Q4 2019 Earnings Call
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Greetings and welcome to kill each Inc. fourth quarter 2019 earnings results Conference call.
This time, all participants are not listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder of this conference is being recorded it is now my pleasure to introduce your host Guar Jackson Investor Relations for Tilly's, Inc. Thank you you may begin good afternoon, and welcome to the Tilly's fiscal 2019 fourth quarter earnings call I'd, Thomas President and CEO, Michael Henry CFO will discuss the company's results and then how secure.
Today's session for a copy of today's earnings release. Please visit the Investor Relations section of the company's website. It tilly's dot com from the same section shortly after the conclusion of the 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 the reflectively judgment and analysis only as of today March 12, 2020, and actual results may differ materially from current expectations based on a number of factors affecting tilly's business, including the current Corona virus situation. Accordingly, you should not place undue reliance.
These forward looking statements for a more thorough discussion of the risks and uncertainties associated with any forward looking statements. Please see the disclaimer regarding forward looking statement said is included in our fiscal 2019 fourth quarter earnings release, which is furnish the FCC today on form 8-K is always our other filings with the FCC referenced in that disclaimer todays.
Paul will be limited to one hour and will include a cure day session. After our prepared remarks, now I will turn the call over to add.
Thanks Scott.
Good afternoon, everyone and thank you for joining us today.
As we pre announced in mid January fiscal 2019 fourth quarter results were disappointing due to a deeper than expected drop in store traffic and comp sales during the second and third week. So December ultimately, resulting in a person negative comp corridor and over three and a half fears.
Given that several other retailers have cents reported similar slowdown in their businesses. During the same period. We believe this drop was primarily due to a shifting consumer behavior in connection with the shorter window between Thanksgiving and Christmas for this past holiday season.
Our E com business net sales decreased one by 1.2% during the fourth quarter, which we believe was due in part due in narrowed online product offering compared to last year, which has since been corrected.
Ecommerce sales have increased by a single digit percentage.
As far in the first quarter fiscal 2020.
Department in the fourth quarter girls than women composite of well footwear accessories boys.
Men's comped negative we experience a deceleration themselves from a couple of what.
Third party brand.
Going forward as we typically do we're adjusting our assortments by bringing a specific new brands.
Yeah in fact, the selectively buying deeper m. existing brands that we believe we'll continue to grow some of these no brands have already been introduced into a spring assortment.
And we'll law will be forthcoming.
For the back to school season.
Thus far in the first quarter fiscal 2020.
Total comps are low single digits with girls women's and men's Comping positive.
Accessories footwear and boys.
Being negative.
I knew you are good temporary proprietary brand west a Melrose, there's no and 100 of total stores as well as online and continues to receive.
Positive response.
As a reminder, western Melrose and the brands connected with it.
All right aimed at women's fashion, which we believe.
Well help incrementally extended the age reach of our womens business over time.
For those of you who visit our stores you will see the western Melrose.
In its own featured section along with a target selection of certain third party brands to form a collection.
We anticipate the western Melrose collection will be available in all stores for the back to school season.
In terms of merchandising priorities for fiscal 2020.
No Chief Merchandising officer, Tricia Smith has identified several opportunities that we believe will improve our business overtime notwithstanding current concerns regarding the potential near term effects.
Oh, the Corona virus situation, which I will address directly a bit later.
Number one is applying it digital first mentality planning assortments that are specifically targeted to drive a lot of online business, then everything those assortments down four stores.
With our customer demographic. We believe it is critical to always have the best of our assortment online and to a job style buys.
Into the styles and items that drive E com sales.
We expect a greater known as a more frequently.
It help increase regular price selling online and E com profitability over time.
Number two.
As they focus on increasing our investment in denim not only in the amount. We can we carry but also in the available size ranges. We believe they're carrying additional denim inventory will provide us with a much more meaningful year round denim presentation to attract more customers.
Number three is to further develop our proprietary rescue brand.
With very little direct marketing rescue was a number two.
Overall brand for fiscal 2019 with $60 million, an annual net sales, making it our strongest denim brand.
By focusing reserves this proprietary brand expanding our denim presentation and with the creation of the rescue concept store now scheduled to open at the end of Joan and the Irvine spectrum, we believe that rescue has meaningful growth opportunities ahead.
Number four is there further capitalize on our boys and girls businesses, which we believe our key differentiators for us versus the competition our competitors.
Without without significant marketing efforts behind them, our boys and girls business is combined to account for nearly $70 million in total net sales between apparel and footwear in fiscal 2019.
We have recently started creating kids specific marketing materials to generate greater awareness.
This part of our business, we believe it can grow further with better communication and marketing behind that particularly in new markets.
And number five as mentioned earlier, we believe we can expand out women's business with improved assortment.
The West a Melrose collection is just the beginning of an effort to expand the age range.
Our women's business beyond the early high school years.
Given we carry both young adults and kids clothing, we often see young families shopping in our stores and believe we have an opportunity to offer assortments that can retain our young woman customer is longer than we have in the past.
Although some of these merchandising strategies are already underway.
We expect the impact of many of them to be in an artist with the back to school season.
In the meantime, Tricia it very quickly brokered.
Several no grounds for Tilly's and we're excited about their prospects to drive additional business over time.
Turning to real estate, we continue to believe that we ever made it for a number of opportunities to open profitable accretive new stores in the future again, not withstanding the potential near term effects of the car virus situation.
We opened 12, new full size stores during fiscal 2018 that and total produced.
Well well profitability that was very consistent with our existing store above portfolio.
In their first full year of operation.
We opened 14 additional full sized stores in 2019.
We plan to continue our store expansion my opening up to 15 new.
Well side of stores during the <unk> fiscal 2020.
Yeah. So it's been a practice, we will only opened stores.
If we believe they will be supported by appropriate economics that are reflective of the circumstances involved with each individual leasing decision and the brought a retail environment.
We will continue to prioritize expanding our presence in existing markets, where and we believe.
We can achieve greater market penetration and brand awareness.
We closed one store in early February as a result, though.
The landlord wanting a rent increase but we do not have any additional confirms store closures.
In fiscal 2020 at this time.
More may yet occur as we work our way through fiscal 2020 at least decision how of which there are nearly 60.
In terms of customer facing investments, we just launched after pay I.
I know deferred payment program online at the beginning of March and the early retirement reads have been very encouraging with significant average order increases.
We intend to launch.
After pay.
For all stores within the next couple of months pending certain programming enhancements.
We need for installed point of sale vendor.
We're excited about the opportunities to drive my business through this alternative payment method.
That allows customers to defer a payment on current purchases.
We also continue to believe that there are a meaningful growth opportunities for our E. Com business is generally having just finished fiscal 2019 at 16% of not total sales.
Situation compared to a certain of our competitors, who have a much higher online sales pet penetration than we do.
We will continue to enhance our omnichannel capabilities in fiscal 2020 to improve our customer convenience.
In closing despite a fourth quarter mess.
I'm proud of the fact that we produce no worse than flat comps.
And industry contrary in.
Store traffic results during the prior 14 consecutive quarters.
Leading up to this fourth quarter.
As we began fiscal 2020, we obviously facing an unprecedented environment as a result of the effects of Caronna virus.
Yeah, very closely monitoring event at work and without third party brands and proprietary suppliers to gather information determine alternative action plans and adapt or any foreseeable business impacts.
Currently we have been up form that some of the new product receipts will be delayed in the March 3rd Joan period, we cannot predict in greater detail, what the potential impacts on quite a virus maybe on our business as any potential changes and the number of cases and severity of the situation.
And its potential impacts on consumer behavior store traffic.
Production capabilities timing of deliveries are people why the market generally our unknowable.
Further we may be required to take extraordinary measures to ensure the safety of our employees and business partners.
Hi, sales and operating results could materially negatively impacted at a time as the Corona virus situation evolved.
As a result, we are unable to provide specific earnings guidance for fiscal 2020. At this time, we will continue to carefully monitor this current a virus situation and continue to execute our business plans to the best Arousability. Despite the near term kind of concerns about core virus as.
The other near term headwinds from minimum wage and shipping cost increases we remain confident that our long term growth opportunities continue to exist for a business and we look forward to sharing our progress with you.
Mike will now discuss the details of our fiscal 2019 fourth quarter operating performance Mike.
Thanks, Ed details of our fiscal 2019 fourth quarter operating performance compared to fiscal 2018 fourth quarter were as follows.
Total net sales of $172.5 million increased by $1.9 million were 1.1% from $170.6 million last year.
Total comparable store net sales, including E commerce declined 2.0% versus last year's increase of 6.4%.
Comp sales on physical stores declined 2.2% versus last year's 0.9% decrease.
Stores represented approximately 80.7% of our total net sales for the quarter compared to 80.3% last year.
E Comm net sales declined 1.2 per cent compared to last year's 49.6% increase.
E Com represented approximately 19.3% of our total net sales compared to approximately 19.7% of our total net sales last year.
We ended the quarter with 240 total stores, including one rescue pop up shop compared to 229 total stores last year, which included four rescue pop up shops.
Gross profit, including buying distribution and occupancy expenses was $52.1 million worth 30.2% of net sales compared to $52.2 million worth 30.6% of net sales last year.
[noise] product margins declined approximately 20 basis points compared to last year due to increased markdowns.
Occupancy costs de leveraged approximately 70 basis points as a percentage of net sales primarily due to opening 11, net new stores compared to last year.
And the negative sales.
Distribution expenses improved by approximately 50 basis points, primarily due to lower E comm shipping charges compared to last year.
Total US you know expenses were $43.6 million were 25.3% of net sales compared to $41.2 million were 24.2% of net sales last year.
Primary yesterday variances to last year include approximately $1.5 million of increased store payroll from store count in minimum wage growth.
Approximately zero point $8 million of increased workers compensation claim reserves.
And approximately zero point $4 million it increased marketing expenses, primarily relating to E com.
Partially offset by a 1.2 million dollar reduction in corporate bonus expense.
Also last years, that's Gina included approximately zero point $9 million of nonrecurring expense reductions from negotiated resolutions of certain vendor disputes.
Operating income of $8.5 million or 4.9% of net sales decreased by $2.4 million compared to $10.9 million or 6.4% of net sales last year, primarily due to be SGN eight and occupancy increases noted above which were not offset by enough net sales growth.
Income tax expense was $2.8 million were 30.9% of pre tax income compared to $3.1 million or 26.4% of pretax income last year.
This call 2019 income tax expense includes approximately zero point $5 million of discrete tax items relating to the acceleration and expiration of certain stock options.
Net income was $6.3 million were 21 cents per diluted share compared to $8.7 million or 29 cents per diluted share last year.
Weighted average diluted shares for the quarter were 29.9 million compared to 29.8 million last year.
Turning to our balance sheet, we ended the fiscal year with $139.9 million in cash and marketable securities and no debt compared to $144.1 million and no debt last year.
As announced in late January our board of directors authorized the special cash dividend of $1 per share were $29.7 million in the aggregate, which was paid on February 26.
This was the fourth consecutive year that the company has paid a special dividend to shareholders.
We ended the fiscal year with inventory per square foot down, 2.2% and with a slightly improved inventory aging compared to last year.
Total capital expenditures for fiscal 2019 were $14.3 million compared to $14.9 million for fiscal 2018.
Now turning briefly to the first quarter fiscal 2020.
Through March 10, total comparable store net sales, including ecommerce have increased by a low single digit percentage with comp sales in stores slightly negative and E. Commerce net sales up high single digits on a percentage basis.
As Ed noted earlier, given the unpredictability of the effects of the current a virus on among other things consumer behavior store traffic production capabilities timing of deliveries are people economic activity and the market generally in the coming weeks and months. We are unable to provide specific earnings guidance for fiscal 2020 at this time we play.
And to report our first quarter results in late May Following Memorial day, operator, well now go to our Q and a session.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
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Our first question comes on line of Jeff Van Sinderen with B. Riley. Please proceed with your question.
Hello. This is Richard Magnus an unfortunate offense, Andrew I first off can you speak more about inventory and supply chain or what youre experiencing so far in terms of timing of receipts or you expect for Q2, given the manufacturing place in China and to what extent you might expect Q3 to be normalize in this regard.
Yes, so as we noted in our prepared remarks, we had been notified of a relatively modest percentage of our total receipts being delayed in the March through June time period, and when I say relatively modest and less than 10% in this current month.
Maybe a little more than 10% and some of those other months, but not not expecting that that's going to result in any direct correlation with with sales activity. Our teams are working very hard.
With our brand partners to.
Identify alternative actions and.
Figure out as best we can the timing of deliveries.
We're not expecting any major business disruption solely from the timing of the deliveries themselves.
And really it's only through June that we've gotten any specific information of.
New receipts being delayed we've been receiving reports that.
Production.
Capacity in China seems to have gotten back to anywhere from 70%, 80%, 85% based on Who's report you read so.
Hopefully.
This this situation will start moderating at some point and we can get back to some sense of normalcy, but.
For now we're we're doing everything we can to stay as important as we can.
Thank you and then can you speak about planned promotional levels currently and what you will do to if traffic falls off hard to covert 19 or kind of ours.
Well I'm, we're not really gone well not planning on doing anything that we.
Don't normally dough.
Even if we see south mattson sales, we been aggressively managing our inventory.
As we have done for the past few years I'm, just a adjusted inventory levels to what we think the sales levels, well oh ought to be so from a promotional standpoint I'm not expecting.
Anything unusual from my standpoint.
Okay and then one last question is it's understood that you're not providing guidance, but what does your thinking about generating positive cash flow for sure.
Well, let that all depends on exactly how things shake out.
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As long as comps are anywhere better than minus 20, we should be able to.
Have a positive cash flow for the year. So it would you would take a minus 20, and maybe even worse for us to getting that any position, where we would be dropping cash you know net net year over year.
So we've got a strong balance sheet.
That's what's going to help us weather the storm, depending on what happens and you know looking at the.
Environment. Just these last several days, we have seen store traffic drop off in all markets by at least double digits.
So that certainly has given us pause and then.
Even just today within the past our the amount of news coming out about.
Sports leagues canceling their seasons and even Disneyland here closing those are some pretty shocking and remarkable events that.
Just makes it impossible for us to predict with any certainty.
What's going to happen, but thankfully, we're very healthy company from balance sheet standpoint, and should be able to ride this out.
Oh, Thank you very much.
Thank you.
As a reminder, it is star one to ask your question. Our next question comes from the line of Mitch Kummetz with pivotal research. Please proceed with your question.
Yeah. Thanks for taking my questions I guess first just a follow up buys you're talking about store traffics dropped off double digits in all markets or at least double digits. All markets have you seen any uptick of the E com business How's the store traffic has fallen off or is it just that nobody is interested in buying or anything.
We've seen a we've seen a this is that we've seen a site.
Improvement in our E com business for short so you know we were hoping that that's consistent.
Going forward, which we have no reason to believe it won't be consistent so.
Its been decent.
And then Ed you talked about during the quarter I think you referred to the quarter that you saw some deceleration and some a top third party brands can you maybe elaborate on that is this is this part of a bigger trend shift away from like the whole kinda retro thing or is this specific to just a couple.
A couple of brands a video just sort of run their course, and then you also talked about maybe shifting to some new brands are buying deeper into some of the ones that are working just kinda filling those pieces.
Yeah, I mean, it's not a shift away from retro that was saying some of the brands that have been strong during that trend continued to be strong.
There's a couple of brands that have tailed off but really they started to tail off at parts last year and we have adjusted Accordingly, and then as we always do we're always bringing in new brands and you know a couple of the most recent new brand we brought and we're just not a new brand, but no for US is obey and we're pleased with the initial.
South of that we brought back free people as part of the Western Melrose collection.
So that's the type of thing that you know when you carry as many brands as we do Luckily were not dependent on any one brand and I I'm not concerned about any kind of shift and trend.
At all because we what we've always dealing with something like that and that the team does a great job of managing through that.
I guess lastly on on footwear I know it was negative comp in the quarter I think if I heard correctly. It was a negative comp a Q1 to date I know there were some maybe some allocation issues in the fourth quarter can you sort of speak to the broader trend that you're seeing in footwear I know you're fairly concentrated in one brand in that category.
Yeah, well honestly, what we just couldn't get enough of a certain styles of a certain brand than had we had enough inventory and those I results would have been quite a bit better.
Is that it doesn't sound like that's correct. It so far through the first quarter are you still in the process, so trying to correct out or.
It's still I would say, it's still a work in progress, but we've made pretty substantial progress with it.
Okay. All right. Thanks, guys. Good luck.
Alright, thank you.
There are no other questions in queue I'd like to hand, the call back to Mr. Thomas for closing remarks.
Hi, Thank you for joining us today and have a good evening everyone.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.