Tilly's, Inc. (TLYS) is a leading specialty retailer of casual apparel, footwear, accessories, and hardgoods for young men, young women, boys, and girls. Founded in 1982, the company has grown to become a prominent player in the young adult fashion market, known for its diverse brand portfolio and unique retail experience.
Business Overview and History Tilly's was established in 1982 by co-founders Hezy Shaked and Tilly Levine, who opened the first store in Orange County, California. The company originally operated under the name World of Jeans & Tops, focusing on casual apparel, footwear, accessories, and hardgoods for young consumers. In 1984, the business began operating under the name Tilly's through the California corporation World of Jeans & Tops.
A significant milestone in the company's history occurred in May 2011 when Tilly's, Inc., a Delaware corporation, was formed to reorganize the corporate structure of World of Jeans & Tops in preparation for an initial public offering. The IPO took place in May 2012, resulting in World of Jeans & Tops becoming a wholly owned subsidiary of Tilly's, Inc.
Throughout its history, Tilly's has maintained its focus on providing an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active, outdoor, and social lifestyle. The company has experienced steady growth over the years, expanding its store count and product assortment to meet the evolving needs and preferences of its target customers.
As of November 2, 2024, Tilly's operates 246 stores across 33 states, with an average store size of approximately 7,240 square feet. The company has also developed an integrated omnichannel strategy, which includes its e-commerce website, www.tillys.com, to provide customers with a seamless shopping experience across both physical stores and online platforms.
Financial Performance and Ratios Tilly's has faced some challenges in recent years, as evidenced by its financial performance. In the fiscal year ended February 3, 2024, the company reported total revenue of $623.08 million, a decrease from $672.28 million in the prior fiscal year. Net income for the year was a loss of $34.49 million, compared to a profit of $9.68 million in the previous year.
Financials Despite these headwinds, Tilly's maintains a solid financial position. As of November 2, 2024, the company had $52 million in cash and marketable securities, with no outstanding debt. The company's current ratio, a measure of short-term liquidity, stood at 1.35, indicating a healthy ability to meet its short-term obligations.
However, the company's profitability ratios have been under pressure. In the most recent fiscal year, Tilly's gross profit margin was 26.40%, down from 30.20% in the prior year. The net profit margin was -5.50%, a significant decline from the previous year's 1.40%. These metrics highlight the challenges the company has faced in maintaining profitability amidst a competitive retail landscape.
For the first nine months of fiscal 2024, Tilly's reported total net sales of $422.17 million, a 6.2% decrease compared to the same period last year. Comparable store sales, including both physical stores and e-commerce, decreased 6.8% during this timeframe. E-commerce net sales represented 20.3% of total net sales, up slightly from 20.0% in the prior year period.
Gross profit for the first nine months was $111.43 million, or 26.4% of net sales, flat compared to the same period in the prior year. This was despite a 130 basis point improvement in product margins, offset by 140 basis points of deleverage in buying, distribution, and occupancy costs.
Selling, general, and administrative (SG&A) expenses increased to $147.13 million, or 34.9% of net sales, compared to $141.44 million, or 31.4% of net sales, in the prior year period. This deleverage was driven by increases in store payroll, software expenses, corporate payroll, e-commerce fulfillment, and non-cash store asset impairment charges.
Overall, Tilly's reported an operating loss of $35.70 million, or 8.5% of net sales, for the first nine months of fiscal 2024, compared to an operating loss of $22.46 million, or 5.0% of net sales, in the same period last year. The company's net loss for the first nine months was $32.56 million, or $1.08 per share, compared to a net loss of $13.94 million, or $0.47 per share, in the prior year.
In the most recent quarter (Q3 2024), Tilly's reported revenue of $143.44 million, a decrease of 13.8% year-over-year. The net loss for the quarter was $12.88 million. The decrease in revenue was primarily due to the calendar shift impact of last year's 53rd week in the retail calendar, which caused a portion of the back-to-school season's sales volume to shift into the second quarter this year from the third quarter last year, resulting in an $18.4 million reduction in net sales.
Liquidity Tilly's liquidity position remains stable, with $52 million in cash and marketable securities and no outstanding debt as of November 2, 2024. The company's current ratio of 1.35 indicates a healthy ability to meet short-term obligations. This strong liquidity position provides Tilly's with financial flexibility to navigate the challenging retail environment and invest in strategic initiatives.
The company's debt-to-equity ratio stands at 1.80, while its quick ratio is 0.58. Tilly's has a $65 million asset-backed revolving credit facility, of which $63 million was available as of Q3 2024. The facility matures in April 2026, providing additional financial flexibility for the company.
Operational Highlights and Challenges Tilly's has been navigating a challenging retail environment, with the COVID-19 pandemic and changing consumer preferences posing significant headwinds. The company has taken steps to adapt to these changes, including investing in its digital capabilities, optimizing its store footprint, and refining its merchandising strategy.
In the third quarter of fiscal 2024, Tilly's reported a 3.4% decrease in comparable net sales, which included a 5.6% decline in store sales and a 4.9% increase in e-commerce sales. The company attributed this performance, in part, to the timing shift of the back-to-school season, which resulted in an $18.4 million reduction in net sales compared to the prior-year period.
To address these challenges, Tilly's has focused on improving its product margins, with the company expecting approximately 200 basis points of improvement in the fourth quarter of fiscal 2024 compared to the prior-year period. The company has also been actively managing its expenses, renegotiating leases, and exploring ways to enhance its overall operational efficiency.
Product Segments Tilly's operates in several key product segments:
1. Apparel: The company offers a wide range of casual apparel for young men, young women, boys, and girls. This includes iconic global, emerging, and proprietary brands rooted in an active, outdoor, and social lifestyle. Key apparel categories include tops, bottoms, dresses, and outerwear.
2. Footwear: Tilly's provides a selection of casual footwear options for its target customer base. This includes shoes, sandals, and boots from both third-party and proprietary brands.
3. Accessories: The accessory offerings complement Tilly's apparel and footwear products. This segment includes items such as hats, backpacks, bags, wallets, sunglasses, jewelry, and other fashion accessories.
4. Hardgoods: This segment encompasses a variety of lifestyle-oriented products beyond just apparel and accessories. This includes items like skateboards, electronics, beauty products, and other lifestyle-related merchandise.
Industry Trends The apparel retail industry has seen a shift towards e-commerce and omnichannel strategies in recent years. The COVID-19 pandemic further accelerated this trend as consumers shifted their shopping habits. Industry analysts estimate the CAGR for the US apparel retail industry to be in the low to mid single digits over the next 5 years.
Guidance and Outlook For the fourth quarter of fiscal 2024, Tilly's expects total net sales to be in the range of $149 million to $156 million, translating to a comparable net sales decline of 9% to 5%. The company anticipates generating product margin improvements of approximately 200 basis points relative to the prior-year period.
Tilly's expects SG&A expenses to be approximately $52 million before any potential non-cash store asset impairment charges. The company's outlook for the quarter also includes a pretax loss and net loss in the range of $13 million to $9.5 million, with a near-zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on its deferred tax assets.
The company expects a loss per share to be in the range of $0.43 to $0.32, based on estimated weighted average shares of approximately 30 million. Tilly's plans to close at least 10 predominantly underperforming stores near the end of the fourth quarter, which would bring the total store count to 239 at the end of the fiscal year, a net decrease of 9 stores from the end of fiscal 2023.
Conclusion Tilly's has faced a challenging retail landscape in recent years, navigating the impact of the COVID-19 pandemic and evolving consumer preferences. The company has responded by focusing on improving its product margins, optimizing its store footprint, and enhancing its digital capabilities. While the company's short-term outlook remains cautious, Tilly's is working to position itself for long-term success by addressing its operational and financial challenges. As the retail industry continues to evolve, Tilly's will need to maintain its adaptability and strategic focus to overcome the headwinds and capitalize on emerging opportunities in the young adult fashion market.