Q3 2020 Tillys Inc Earnings Call
[music].
Bad debt.
Reminder, this conference is being recorded its now my pleasure to introduce your host Gar Jackson. Thank you Guar you may begin.
Good afternoon, and welcome to the Tillys fiscal 2023rd quarter earnings call, Ed Thomas President and CEO and Michael Henry CFO will discuss the company's results and then host a Q and a session for a copy of Tillys earnings Press release. Please visit the Investor Relations section of the company's website at Tillys dotcom from the SEC.
Action shortly after the conclusion of the call you'll also be able to find a recorded replay of this call for the next 30 days certain forward looking statements will be made during this call that reflect tillys judgment and analysis only as of today December Threerd 2020, and actual results may differ materially from current expectations based on various factors.
Affecting tillys business, including impacts of and the company's actions in response to the ongoing COVID-19 pandemic accord.
Accordingly, you should not place undue reliance on 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 statements that is included in our fiscal 2023rd quarter earnings release, which was furnished to the FCC today on form 8-K, as well as our other filings with the EPS.
You see referenced in that disclaimer today's call will be limited to one hour and I will include a Q and a session. After our prepared remarks, I will now turn the call over to Ed.
Thanks, Gar good afternoon, everyone and thank you for joining us today.
We continue to adapt to this rapidly evolving COVID-19 environment and its impact on retail.
We have gone from having a store was open for only 50% of total available operating days.
In the first quarter to 65% in the second quarter to 94% in the third quarter, all with restrictions on operating hours and customer traffic upon store re openings that began during the second quarter.
We ended the third quarter with 33 of our California into a mall stores closed for the entire.
Month of August.
Again reopening these stores throughout September and reopen the final eight stores on October 7th.
As we announced in early September back to school days were meaningfully delayed.
EBITDA prior years, which got us off to a very weak start to the quarter in August however.
Schools announced their later reopening dates I business began to rebound to a degree later in the quarter.
Compared to the respective fiscal month of last year, I guess net sales decreased.
35%, but then September net sales increased 22% and October net sales increased 10%.
Altogether. This resulted in a total net sales decrease of 9% from the third quarter.
Which we view as an encouraging result, particularly in light of our Argus resolved in a significant number of stores that were closed for a portion of the quarter.
Our ecommerce business continues to thrive during the third quarter generating 50% so 57%.
Net sales increase.
With significantly improved product margins and bottom line profitability compared to last year.
We have hung Chen with a digital first mindset.
During this pandemic period and it has driven significant improvement in our ecommerce assortment management.
Resulted in expanded and more profitable digital spend additional customer convenience enhancements, including curbside pickup.
Operational improvements in our E Commerce distribution center.
All of these factors have combined to drive meaningful improvement.
In our ecommerce business, which we hope to sustain and build upon going forward.
In terms of merchandising for the third quarter, a woman's was our strongest performing department.
The mid single digit percentage increase income sales compared to last year although.
Although all other departments come from negative to last year, each department improved from wise as the quarter progressed.
We introduced several new third party brands during the quarter and we have been pleased with their performance.
We also launched a certain or hard goods during the quarter, including skateboards bikes and roller skates, which have performed well.
Accessories were particularly challenging due to the reduced sales of backpacks, which we believe is primarily due to increased volume of in home and remote learning during the pandemic. We ended the quarter with total inventory per square foot down 7.4% to last year and believe.
Our inventories are well positioned for the holiday season.
Turning to real estate, we have reached agreements in full or in principle.
[noise] addressing nearly 90% of our total store leases.
Relating to withheld and revenue during the periods of store closures and adjustments of future rounds.
In light of the ongoing pandemic, we are appreciative.
Of the support provided by our to our company by the landlord community.
We currently expect to open seven new stores during the fiscal during fiscal 2021 that were deferred from the Shia by agreement with the respective mall landlords.
These stores are currently expected to open during the March to May time period.
Although this remains subject to change we will continue to be very selective and opportunistic about opening any additional stores next year in light of the rapidly evolving environment.
Finally, just before the end of the quarter.
We opened our first rescues gate test store here in the Irvine spectrum.
This new tester is a skate influence concept store under our proprietary rescue brand.
Which incorporates hard goods, including a skateboard assembly.
Apparel and accessories.
Given what we believe is a broad an increasing appeal of scape board.
Boarding, particularly with its inclusion in the Olympics next year. We think this is an important test for us however.
This is just a test store at this stage not a fully develop chain concept.
And any future plans will be dependent upon consumer reaction to and performance of this test store in greater stability in the retail environment.
Turning to the fourth quarter total comparable net sales have been just shy of flat through December for us.
Purchases corresponding period last year of last year.
As expected E com.
Sales have continued to be strong with a 42% increase during this time period comparable net sales in physical stores have decreased by 14%.
In the fourth quarter compared to the corresponding period of last year No stores were open on Thanksgiving day, this year and Black Friday results in stores were well off last year's pace.
As we had anticipated however.
Store comps have been positive each day since black Friday overall significant reductions in store traffic have been partially offset.
By an improved conversion rate and higher average transaction value.
We can't be certain what the rest of the holiday season will look like.
What impact the ongoing pandemic will have on our ability to drive sales and continue to operate our stores or E commerce, particularly in light of the recent sharp increase in covert cases across the country in additional threat customer traffic restrictions in certain areas. However.
As long as we are able to continue to be fully operational we are hopeful that this year's holiday season can be somewhat.
Closer to normal.
And what we saw during the back to school period.
At this time, we expect total sales sales for the fourth quarter to be somewhat lower than last year overall.
Due to the ongoing pandemic and much higher unemployment than last year at this time.
Even if we are able to continue to operate.
Our operating stores throughout the quarter.
In closing.
I want to thank our entire team of store associates field and corporate employees.
For their tireless commitment to.
To making tillys the best it can be during this incredibly challenging time for all of Us Michael.
Mike will now provide more details.
On our third quarter operating performance and balance sheet Mike.
Thanks, Ed Good afternoon, everyone details of our third quarter operating performance compared to last year's third quarter were as follows.
Total net sales for the third quarter were $140.3 million, a decrease of $14.5 million or 9.4% compared to $154.8 million last year.
Net sales from physical stores over $104.6 million, a decrease of $27.5 million or 20.8% compared to $132.1 million last year.
These results were negatively influenced by the delayed back to school dates this year and the stores that were closed for a portion of the quarter the Ed referenced earlier.
Net sales from stores represented 74.5% of total net sales for the quarter compared to 85.3% of total net sales last year.
Ecommerce net sales were $35.7 million, an increase of $13 million or 57.3% compared to $22.7 million last year.
Ecommerce net sales represented 25.5% of total net sales for the quarter compared to 14.7% last year.
We ended the quarter with 230 total stores all of which were open for business with restrictions on operating hours in customer traffic compared to 232 total stores operating as normal last year.
On a year to date basis, we have opened one new store and permanently closed three stores.
Gross profit, including buying distribution and occupancy expenses was $40.7 million or 29.0% of net sales compared to $47.2 million or 30.5% of net sales last year.
Product margins improved by 70 basis points, primarily due to improved E com product margins and reduced markdowns overall compared to last year.
Buying distribution and occupancy costs deleveraged by 220 basis points collectively against lower total sales.
Distribution expenses Deleveraged by 120 basis points, primarily due to an increase in E com shipping costs of $1.5 million associated with the significant increase in E Commerce orders.
Occupancy costs decreased by $1 million, but de leveraged by 110 basis points against lower total net sales.
Buying costs improved by $300000 or 10 basis points, primarily due to a severance obligation recorded in last years third quarter.
Total assets from the expenses were $37.1 million or 26.5% of net sales compared to $39.5 million or 25.5% of net sales last year.
Total SDMA was reduced by $2.3 million, but deleveraged 100 basis points against lower total net sales compared to last year.
Store payroll and related benefits decreased by $3.9 million in total primarily resulting from the various periods of store closures during the quarter careful management of staffing levels, and including a $1.2 million payroll tax benefit from the cares Act.
Most other expenses were also reduced compared to last year the.
The primary exceptions to this were increased income marketing and fulfillment expenses of $2.3 million due to the significant growth in E Commerce orders and a $1.7 million disputed sales tax assessment received from the state of California relating to the 2015% to 2017 years.
Operating income was $3.5 million or 2.5% of net sales compared to $7.7 million or 5% of net sales last year.
This decline in operating results was directly attributable to the impact of the COVID-19 pandemic on our retail stores.
Other income expense decreased by zero point $9 million compared to last year, primarily due to having lower total cash and marketable securities, earning lower interest rates on our investments and paying interest on previously borrowed cash compared to last year.
Income tax expense was $1.4 million or 39.8% of pretax income compared to $2.2 million or 25.9% as pre tax income last year.
The increase in income tax rate is primarily due to the impact of the cures Act, which allows for the carry back of year to date operating losses to prior fiscal years that had higher tax rates.
We cannot accurately predict what our effective income tax rate will be going forward as it is dependent upon our operating results, which are also largely unpredictable in the current environment.
Net income was $2.1 million or seven cents per diluted share compared to $6.4 million or 21 cents per diluted share last year.
Weighted average shares were $29.8 million for both periods.
Turning to our balance sheet, we ended the third quarter with cash and marketable securities totaling $125.3 million, including $12.4 million withheld store lease payments and no debt outstanding compare.
Compared to $130.1 million and no withheld store lease payments or debt outstanding last year.
We ended the quarter with inventories per square foot down 7.4%.
Year to date capital expenditures were $6.4 million compared to $10.6 million last year, primarily due to the reduction in new store openings. This year.
One additional item of note regarding liquidity is announced in early November we replaced our $25 million revolving credit facility with a $65 million assets that credit facility in order to provide our company with increased protection against potential future business disruptions from the pandemic or otherwise.
We think our longtime banking partner Wells Fargo Bank for working with us to provide greater liquidity protections for our company.
As of December two.
2020, our total cash and marketable securities totaled $138.6 million, including $4.4 million of withheld store lease payments and no debt outstanding compared to $143.7 million and no withheld store lease payments or debt outstanding at the corresponding time last year.
Turning to the fourth quarter, given the continuing unpredictability surrounding the code 19, pandemic, including but not limited to its impacts on consumer behavior and our ability to continue to operate some or all of our stores or E. Commerce at any point in time.
We are unable to unable to reliably predict our future sales or earnings at this time, and therefore, therefore will not be providing any specific guidance.
However, given the anticipated negative impacts of the ongoing pandemic, including restrictions on customer traffic to stores and significantly higher unemployment this year compared to last year, we expect our fourth quarter net sales and earnings per share to be lower than last year's fourth quarter. We do not believe it is realistic to expect our earnings to be near last years levels due to the lower.
Sales expectations in higher shipping rates compared to last year.
Operator, we'll now go to Q day.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star key.
One moment, please while we poll for questions.
Thank you. Our first question comes from David Buckley with Bank of America. Please proceed with your question.
Hi, guys. Good afternoon, Thanks for taking my question.
Mike just on the last comment on on margin could you just discuss E com profitability outlook from the fourth quarter anytime surcharge pressure and you expect to incur and then whether or not you expect product margins two to improve again in the fourth quarter.
So so again, we're not providing any specific guidance on anything.
Anything given how unpredictable the environment is but.
I think directionally, we would expect some.
Some of the trends that we saw in the third quarter to carry into the fourth quarter. So we have seen.
Meaningfully improved regular price selling full price selling on E com for several months now.
That probably isn't going to change we think during the fourth quarter.
Certainly added shipping charges in such with the high increase in E com sales that were anticipating.
But year over year E Com has.
Certainly improved its profitability relative to historical years.
From a combination of.
The operational improvements that we mentioned, but also to the full price selling has been significantly stronger.
For most of the year at this point, so I don't think that's going to change.
Okay, Great and can you just discuss have you guys had in each store capacity issues or from a black Friday or since then and if so how are you managing that.
Yes, we have.
It varies by State County.
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Actually Jeff just a little while ago, California announce some further restrictions on capacity but.
We've managed net well the teams have managed it well our conversion rates are actually up.
Which is a good good thing and.
It's a challenge sometimes but overall, we've got we've gotten through it pretty successfully.
Okay, great. Thank you.
Thank you. Our next question comes from Jeff Van Sinderen from B. Riley and company. Please proceed with your question.
Hi, good afternoon, everyone.
Let me just say coveted side congrats on underlying strong performance odds.
It's great to see.
Maybe just as a follow up if you can touch on what you've seen around Black Friday weekend, and I know you said trends improved since then so just wondering.
Maybe regionally I know, obviously it depends by region anything to call out in terms of trends.
Maybe where it's a little bit more open versus where it's a little bit more restricted.
Sure.
Yeah on.
Black Friday in particular sales were well off in stores they were down over 30% on that particular day.
And Thanksgiving day.
No stores were opened this year last year. Most stores were opened for some number of hours on Thanksgiving day. So between those two days combined we lost close to $5 million in top line volume relative.
Relative to last year.
But then interestingly since then store comps have been positive each day follow.
Following black Friday so.
As we think about the fourth quarter I think we're anticipating debt.
Some of the traditional big shopping days of the quarter might not be as high of other peak on those particular days, but that maybe you kind of stretch business out across other days.
As as we go through.
We go through the quarter.
I'd traffic patterns have been.
Pretty similar to what's been publicly reported by.
A different company, so I wouldn't say, our traffic trends already mint and a different materially but like Mike said, it's encouraging to see our.
Performance post Black Friday in the stores.
As a little bit better than what it had been trending going into black Friday, I think in particular because of that dynamic on Thanksgiving day, and Black Friday itself, all areas were down meaningful double digits across across Black Friday weekend, but were recovering ground with each day it seems so far.
Our.
Okay, well good to hear that the trends improving.
And then I just wanted to touch on inventory I know weighted toward profit is down mid you can speak a little bit more about how you're kind of working from management of inventory in Q4, given what seems to be sort of erotic traffic and even some some recent locked down activity.
Yes, we we planned fourth quarter with the idea that stores were unlikely to be meaningfully negative.
Thankfully the negative that we reported so far 14%.
Has not been as bad as we thought it was going to be.
We also planned for E comm to be up more than it has been so far so in a way we're kinda off on both on both assumptions I think stores have been better than we thought it would be so far.
We thought he come would be very strong we thought to be even stronger than it has been so far.
Non.
Thinking that that is likely to continue as we go through the rest of the quarterly like I was mentioning earlier some of these peak days.
We think it's more likely than not that we are going to lose some ground on those traditional peak days, but that hopefully based on the signs were seeing we'll do better in between those peak days and maybe at least with what we've seen so far maybe stores can end up better than how we planned. So I think we feel pretty good about how we planned inventory overall.
And we made the comment that we think our inventories are well positioned for the holiday season.
We're constantly making changes every single week and sometimes intra week as we continue to read the business, yes, just to add a little to that is.
We feel really good about our inventory levels right now it's been it's always challenging to to balance the inventory between channels bad debt.
I think Jeff as you know we have the ability to fulfill out of our store was for E commerce as necessary.
And we've done that for a long time, and we continue to do that so many balancing issues that we may have we can offset a buyer that ability alone.
So I feel pretty good about where we're at.
Okay. That's helpful. And then if I could just squeeze in one more any comment on supply chain around hard goods.
Well, it's a weird really at the early stages of it so.
You know were not I think.
The supply chain is challenging for sure, but it seems to be getting a little bit better.
So more to come on that later as we get further into it.
Okay Fair enough. Thanks for taking my question is investing block the rest in Q4.
Right. Thanks, Jeff.
Thank you. Our next question comes from Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hi, guys. Thanks, just wanted to get a little bit more color on your Q4 revenue commentary expecting net sales to be lower year over year. So I guess, we're comping flat overall quarter to date looks like traffic declines sort of improved sequentially into November tickets up.
He said trends are improving sort of post black Friday.
Are we factoring in sort of some degradation in traffic for the latter portion of this month what are the other headwinds that we should be back to Randy It sounds like things have gotten better since the other number you provided.
Yes, and I think we are thinking about to some of the responses. We just had with Jeff some of those peak days, we're anticipating that we'll probably lose some ground on those on those peak days just as we saw on Black Friday in particular right.
Based on what we've seen so far we think during those big day is there's a sector of the population that isn't going to be as comfortable going out to stores and being in large crowds and long lines and things of that nature.
It's why we kind of planned stores to be even more negative than they have been so far.
For the quarter in that there would be some shift of that over to the E com side.
So far no thankfully stores have performed better better than we thought it would be really nice effect could continue through.
Through the rest of the fourth quarter, but as we've seen over this entire period last several months. So much changes so quickly and it's so unpredictable.
We're just trying to make sure that we stay in a place that we think is reasonable and conservative.
Make sure that we give our give our company the best chance to be successful and yet protect ourselves from downside risk at the same time.
Okay Fair enough and then on the E Commerce side of the business I was just curious about capacity from your standpoint, I mean, do we have enough in terms of shipping slot allocation from your providers maybe.
Maybe you could also discuss sort of the use of curbside and how important that that has been to the ecommerce business over the last quarter or so and how you expect it to play out for the remainder of the holiday.
Yes, we definitely have enough capacity.
So far we have not been negatively impacted by some of the shipping carrier issues that you're probably hearing about.
In terms of delays or anything like that we have not and just to kind of repeat a little bit of what what I said the Jeff.
We have the ability to fulfill out of our store was as a backup if inventory if we have inventory in the stores and not in the E. Com distribution center, we've had that ability for a long time, and we take advantage of it where necessary.
So I feel pretty good about where we're at and we should be in.
Decent shape through the holiday season.
Okay I'll leave it there guys. Thank you.
Thanks.
Thank you. Our next question comes from Mitch Kummetz with pivotal research. Please proceed with your question.
Oh, yeah. Thanks for taking my questions and you mentioned that womens was up mid singles on a corner could you maybe speak a little bit more to that and to what extent is that because you're tapping into some of these trends have been bolstered by total there's like comfort or maybe even the fitness.
Generally.
Women's business across the board was was improved across the board really.
And.
What's driving that is the west and Melrose brand and collect Jim.
That we introduced over a year ago.
That's been really strong for us and just keeps continues to get better as we bill as the brand a.
Bills on that brand gets better recognition.
So I would say that's probably some of it's come from the categories that you would expect during these times, but it really is good.
Across the board in womens Okay. No one is perfect brand.
Got it and then on the other categories you mentioned they were down but you didn't really kinda.
Kinda speak to the order of magnitude I was hoping you might be able to do that.
Well all categories with the exception of women's went down in Q3 right there.
They're all improving across the board all of them.
Have improved so far quarter the day.
So was there anything that was worse than others in the quarter.
I feel like footwear footwear was a little more challenged over the last couple of quarters and I was just curious if that was still footwear category.
Well, what we have for EPS was down but it's it's comping positive right now.
And I would say probably the most challenging part of our business was our kids business voice, how boys and girls boys in particular.
That was a little softer than we expected and then the accessories area too because of the backlog at net back taxes. The major items you know, it's a major category for us.
And then I guess last thing you mentioned some of the restrictions in California, I know the L.A. County is sort of reimposed. Some from stay at home owners I'm wondering to what extent, you're seeing any impact from that already and.
Ours is that impacting you know set up you know consumer sentiment or or people's willingness to want to get out of the stores or how do you see that sort of translate if at all.
It's hard to really quantify it honestly, but I.
I mean, just us from just today, we announced that reduce capacity.
Our capacity limitation.
And the percentages are different across this day.
Depending on county. So there is no question that that is a challenging thing for us to deal with for everybody to deal with.
But it's probably the right thing to do at this point.
So hard to quantify how much of an impact it is.
Other than the fact that I think you have less people browsing stores.
And the people that are coming in a real purchases.
Which really contributes to an improved conversion rate for us.
All right. Thanks, guys. Good luck for all other thank.
Thank you okay.
[laughter].
There are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Thank you all for joining us on the call today happy.
Happy holidays to everyone and please stay safe have a good evening everyone.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great evening.
[music].
[music].
Greetings and welcome to the Tillys incorporated third quarter 2020 earnings results Conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad other.
Reminder, this conference is being recorded its now my pleasure to introduce your host Gar Jackson. Thank you Guar you may begin.
Good afternoon, and welcome to the Tillys fiscal 2023rd quarter earnings call I'd, Thomas President and CEO and Michael Henry CFO will discuss the company's results and then host a Q and a session for a copy of Tillys earnings Press release. Please visit the Investor Relations section of the company's website at Tillys Dot com from the SEC.
<unk> shortly after the conclusion of the call you will also be able to find a recorded replay of this call for the next 30 days certain forward looking statements will be made during this call that reflect tillys judgment and analysis only as of today December Threerd 2020, and actual results may differ materially from current expectations based on various factors.
Affecting tillys business, including impacts and the company. These actions in response to the ongoing Kobe 19 pandemic accord.
Accordingly, you should not place undue reliance on these forward looking statements from more thorough discussion of the risks and uncertainties associated with any forward looking statements. Please see the disclaimer regarding forward looking statements that is included in our fiscal 2023rd quarter earnings release, which was furnished to the FCC today on form 8-K, as well as our other filings with the <unk>.
You see referenced in that disclaimer today's call will be limited to one hour and I will include a Q and a session. After our prepared remarks, I will now turn the call over to Ed.
Thanks, Scott Good afternoon, everyone and thank you for joining us today.
We continue to adapt to this rapidly evolving COVID-19 environment and its impact on retail.
We have gone from having a store was open for only 50% of total available operating days.
In the first quarter to 65% in the second quarter to 94% net in the third quarter, all with restrictions on operating hours and customer traffic upon store, we openings that began during the second quarter.
We ended the third quarter were 33 of our California, Endo mall stores closed for the entire.
Oh.
Yes.
Began reopening the store throughout September and reopen the final eight stores on October 7th.
As we announced in early September back to school dates were meaningfully delayed.
Compared to prior years, which got us off to a very weak start to the quarter. In August. However, Escos announced later reopening dates our business began to rebound to a degree later.
The quarter.
Compared to other respective fiscal month of last year, I guess net sales decreased.
35%, but down in September net sales increased 22% and October net sales increased 10%.
Altogether. This resulted in a total net sales decrease of 9% for the third quarter.
Which we view as an encouraging result, particularly in light of our August results and a significant number of stores that were closed for a portion of the quarter.
Our ecommerce business continue to thrive during the third quarter generating 50%, 57%.
Net sales increase.
With significantly improved product margins and bottom line profitability compared to last year.
We have hung Chen within digital from Us mindset.
Turning this pandemic period and it has driven significant improvement in our ecommerce assortment management.
Resulted in expanded and more profitable digital spend additional customer convenience enhancements, including curbside pickup.
Operational improvements in our E Commerce distribution center.
All of these factors have combined to drive meaningful improvement.
In our ecommerce business, which we hope to sustain and build upon going forward.
In terms of merchandising for the third quarter, a woman's was our strongest performing department.
The mid single digit percentage increase in comp sales compared to last year although.
Although all other departments come negative to last year, each department improved trend wise as the quarter progressed.
We introduced several new third party brands.
During the quarter and we have been pleased with their performance.
We also launched certain non hard goods during the quarter, including skateboards bikes and roller skates, which have performed well exceed.
Accessories were particularly challenging due to the reduced sales of backpacks, which we believe is primarily due to increased volume of in home.
And remote learning during the pandemic, we ended the quarter with total inventory per square foot down 7.4% to last year and believe our inventories are well positioned for the holiday season.
Turning to real estate, we have reached agreements and flow or in principle.
Addressing nearly 90% of our total store leases related.
Relating to withheld on revenue during the periods of store closures and adjustments of future revenue.
In light of the ongoing pandemic.
We are appreciative.
Of the support provided by our.
To our company by the landlord community.
We currently expect to open seven new stores during the fiscal during fiscal 2021 that were deferred from the Shia by agreement with the respective mall landlords.
These stores are currently expected to open during the March to May time period.
Although this remains subject to change we will continue to be very selective and opportunistic about opening any additional stores next year in light of the rapidly evolving environment.
Finally, just before the end of the quarter.
We opened our first rescues gate test store here in Irvine spectrum.
This new tester is a skate influence concept store under our proprietary rescue brand.
Which incorporates hard goods, including escape Board Assembly.
Apparel and accessories.
Given what we believe is a broad an increasing appeal of scape board.
Boarding, particularly with its inclusion in the Olympics next year. We think this is an important test for us however.
This is just a tester at this stage not a fully develop chain concept.
And any future plans will be dependent upon consumer reaction to and performance of this test store in greater stability in the retail environment.
Turning to the fourth quarter total comparable net sales have been just shy of flat through December for us.
Yes.
Corresponding period last year of last year.
As expected income.
Sales have continued to be strong with a 42% increase during this time period comparable net sales in physical stores have decreased by 14%.
In the fourth quarter compared to the corresponding period of last year No stores were open on Thanksgiving day, this year and Black Friday results and stores were well off last year's pace.
As we had anticipated however.
Store comps have been positive each day since black Friday overall significant reductions in store traffic have been partially offset.
By an improved conversion rate and higher average transaction value.
We can't be certain what the rest of the holiday season will look like.
What impact the ongoing pandemic will have on our ability to drive sales and continue to operate our stores or E commerce, particularly in light of the recent sharp increase in covert cases across the country and additional direct customer traffic restrictions in certain areas. However.
As long as we are able to continue to be fully operational we are hopeful that this year's holiday season can be somewhat.
Closer to normal.
And what we saw during the back to school period AD.
At this time, we expect total sales sales for the fourth quarter to be.
Somewhat lower than last year overall debt.
Sales of the ongoing pandemic and much higher unemployment than last year at this time.
Even if we are able to continue to operate.
Our operating stores throughout the quarter.
In closing.
I want to thank our entire team of store associates field and corporate employees.
For their tireless commitment to.
To making tillys the best it can be during this incredibly challenging time for all of Us Mike.
Mike will now provide more details.
On our third quarter operating performance and balance sheet Mike.
Thanks, Ed Good afternoon, everyone details of our third quarter operating performance compared to last year's third quarter were as follows.
Total net sales for the third quarter were $140.3 million, a decrease of $14.5 million or 9.4% compared to $154.8 million last year.
Net sales from physical stores over $104.6 million, a decrease of $27.5 million or 20.8% compared to $132.1 million last year.
These results were negatively influenced by the delayed back to school dates this year and the stores that were closed for a portion of the quarter the Ed referenced earlier.
Net sales from stores represented 74.5% of total net sales for the quarter compared to 85.3% of total net sales last year.
E Commerce net sales were $35.7 million, an increase of $13 million or 57.3% compared to $22.7 million last year.
Ecommerce net sales represented 25.5% of total net sales for the quarter compared to 14.7% last year.
We ended the quarter with 238 total stores all of which were open for business with restrictions on operating hours and customer traffic compared to 232 total stores operating as normal last year.
On a year to date basis, we have opened one new store and permanently closed three stores.
Gross profit, including buying distribution and occupancy expenses was $40.7 million or 29.0% of net sales compared to $47.2 million or 30.5% of net sales last year.
Product margins improved by 70 basis points, primarily due to improved E com product margins and reduced markdowns overall compared to last year.
Buying distribution and occupancy costs deleveraged by 220 basis points collectively against lower total sales.
Distribution expenses Deleveraged by 120 basis points, primarily due to an increase in E com shipping costs of $1.5 million associated with the significant increase in ecommerce orders.
Occupancy costs decreased by $1 million, but de leveraged by 110 basis points against lower total net sales.
Buying costs improved by $300000 or 10 basis points, primarily due to a severance obligation recorded in last years third quarter.
Total asked from the expenses were $37.1 million or 26.5% of net sales compared to $39.5 million or 25.5% of net sales last year.
Total SDMA was reduced by $2.3 million, but deleveraged 100 basis points against lower total net sales compared to last year.
Store payroll and related benefits decreased by $3.9 million in total primarily resulting from the various periods of store closures during the quarter careful management of staffing levels, and including a $1.2 million payroll tax benefit from the cares Act.
Most other expenses were also reduced compared to last year the.
The primary exceptions to this were increased income marketing and fulfillment expenses of $2.3 million due to the significant growth in E Commerce orders and a $1.7 million disputed sales tax assessment received from the state of California relating to the 2015% to 2017 years.
Operating income was $3.5 million or 2.5% of net sales compared to $7.7 million or 5% of net sales last year.
This decline in operating results was directly attributable to the impact of the COVID-19 pandemic on our retail stores.
Other income expense decreased by zero point $9 million compared to last year, primarily due to having lower total cash and marketable securities, earning lower interest rates on our investments and paying interest on previously borrowed cash compared to last year.
Income tax expense was $1.4 million or 39.8% of pre tax income compared to $2.2 million or 25.9% of pre tax income last year.
The increase in income tax rate is primarily due to the impact of the cares Act, which allows for the carry back of year to date operating losses to prior fiscal years that had higher tax rates.
We cannot accurately predict what our effective income tax rate will be going forward as it is dependent upon our operating results, which are also largely unpredictable in the current environment.
Net income was $2.1 million or seven cents per diluted share compared to $6.4 million or 21 cents per diluted share last year.
Weighted average shares were $29.8 million for both periods.
Turning to our balance sheet, we ended the third quarter with cash and marketable securities totaling $125.3 million, including $12.4 million withheld store lease payments and no debt outstanding compare.
Compared to $130.1 million and no withheld store lease payments or debt outstanding last year.
We ended the quarter with inventories per square foot down 7.4%.
Year to date capital expenditures were $6.4 million compared to $10.6 million last year, primarily due to the reduction in new store openings. This year.
One additional item of note regarding liquidity as announced in early November we replaced our $25 million revolving credit facility with a $65 million assets that credit facility in order to provide our company with increased protection against potential future business disruptions from the pandemic or otherwise.
We think our longtime banking partner Wells Fargo Bank for working with us to provide greater liquidity protections for our company.
As of December two.
2020, our total cash and marketable securities totaled $138.6 million, including $4.4 million of withheld store lease payments and no debt outstanding compared to $143.7 million and no withheld store lease payments or debt outstanding at the corresponding time last year.
Turning to the fourth quarter, given the continuing unpredictability surrounding the code 19, pandemic, including but not limited to its impacts on consumer behavior in our ability to continue to operate some or all of our stores or E. Commerce at any point in time.
We are unable to unable to reliably predict our future sales or earnings at this time, and therefore, therefore will not be providing any specific guidance.
However, given the anticipated negative impacts of the ongoing pandemic, including restrictions on customer traffic to stores and significantly higher unemployment this year compared to last year, we expect our fourth quarter net sales and earnings per share to be lower than last year's fourth quarter. We do not believe it is realistic to expect our earnings to be near last years levels due to the lower.
Sales expectations in higher shipping rates compared to last year.
Operator, we'll now go to Q day.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your hands.
Before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from David Buckley with Bank of America. Please proceed with your question.
Hi, guys. Good afternoon, Thanks for taking my question.
Mike just on your last comment on on margin could you just discuss E com profitability outlook for the fourth quarter, having surcharge pressure and you expect to incur and then whether or not you expect product margins two to improve again in the fourth quarter.
So so again, we're not providing any specific guidance anything given how unpredictable the environment is but I.
I think directionally, we would expect.
Some of the trends that we saw in the third quarter to carry into the fourth quarter. So we have seen.
Meaningfully improved regular price selling full price selling on E com for several months now.
That probably isn't going to change we think during the fourth quarter.
Certainly added shipping charges and such with the high increase in E com sales that were anticipating but.
But year over year E Com has.
Certainly improved its profitability relative to historical years.
From a combination of.
The operational improvements that we mentioned, but also to the full price selling that's been significantly stronger from most of the year at this point. So I don't think that's going to change.
Okay, Great and can you just discuss have you guys had any store capacity issues over from a black Friday, our since then and if so how are you managing that.
Yes, we have.
It varies by State County.
[music].
Actually Jeff just a little while ago, California announce some further restrictions on capacity but.
We've managed net well the teams have managed net well our conversion rates are actually up.
Which is a good good thing and.
It's a challenge sometimes but overall, we've got we've gotten through it pretty successfully.
Okay, great. Thank you.
Thank you. Our next question comes from Jeff Van Sinderen from B. Riley and company. Please proceed with your question.
Hi, good afternoon, everyone.
Let me just say coveted side congrats on underlying strong performance odds.
It's great to see.
Maybe just as a follow up if you can touch on what you've seen around Black Friday weekend, and I know you said trends improved since then so just wondering.
Maybe regionally I know, obviously it depends by region anything to call out in terms of trends.
Maybe where it's a little bit more open versus where it's a little bit more restricted.
Sure.
Yes on.
Black Friday in particular sales were well off in stores they were down over 30% on that particular day.
And Thanksgiving day.
No stores were opened this year last year. Most stores were opened for some number of hours on Thanksgiving day. So between those two days combined we lost close to $5 million in top line volume relative.
Relative to last year.
But then interestingly since then store comps have been positive each day follow.
Following black Friday so.
As we think about the fourth quarter I think we're anticipating debt.
Some of the traditional big shopping days of the quarter might not be as high of a peak on those particular days, but that maybe you kind of stretch business out across other days.
As as we go through this.
As we go through the quarter.
Our traffic patterns have been.
Pretty similar to what's been publicly reported by.
A different company, so I wouldnt say, our traffic trends are adamant and a different materially but like Mike said, it's encouraging to see.
Performance post Black Friday in the stores.
As a little bit better than what it had been trending going into black Friday, I think in particular because of that dynamic on Thanksgiving day, and Black Friday itself, all areas were down meaningful double digits across across Black Friday weekend, but were recovering ground with each day it seems so far.
Okay.
Okay, well good to hear that the trends improving.
And then I just wanted to touch on inventory I know and toward per foot is down mid you can speak a little bit more about how you're kind of working from management of inventory in Q4, given what seems to be sort of erotic traffic and even some some recent locked down activity.
We we planned fourth quarter with the idea that stores were unlikely to be meaningfully negative.
Thankfully the negative that we reported so far 14%.
Has not been as bad as we thought it was going to be.
We also planned for E com to be up more than it has been so far so in a way we're kinda off on both on both assumptions I think stores have been better than we thought it would be so far.
We thought he come would be very strong we thought to be even stronger than it has been so far.
Non.
Thinking that that is likely to continue as we go through the rest of the quarter like like I was mentioning earlier some of these peak days.
We think it's more likely than not that we are going to lose some ground on those traditional peak days, but that hopefully based on the signs were seeing we'll do better in between those peak days and maybe at least with what we've seen so far maybe.
Maybe stores can end up better than how we planned so I think we feel pretty good about how we planned inventory overall.
And we made the comment that we think our inventories are well positioned for the holiday season.
We're constantly making changes every single week and sometimes intra week as we continue to read the business, yes, just to add a little to that is.
We feel really good about our inventory levels right now it's been it's always challenging to to balance the inventory between channels, but.
I think Jeff as you know we have the ability to fulfill out of our stores for E commerce as necessary.
And we've done that for a long time, and we continue to do that so any balancing issues that we may have we can offset a buyer that ability alone.
So I feel pretty good about where we're at.
Okay. That's helpful. And then if I could just squeeze in one more any comment on supply chain around hard goods.
Well, it's a weird really at the early stages of it so.
You know we're not.
I think.
The supply chain is challenging for sure, but it seems to be getting a little bit better.
So.
More to come on that later as we get further into it.
Okay fair enough. Thanks for taking my questions and best of luck the rest in Q4.
All right. Thanks, Jeff.
Thank you. Our next question comes from Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hi, guys. Thanks, Joe.
Just wanted to get a little bit more color on your Q4 revenue commentary expecting that sales to be lower year over year sales.
Yes, we're comping flat overall quarter to date looks like traffic declines sort of improved sequentially into November tickets up you said trends are improving sort of post black Friday are.
Are we factoring in sort of some degradation and traffic for the latter portion of this month what are the other headwinds that we should be factoring it sounds like things have gotten better since the other numbers you provided.
Yes, and I think we are thinking about the two that to some of the responses. We just had with Jeff some of those peak days, we're anticipating that we'll probably lose some ground on those on those peak days just as we saw on Black Friday in particular right.
Based on what we've seen so far we think during those big day is there's a sector of the population that isn't going to be as comfortable going out to stores and being in large crowds and long lines and things of that nature.
It's why we kind of plan stores to be even more negative than they have been so far.
For the quarter and that there would be some shift of that over to the E com side.
So far thankfully stores have performed better and better than we thought it would be really nice if that could continue through through.
Through the rest of the fourth quarter, but as we've seen over this entire period last several months. So much changes so quickly and it's so unpredictable.
We're just trying to make sure that we stay in a place that we think is reasonable and conservative to.
To make sure that we give our give our company the best chance to be successful and yet protect ourselves from downside risk at the same time.
Okay Fair enough and then on the E Commerce side of the business I was just curious about.
Capacity from your standpoint, I mean, do we have enough in terms of shipping slot allocation from your providers maybe.
Maybe you could also discuss sort of the use of curbside and how important that that has been to the ecommerce business over the last quarter or so and how you expect it to play out for the remainder of the holiday.
Yes, we definitely have enough capacity.
So far we have not been negatively impacted by some of the shipping carrier issues that you're probably hearing about.
In terms of delays or anything like that we have not and just to kind of repeat a little bit of what I said that Jeff.
We have the ability to fulfill out of our store was as a backup if.
Inventory, if we have inventory in the stores and not in the E. Com distribution center, we've had that ability for a long time, and we take advantage of it where necessary.
So I feel pretty good about where we're at and we should be in.
Decent shape through the holiday season.
Okay I'll leave it there guys. Thank you.
Thanks.
Okay.
Thank you. Our next question comes from Mitch Kummetz with pivotal research. Please proceed with your question.
Yes, thanks for taking my questions.
You mentioned that womens was up mid singles on the quarter could you maybe speak a little bit more to that and to what extent is that because you're tapping into some of these trends have been bolstered by total comfort or maybe even the fitness.
Generally the women's business across the board was was improved across the board really.
And.
Part of what's driving that as the west and Melrose brand and collect Jim.
That we introduced over a year ago.
That's been.
Really strong for us and just keeps continues to get better as we bill as the brand.
Sales on that brand gets better recognition.
So I would say that's probably if some of us comfort on the categories that you would expect during these times, but it really is good.
Across the board in womens Okay, no went into effect from.
Got it and then on the other category as you mentioned they were down but you generally kind.
Kind of speak to the order of magnitude I was hoping you might be able to do that.
Well all categories with the exception of women's went down in Q3 right there.
They are all improving.
Across the board all of them.
We have improved so far quarter to date.
So was there anything that was worse than others in the quarter.
I feel like footwear footwear was a little more challenged over the last couple of quarters and I was just curious if that was still total arrows category.
Footwear for EPS was down, but it's it's comping positive right now.
And.
I would say probably the most challenging part of our business as well as our kids business voice, how boys and girls boys in particular.
That was a little softer than we expected and then the accessories area too because of the backlog and then back Capex was a major as you know it's a major category for us.
And then I guess last thing you mentioned some of the restrictions in California, I know that Allied County, Sorta reimposed from let's say at homeowners I'm wondering to what extent, you're seeing any impact from that already and.
Ours is that impacting your set up you know consumer sentiment or or people's willingness to want to get out of the stores or how do you see that sort of translate if at all.
It's hard to really quantify it honestly, but.
I mean, just us from just today, we announced our reduced capacity.
Our capacity limitations.
And the percentage is different across the state that day.
Depending on county. So there is no question that that is a challenging thing for us to deal with for everybody to deal with.
But it's probably the right thing to do at this point.
So hard to quantify how much of an impact it is.
Other than the fact that I think you have less people browsing stores.
And the people that are coming in a real purchases.
It's really contributes to an improved conversion rate for us.
All right. Thanks, guys. Good luck for all that.
Thank you okay.
Okay.
There are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Yes.
Thank you all for joining us on the call today happy.
Happy holidays to everyone and please stay safe have a good evening everyone.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.