) | $(565) | | Total share-based compensation, net of tax | $1,681 | $1,499 | $1,571 | - As of January 29, 2022, there was $3.8 million of total unrecognized share-based compensation expense, with a weighted average remaining recognition period of 2.6 years[360] Note 13: Retirement Savings Plan - The Tillys 401(k) Plan covers employees aged 21+ with at least three months of employment[361] Employer Contributions to 401(k) Plan (in millions) | Fiscal Year | Amount | | :--- | :--- | | 2021 | $0.9 | | 2020 | $0 | | 2019 | $0.7 | Note 14: Income Taxes Components of Income Tax Expense (in thousands) | Category | Fiscal Year Ended Jan 29, 2022 | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | | :--- | :--- | :--- | :--- | | Current Federal | $16,147 | $2,279 | $11,211 | | Current State | $6,094 | $1,284 | $3,238 | | Deferred Federal | $709 | $(3,889) | $(4,704) | | Deferred State | $(198) | $(988) | $(1,011) | | Total income tax (benefit) expense | $22,752 | $(1,314) | $8,734 | Net Deferred Tax Asset (in thousands) | Category | January 29, 2022 | January 30, 2021 | | :