Tilly’s, Inc. (NYSE:TLYS) is a leading specialty retailer of casual apparel, footwear, accessories, and hardgoods for young men, young women, boys, and girls. With a rich 42-year history, the company has established itself as a destination for trendy, lifestyle-inspired merchandise across its extensive network of brick-and-mortar stores and e-commerce platform.
Company History
Founded in 1982 by Hezy Shaked and Tilly Levine, Tilly’s started as a single store in Orange County, California, catering to the active and outdoor-oriented youth culture. The company’s initial concept focused on providing casual apparel, footwear, accessories, and hardgoods targeted towards young men, young women, boys, and girls. In 1984, the business was formally incorporated as World of Jeans & Tops, operating under the Tilly’s name. Over the following decades, Tilly’s experienced steady growth, expanding its footprint across the western United States.
By the late 2000s, Tilly’s had solidified its position as a leading destination for youth culture fashion and lifestyle products, with over 100 stores across 23 states. A significant milestone in the company’s history came in May 2012 when Tilly’s completed its initial public offering, reorganizing the corporate structure and becoming Tilly’s, Inc. This transition to a publicly-traded company provided Tilly’s with additional capital to continue expanding its retail footprint and investing in its omni-channel capabilities.
Throughout its history, Tilly’s has faced various challenges common to the retail industry, including navigating changes in consumer preferences, macroeconomic conditions, and the ongoing shift towards e-commerce. The company has consistently worked to adapt to these changes, evolving its merchandising, marketing, and operational strategies to best serve its target customer base. While Tilly’s has experienced periods of strong performance, it has also weathered more difficult stretches, requiring the leadership team to make tough decisions to position the company for long-term success.
Recent Performance
Despite navigating through challenging macroeconomic headwinds, Tilly’s has demonstrated resilience and a commitment to adapting its business model to evolving consumer preferences. The company’s second quarter of fiscal 2024 saw net sales reach $162.9 million, a 1.8% increase compared to the same period last year. This growth was primarily driven by the timing shift of back-to-school sales volume due to the 53rd week in the prior year’s retail calendar. However, comparable net sales, including both physical stores and e-commerce, decreased by 7.8% during the quarter.
Financials
Revenue and Net Income
For the most recent fiscal year ending January 31, 2024, Tilly’s reported revenue of $623.08 million, with a net loss of $34.49 million. The company’s operating cash flow for the same period was negative $6.73 million, while free cash flow stood at negative $20.69 million.
In the most recent quarter ending August 3, 2024, Tilly’s generated revenue of $162.87 million, with a net loss of $69,000. The company’s operating cash flow for the quarter was $10.49 million, with free cash flow of $8.00 million.
Gross Profit and Margins
Gross profit for the second quarter improved significantly, reaching 30.7% of net sales, a 300 basis point increase compared to the same period last year. This improvement was largely attributed to a 270 basis point increase in product margins, facilitated by a combination of better initial markups and lower total markdowns. Additionally, buying, distribution, and occupancy costs were more efficiently managed, leading to a 30 basis point improvement.
Operating Expenses
Despite the topline challenges, Tilly’s remained focused on cost discipline, with total selling, general, and administrative (SG&A) expenses coming in at $50.8 million or 31.2% of net sales, compared to $47 million or 29.4% of net sales in the prior-year quarter. The primary drivers of the SG&A increase were store payroll and related benefits, digital marketing expenses, software-as-a-service expenses, and corporate payroll and related benefits.
Net Income
Tilly’s second quarter of fiscal 2024 ended with a pre-tax loss of $73,000, a significant improvement from the prior-year quarter’s pre-tax loss of $1.5 million. The company’s net loss for the quarter was $69,000, or breakeven on a per-share basis, compared to a net loss of $1.1 million, or $0.04 per share, in the same period last year.
Product Segments
Tilly’s operates in several key product segments:
Womens: The womens segment made up 30% of Tilly’s total net sales in both the second quarter and first half of the year.
Accessories: This segment represented 16% of net sales in the second quarter and 14% in the first half of fiscal 2024.
Footwear: The footwear segment made up 11% of second quarter net sales and 12% of first half net sales.
Boys: This category contributed 5% of net sales in both the second quarter and first half of the year.
Girls: The girls’ category accounted for 5% of Tilly’s total net sales in the second quarter and first half of fiscal 2024.
This diversified product mix helps Tilly’s mitigate the impact of shifting consumer preferences within any one segment.
Future Outlook
Looking ahead, Tilly’s faces ongoing macroeconomic challenges, as the uncertain and inflationary environment continues to impact consumer spending, particularly within the company’s core demographic of teens, young adults, and young families. For the third quarter of fiscal 2024, Tilly’s expects:
Tilly’s expects to have 246 total stores open at the end of the third quarter, a net decrease of 3 from the end of last year’s third quarter. During the fourth quarter, the company currently expects to open 2 new stores and close 5 unprofitable stores, with the number of store closures potentially growing depending on lease expirations and profitability.
Despite the near-term headwinds, Tilly’s remains committed to adapting its business model and connecting with its customers in meaningful ways. The company has implemented a new brand marketing strategy to redefine its purpose and emphasize the importance of personal style, confidence, and mental well-being. This initiative, coupled with the introduction of new product collaborations and brand partnerships, aims to drive customer engagement and create new sales opportunities.
Liquidity
Tilly’s robust balance sheet provides a solid foundation for weathering the current challenges. As of January 31, 2024, the company reported:
Additionally, Tilly’s has access to up to $65 million under its new asset-backed credit agreement, with no outstanding borrowings as of August 3, 2024. The credit agreement includes a $10 million sub-limit for letters of credit and a $7.5 million sub-limit for swing line loans.
Conclusion
As Tilly’s navigates through these dynamic market conditions, the company’s ability to identify and respond to evolving consumer preferences, effectively manage costs, and execute its strategic initiatives will be crucial in determining its future success. The company’s balanced merchandise mix, with no single product category exceeding 35% of total net sales, provides some resilience against shifting consumer preferences. Additionally, Tilly’s continues to maintain a balanced omni-channel approach, with e-commerce sales representing 18.7% of total net sales in the second quarter and 19.2% in the first half of the year.
The apparel retail industry has been impacted by the shift to online shopping, persistent inflation, and changes in consumer spending patterns. Retailers with an omnichannel presence, like Tilly’s, have been better positioned to adapt to these industry trends. As Tilly’s continues to navigate these challenges, investors will closely monitor the company’s progress in restoring sales growth and profitability in the quarters ahead.
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