Q3 2019 Earnings Call
Greetings and welcome to the totally think third quarter 2019 earnings results Conference call. At this time all participants are in listen only mode question answer session will follow the formal presentation.
I want to require operator systems during the conference. Please press star zero under telephone keypad.
Please note. This conference is being recorded I'll now turn the conference over to your host Guar Jackson you may begin.
Good afternoon, and welcome to the Tilly's fiscal 2019 third quarter earnings call that Thomas President and CEO and Michael Henry CFO will discuss the company's result, and then how security Sasha for a copy of today's earnings press release. Please visit the Investor Relations section of the company's website until these dot com from the same section shortly after the.
In conclusion other call you'll also be able to find recorded replay of this call for the next 30 days certain forward looking statements will be made during this call that reflect tilly's judgment and analysis only as of today December for 2019, and actual results may differ materially from current expectations based on a number of factors affecting tilly's business.
Accordingly, you should not place undue reliance on these forward looking statements for more thorough discussion of the risks and uncertainties associated with any forward looking statement. Please see the disclaimer regarding forward looking statements is included in our fiscal 2019 third quarter earnings release, which was furnished to the FCC today on form 8-K, as well as our other filings with the FCC reference.
In that disclaimer today's call will be limited to one hour and will include acuity session. After our prepared remarks.
I'll now turn the call over that.
Thanks, guys are good afternoon, everyone and thank you for joining us today.
We're very encouraged by our results during the third quarter as well as during Thanksgiving weekend and cyber Monday.
Oh, 14th consecutive quarter of flat to positive comps sales in the third quarter included positive comps and the each month of the quarter, both from stores and E com and from each of our merchandising departments.
Our graphic Tees business was particularly strong across all apparel department.
And women, we introduced a new young contemporary proprietary brand Western Melrose and a few targeted stores during the back to school season that will soon be introduced.
To most of our stores based on the positive initial customer response to this collection.
<unk> branded and proprietary product west the Melrose is aimed at capturing the older team and college age young woman.
Which we believe will help extend the reach of our women's business.
Speaking of merchandising I'd like to probably welcome Tricia Smith to our company Tricia joined US at the end of September as New Executive Vice President and Chief Merchandising officer. She enjoyed a successful 25 year career at Nordstrom, Most recently as executive Vice President General merchandise.
Manager of women.
Yeah contemporary designer and specialized apparel before deciding to join us.
We're very excited to have someone of Tricia his experience in background, leading our merchandising efforts. We have been very impressed with tricia's contributions thus far and she is already beginning to identify opportunities for improvement.
Nutritious leadership, we expect to see a more targeted and carefully edited assortment overtime that will tell a clearer product stories for our customers to better understand what Kelly stands for and its merchandising offering.
Turning to real estate.
We remain encouraged by the performance of our new store openings and continue to believe we have a meaningful number of opportunities to open profitable new stores in the future.
We opened four new full size tilly's stores during the third quarter and we have and have we have opened just opened seven more stores during the fourth quarter prior to Thanksgiving.
We also plan to open a new tilly's store at Universal City walk before Christmas, bringing our total new store openings for fiscal 2019 to 14.
As planned we closed a rescue pop up store in King of Prussia upon opening about full size store there during the third quarter.
In fiscal 2020, our preliminary expectations.
To open up to.
To 15 no stores.
Filming appropriate economics can be a to obtain.
We will continue to prioritize expanding our presence in existing markets wherein we believe we can achieve greater market.
Penetration and brand awareness.
We do not have any confirmed store closures in fiscal 2020 at this time you had some may likely occur as we work our way through our continuous lease renewal negotiations.
In closing I'd like to thank our entire team for continuing to drive positive comps and improvements in our business.
Despite a slow start to the fourth quarter as a result related Thanksgiving this year.
Friday weekend met our expectations, leaving us optimal this up optimistic.
About our opportunity to deliver positive comps in the fourth quarter.
Mike will now discuss the details about third quarter operating.
Performance and introduced a fourth quarter earnings outlook Mike.
Thanks, Ed our fiscal 2019 third quarter operating results compared to last year's third quarter were as follows.
<unk> sales of $154.8 million increased by $8 million or 5.4% from $146.8 million last year.
Total comparable store net sales, including E Commerce were up 3.1% on top of last years, 4.3% increase.
Comp sales and physical stores were up 2.4% on top of last year's 1.3% increase.
Stores represented approximately 85.3% of our total net sales for the quarter compared to approximately 85.5% last year.
He called net sales increased 7.4% on top of last years, 26.7% increase.
And represented approximately 14.7% of our total net sales this year compared to approximately 40, 14.5% of our total net sales last year.
We ended the quarter with 232 total stores, including one rescue pop up shop compared to 227 total stores last year, which included four rescue pop up shops.
Gross profit, including buying distribution and occupancy expenses was $47.2 million or 30.5% of net sales compared to $43.7 million were 29.7% of net sales last year.
I'd like to margins improved by 80 basis points compared to last year.
Total buying distribution and occupancy cost de leveraged by less than 10 basis points as a percentage net sales.
Merely due to severance and other transition costs associated with our change in merchandising leadership during the quarter of approximately zero point $7 million, partially offset by improved leverage of distribution costs.
But unless you <unk> expenses were $39.5 million or 25.5% of net sales compared to $36.9 million or 25.1% of net sales last year.
Primary yesterday variances to last year include approximately $1 million of increased marketing and expenses primarily relating to E com.
0.5% 0.5 million dollar asset write off charge relating to mobile App development.
Approximately zero point $5 million of increased store payroll for minimum wage in store count growth.
And approximately zero point $5 million increase temporary labor costs.
Despite the increase in store payroll dollars, we're able to improve operating leverage of store payroll costs by 30 basis points on higher total sales.
Last year was asked you now includes approximately zero point $7 million, a secondary offering costs that were not repeated this year.
Operating income improved to $7.7 million or 5.0% of net sales compared to $6.7 million or 4.6% of net sales last year due to net sales growth.
Income tax expense was $2.2 million or 25.9% of pretax income compared to $2 million were 26.9% of pretax income last year.
Net income was $6.4 million or 21 cents per diluted share compared to $5.4 million or 18 cents per diluted share last year.
Weighted average diluted shares for the quarter were 29.8 million compared to 30.1 million last year.
All the results just discussed are reported on a GAAP basis in our earnings press release issued today interested parties will also find certain non-GAAP tables, comparing third quarter and year to date performance. The last year, excluding certain infrequently occurring items that are not typically part of our day to day operations, namely the severance and other transition costs.
Raising leadership from this year's third quarter secondary offering cost from last year's third quarter and legal matter credit from last year's year to date results.
Turning to our balance sheet, we ended the quarter with cash and marketable securities totaling $130.1 million and no debt compared to $120.5 million and no debt last year.
We ended the quarter with inventories per square foot down, 3.8% and more current in terms of aging compared to last year at this time.
Total year to date capital expenditures through the third quarter were $10.6 million compared to $10.4 million last year.
We anticipate total capital expenditures for fiscal 2019 to be approximately $19 million.
For fiscal 2020, we preliminarily anticipate total capex to be approximately $20 million based on opening 15 new stores.
It's been hands omni channel another customer facing capabilities.
Now turning to our outlook for the fourth quarter fiscal 2019.
Based on current and historical trends, particularly with respect to years with a later Thanksgiving in short timeframe until Christmas. We expect total net sales to range from approximately $179 million to approximately $184 million based on a comparable store net sales increased 2% to 5% for the quarter.
We expect operating income to range from approximately $11 million to approximately $12.5 million and earnings per diluted share to range from 29 cents to 32 cents.
[noise] outlook assumes no asset impairment charges and effective income tax rate of approximately 27% and weighted average diluted shares of approximately 29.9 million.
We expect inventories per square foot to remain consistent with our comp sales performance.
Operator, well now go to our QNX session.
<unk>.
Thank you at this time, we will be conducting a question and answer session. You would like to ask a question. Please press star one on your telephone keypad.
Information tonal indicate your line is in the question Q you May press Star Q, if he would like to remove your question from the Q for participants using speaker equipment, there may be necessary to pick up your handset before pressing the starkey one moment. Please while we poll for questions.
Our first question comes from the line of Mitch Kummetz of pivotal research. Please proceed with your question.
Oh, Thanks for taking my questions and congrats on a quarter I guess it got a handful Ed could you be a little more specific on your Q4 today comp performance I recognize that yeah. Thank you Thanksgiving was way, but I was hoping <unk> kinda tell us how you're trending for the quarter and also can you.
Talk about you mentioned you don't you highlighted the strong Thanksgiving weekend in cyber Monday performance, maybe you can give us some numbers on that as well.
Well I can tell your matches that.
Performance was a little bit better than we expected on both channels, both stores and E com a and so we saw pretty good momentum of the thing that you know the thing that I want to call out is.
Unlike a lot of our competitors, we did not give the star away we didn't come out.
Percentage off the whole store, we do you know we had planned promotions, but it was done I'd add it really good merchandise margin.
Okay, and then you in the press release and also in your comments you referenced kind of historical trends given prior years of weight Thanksgiving something 2013 was maybe the last time, we saw this a shift from like the 22nd to the 28 could you kind of refresh our memory well what happened back that's instructive in terms of what.
You might expect this year.
Yeah It matches Mike.
No not 2013 year, what what we saw this is you know very much what's happened so far in so we'd like to think that the similar pattern will exist.
Obviously, the third week of November was very highly negative because it's going up against last year's Thanksgiving weekend and Black Friday, then week four was very highly positive going back and you have their direction. So you have because it's a flip of timing within the quarter, but then following a Thanksgiving weekend in cyber Monday, we saw a consistent level of positive business.
Through the month of December .
And on into January and and that's you know history means anything.
Similar pattern would would send us into positive territory in the manner that we've suggested in our guidance.
Can you remind us what you're going up against and in December in terms your comp performance last year.
Oh sure. So December a total comps were up 5.5% in January or they were up 10.
Okay.
<unk>.
The quarter as a whole was up 6.4.
Got it how do you think about that tough December compare.
Well the minimum bar business that we just saw coming out of the back to school quarter in Q3, and the very strong Thanksgiving weekend in cyber Monday that we just saw tells me that our merchandise is is right and we're expecting to have continuing positive results in the fourth quarter, We got 14 quarters in a row of flat to positive.
Comps and obviously, we're guiding to a 15th quarter. So part of your compares are just one data point, sometimes I mean, some sometimes they don't it's all about help our product is trend right and close enough to to trend with some hot brands as ours is and so we're expecting to have a Scott a successful fourth quarter, yeah, just to add to that match.
One other things I'm really pleased with is.
That.
Well, we ended the quarter with every merchandise department being a major merchandising department being up so there's no one category that's driving the business, it's pretty much across the board.
Okay and then last question just on <unk> product margins. So Mike you mentioned <unk> PD Bip increase in the quarter can you just maybe ill elaborate on that a little bit was that like I am you or was that just fewer markdowns.
We did have fewer markdowns in the quarter than we had in a in a year ago period.
[laughter].
No I mean as you know are historically, our product margins do not tend to swing wildly from period to period. They tend to stay you know.
Neutral to last year to plus or minus 100 basis points either way.
Usually don't move a whole lot and third quarter with similar it moved less than one full percentage point and it was mostly fewer markdowns.
And then what are your thoughts on merch margin in Q4, I know your Mark your <unk> margin was up a little bit last year in Q4 at you spoke to it kind of the promotional sorta levels of the ball I know you guys are mark and I like everybody else is but how do you sort of just a view the overall environment for markdowns and your ability to capture submerged some product margin in Q.
Sure.
Yeah, much we're expecting a you know just as as we mentioned the historically our product margins don't tend to move around a lot. So long as we keep our our strong disciplined management of inventory and addressing things that need addressing in a very timely manner.
And moved through those kinds of things, we expect fourth quarter product margins to be very similar to what they were last year give or take a bit either way depending on exactly what happens we're gonna be responsive to what we see we need to do to manage our own inventory level, we're expecting it to be a healthy product margin.
We just went through black Friday weekend with healthy product margins.
Expecting that to continue through the fourth quarter.
Great. Thanks, guys. Good luck.
Thank you [noise].
Our next question comes from the line of Dave King of Roth Capital Partners. Please proceed with your questions.
Hi, good afternoon guys.
Right.
Maybe a follow up to the prior Atlanta questioning on that on the quarter to date trends you know what can you share over black Friday weekend on on traffic was that does that still kinda downturn that start to turn positive I now and then.
You know how its conversion order values things like that thank you.
I don't have all of those steps just for Black Friday weekend, our traffic for third quarter was right about flat average transaction was up low single digits conversion was up low single digits. Those are all third quarter numbers traffic through stores through blue.
On Friday, we can was just down slightly I do have that so.
Although traffic was down slightly our comps were up quite nicely in both channels. So I'm feeling.
Feeling pretty good about things.
Okay that helps and then in terms of the the EPS guidance for Q4, you touched on product margins, but how should we think about the the leverage on rents payroll or excuse me on occupancy payroll et cetera, what it for the puts and takes.
Sure. Thanks.
Sure. So if we're at the higher end of our comp guidance, we'd expect to have a leverage on both buying and the distribution portion of of costs because of the new store openings, the rod occupancy dollars will be higher.
Fourth quarter so.
If we're on the higher into the range occupancy, we may still get little bit of leverage because of various negotiations that we've been doing for last two three years. If we're on the lower end of our guidance, we might not get a little bit of leverage out of out of occupancy in particular.
But in terms of total gross margin I'd expect it to be pretty consistent with last year or two up a little bit as you move from the bottom end of the range to the hiring the right.
Okay. That's great color and then lastly from me capital management.
Yeah, and what what would cause you to maybe take up the special dividend to above a bucket share you know assuming you were to pay it of course is the goal there to to more than covered with free cash flow or what are some of the factors that go into the decision process.
Where we take a lot of things I know caught why make that decision and there's not one specific area a area. So right now I Yeah, we'll do what we usually do is the board disgust was that's pretty regularly and well make a determination of what the amount is whether we do it or not Oh. The next couple of months.
That's perfect and thanks, and good luck that's the holiday.
Thank you.
Our next question comes from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.
Let me add my congratulations on your solid results.
Given the slow start to Q4 did that change your promotional plans at all for Black Friday weekend or did you stick to original plan and then given that compressed time period. This year can you touch on how your marketing plans might be a little bit different this year and maybe a quick update on your enhanced mobile app.
[laughter], Yeah, Jeff I'll take the the margin question first so.
We pretty much stayed to the plan that we intended so you know we we expected the early part of fourth quarter to be slow because of the later timing of Thanksgiving and the shifts in the weeks pretty much played out exactly as we anticipated them then playing out and as I had mentioned earlier actually pleasantly surprised with how good business was through Black Friday weekend.
And cyber Monday, So we went in with a particular plan and we executed to that plan, we didnt change that plan as as we went through that weekend and then if you want to take the Mark Yeah. I mean in terms of marketing plan, we really didn't change anything from what we originally planned we didn't NATO so including the majority of the promotions that we had planned so weve.
Pretty much stuck to the plan it worked as we expected and.
Second I think the other question you had was mobile so we did not we have not put in I know mobile app at this point and I think it's it's certainly going to be delayed until the first half of next year.
But it really doesn't impact us negatively we mobile app is fine.
As it works not what we were going to do is put in and much improved shopping experience with the new mobile happens, we'll see that the first part of next year.
Okay, well they would do it seem that if that successful that could be a little driver for your next year, Yeah, I'm not sure and one other thing Jeff.
We also had planned to put in a pay as you go after pay.
Oh I thought we were in a final stages of testing that we elected not go live with it until after the holiday.
So that's another opportunity for us going forward.
Okay, well, yeah, maybe good to do it seems like you're smart to maybe not do these things during holiday [laughter] workshops that doesn't go up [laughter] that's for sure.
So let me ask you this latest thoughts on where we are in the branded cycle any major shifts you're seeing and then if you could touch on on rescue how that's performing and then anymore. You can say about west as of now rose and what tricia's. Most focused on an early days I know, you mentioned sort of focusing and editing the assortment.
Sure was first the top brands go they really haven't changed the only brand that emerged to you know that.
Really on the top time, that's no from last year in the third quarter does is the only big brand as champion.
Which was I started I tried last year, and it's gotten a big and and the rest of the brands are pretty consistent they may have held up or down.
It's pretty consistent.
With what we saw last year third quarter as far as rescue it's a really solid brand for US. It's very guide it continues to be guard and quite frankly I think.
Our results could have been better I think I've mentioned this before I turn back to school I thought we were too I never been Terry and endeavor and that I meant area, but I.
Particularly the rescue brand and a that's an opportunity for us going forward and that's part of what Tricia is working on an addition to a lot of other things.
In terms of rather they assortment and I also I would expect she's got to bring in some new brands that we haven't carried before mark how are they on that on the sprang she's working on strategy for next year as we speak and I will have more color and that's all.
Okay, and so what we see some of those brands for spring summer or whats the timeframe around that I think you'll see some of 'em for spray for sure.
Okay great.
Yeah, Yeah, why not one other thing Jeff <unk>, then with the majority of the merchandise mix, it's not going to change drastically from what we've historically has done because most of that work. So that's that's really more fine tuning and like we said editing the assortment, we feel that's a big opportunity there and there might be.
Merchandise margin opportunity as a result of doing that.
HM Okay. Good [noise].
Thanks for taking my questions and continued success alright. Thank you.
[laughter] question comes from the line of Jan [noise].
HM Okay Research. Please proceed with your question [laughter], Hi, everybody and congrats on a go Florida, Atlanta, and I couldn't Black Friday [laughter] question on Black Friday, and do you think perhaps your business was slower at the beginning in the quarter because so many retailers.
Got it they're probably more thoroughly and maybe you can you think that puts some pressure on your topline and then you know what do you think with a catalyst for the switch that made the business trying like that because you want as promotional.
You know many many of the team competitor doors. So just one did you know what your view I stay on I think Mike said traffic was down so like you know what what was that one of them wasn't true what was the tradeoff and then I have a couple more questions. Thank you okay.
The agenda. There was no. We don't think though I think that I can put my finger I'd say, okay. It it's switch I made a big yeah, very very slightly and so I think it really what built the business is to ask traffic started to increase that was not driven again by anything that we did promotionally.
Right well them. It was just every week, how traffic and the assortment was right. The timing wise I think we did a better job I'm getting the assortment right at a certain geographic regions and types of things like that that helped that does does as we moved further into the quarter.
Hey was there any sort of key item that.
Went back to execute it this year than last I know you said all categories were good but you know where there any standouts year over here that that you now.
[noise] attribute it to they tend to perform Oh, there really wasn't Janet honestly, there really wasn't any one category or any one particular brand that drove that business. It was across the board.
Actually I was fairly pleased with yeah, because you know to see it come not coming from anyone Contigo thing, it's certainly bodes well for us in the future.
And what about the branded footwear business is that still being led by the two big brands like can van.
[noise].
Vantage definitely that bass brand fries <unk>.
And probably on footwear, and apparel and footwear and footwear <unk>, yeah and Nike.
<unk> Nike starting to emerge now so it's it's I think Nike is starting to began to turn so you'll see we don't have we did we downplayed our assortment and Nike over the last several months, but now you'll see it to start to build that I think you'll see that are the best has build their.
And just and just lastly on the news lines that Tricia thinking about it does she have the pricing strategy involved is she introducing opening price points. If she is going to elevate bid pricing architecture like what's the what's the philosophy there.
I don't think you'll see any chain strategically in terms of how we price right I think it's just a matter of adding some brands that maybe we might have carried in the past, bringing some of those brands back, but by adding some new bringing some new brands into the mix.
I I, that's really what we're thinking and you know I think our biggest opportunity in terms of category is.
Even though we were positive in Q3 with woman's I think I biggest opportunity is probably in the women's business.
Out of all the other categories, we carry and you'll probably see some known as fair.
Okay, great. Thank you goodbye.
And what about allocating some comp in the third quarter was obvious the Boston September tough.
HM.
Hello.
Were there sorry, I'm trying to flip to that Okay, Hi, Oh I didn't know if they haven't stand out [noise].
Yes, and August September were very consistent with each other October was actually the lightest <unk> comp March quarter, but but they were all positive. Thank you.
Okay. Thanks Janet.
[noise]. Our next question comes from the line of Sharon's that fear of William Blair. Please proceed with your question.
Hi, Good afternoon, I also had some questions I guess on the opening schedule for next year. I know you were really backend weighted and 20 910 is that a similar kind of cadence of store openings for 2020.
No I think if they're gonna be spread more evenly throughout the year, Yeah, I think there'd be more in the Q2 timeframe than a year ago, they'll probably be is probably a few more in Q3. It was really back end weighted this year I'd expect expected to be more in the middle part of the year. Then it was this year and not.
So heavily back weighted.
That's helpful and ideally we want ideally we'd want to open as many stores, it's possible that well before back to school.
Okay, and then on 'em on tariffs I don't think that came up at all on today's call have you had to make any any changes to the assortment based on what's happened or are you seeing anything going on with vendor pricing associated with the the tariff that went into effect.
Not anything material, so far quite honestly I'm still kind of waiting to see how this all shakes out and how much of the balance goes between the three parties right. The manufacture us as the retailer and how much is passed on to the consumer have not noticed a.
He material amount of change across the assortment I think it's more in accessories than anywhere else, where we've seen some of it and then also kind of on on a fixture items in stores that are sourced from overseas. We've we've definitely seen you know 10% to 15% cost increases there.
But haven't seen anything material happen in apparel yet.
Okay and my last question is really on SGN, a and the opportunity for leverage there on an ongoing basis can you kind of help us think about how you view their ran about <unk> dollar growth versus revenue and if that's a place where we should see more consistent leverage you know past 2019.
AH Yes, you know leverage is going to have a lot to do with how sales are balance between stores and E com. So.
If you look at recent quarters compared to the quarter. We just finished.
You heard me talk about a you know roughly about a million dollars a cost pressure from E. Com shipping in E com fulfillment in those quarters, where E com was up 30% or 50% when stores were negative.
What you see in the third quarter is a different dynamic when stores are positive and becomes positive. A you know stores are still 85% of our business. So when they can be in a positive comp territory that absolutely helps us leverage.
Column relatively fixed costs, a heck of a lot better than when E. Com is the sole driver of comps. So it's incumbent upon us to ticket can continue to drive improvement from both of those channels not just one or the other.
Because as you've seen in recent quarters, when it's only E. Com those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along.
With the E com business. So we had a better balances out in the third quarter, we're expecting a better balance it out in the fourth quarter.
You know overall generally speaking it should remain at about a total comp.
The labor, just DNA give or take a bit and again, depending on the balance of.
Sales being driven on in stores versus E com.
But at a high level roughly about a three to lever just you in a in as we look at 2020, there will be another year of minimum wage increase in California at a minimum another dollar is coming January one.
You know so that certainly impacts a little over 40% of our store base as well as or distribution centers that were working awful hard to manage that as we have done each at last two years, where we've had that you've not seen a meaningful amount of de leverage coming from store payroll because we worked really really hard on that with our store ops team and in our field leadership they've done a really.
Good job responding to the challenges that that we work together on so I hope that helps to some extent.
Thank you so much.
[noise].
We have reached the end of the question answer session I will now turn the call back over to Ed Thomas President and CEO for any closing remarks.
Thanks again for joining us we look forward to discussing our fourth quarter results with you in mid March have a good evening everyone.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great evening.