Q4 2020 Tillys Inc Earnings Call
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Greetings and welcome to Tilly's, Inc. Fourth quarter 2020 earnings results Conference call. At this time all participants are in a listen only mode for a 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. As a reminder of this conference is being recorded I would now like to turn the conference over to you.
Your host Gar Jackson.
Good afternoon, and welcome to the Tilly's fiscal 2024th quarter earnings call, Ed Thomas President and CEO and Michael Henry CFO will discuss the company's results and then I was for Q&A session.
For a copy of Tilly's earnings press release, please visit the Investor Relations section of the Companys website until each dot com from the same section 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 tilly's judgment and analysis only as of today March.
<unk> 2021, and actual results may differ materially from current expectations based on various factors affecting tilly's business, including impacts of the company's action in response to the ongoing COVID-19 pandemic. Accordingly, you should not place undue reliance on these forward looking statements for a more thorough discussion of the risks and uncertainties associated.
<unk> with any forward looking statements. Please see the disclaimer regarding forward looking statements at is included in our fiscal 2024th quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings at the SEC referenced in that disclaimer today's call will be limited to one hour and will conclude with a Q&A session. After our prepared remarks.
I'll now turn the call over to Ed.
Thanks, Gar good afternoon, everyone and thank you for joining us today.
<unk> 2020 was an incredibly challenging year.
I'm very proud of our team's fourth quarter accomplishments and finishing the year end.
Coding a positive overall comp significantly improved topline and bottom line performance from our E Comm business.
And improved earnings per share compared to last year's fourth quarter, along with a strong debt free balance sheet.
This was our strongest fourth quarter earnings per share performance since fiscal 2012.
Fourth quarter we.
We believe these results are quite remarkable considering the.
On the significant restrictions on store operating hours and customer traffic during the quarter high overall unemployment in the broader economy and other operational challenges posed by the pandemic.
In terms of merchandising results for the fourth quarter compared to last year women's and footwear were our strongest departments with double digit percentage increases in comparable net sales.
Men's was just shy of flat.
And girls decreased in the low single digits accessories and boys.
Kris.
By double digits.
We believe that on improved.
Overall assortment and the introduction of several new brands.
Drove the strong performance of women's and footwear weakness in third party brands in denim, where the primary.
Causes of net sales decline in boys.
Weaker hydration and backpack businesses were the primary causes of net <unk>.
Sales declined in accessories.
Our goods, including Skateboards bikes.
Well escape and certain snow products were launched in 20 stores during the fourth quarter after being soft launched online during the third quarter hard goods represented less than 2% of total net sales during the fourth quarter, but we have been encouraged by the customer response to these new.
Offering so far.
In terms of merchandising priorities for fiscal 2021, we intend to expand our offerings of our proprietary rescue brand.
Which was our number one overall brand in terms of net sales in fiscal 2020.
This expansion will include new product categories, as well as abroad of sizing and fit our offerings with within denim.
We also intend to continue to introduce new third party brands, which we believe will drive additional customer interest in our overall merchandise assortment.
We also intend to expand hard goods into 80 of our stores.
Greater breadth of product offerings during the spring expecting that the draw of individual outdoor activities will continue to.
To be meaningful throughout 2021.
Turning to real estate, we currently have seven new stores planned to open during fiscal 2021 that were originally signed two two opened during fiscal 2020.
These new stores are dispersed among our existing markets and are a mix of both mall and off mall stores.
The first store just opened in Las Vegas on March 1st.
Two of planned to open by the end of April and the remaining for a scheduled to open in early may.
We intend to continue to open a mix of both mall and off mall stores over time, but we will be very selective and only pursue those opportunities were and we believe the economics are appropriate to the environment inclusive of conservative internal sales estimates and good co tenancy at.
Expectations.
With respect to our existing store at pole.
Portfolio, we have addressed.
Approximately 95% of our store leases relative to two of the rents we withheld during the pandemic shutdown period last year in many cases, we have negotiated ongoing adjusted rents while we remain in this pandemic environment. We currently have.
One known store closure that will take place at the end of March.
Turning to the first quarter of fiscal 2021 total comparable net sales have decreased four 6% through March eight.
Versus the comparable period last year comparable net sales were positive in both physical stores and E. Comm during last year's period before the pandemic began adversely impacting our operations.
As a reminder, all of our stores are abruptly closed midway through last year's first quarter and remain closed into the second quarter due to the impact of the.
The COVID-19 pandemic across the country.
This year of stores have been operating with significant government mandated restrictions on customer traffic and reduced operating hours compared to last year's pre pandemic period.
Assuming our stores and E. Comm can remain in operation. This year, we would expect that total net sales and earnings per share to be substantially better than last year for the first and second quarters of fiscal 2021.
However, at this time specifics are impossible to predict with any certainty until we see how our business performs as we begin to anniversary last year's stores shutdown period.
For further complicate any efforts to predict our business we.
We have also been experiencing meaningful product delivery delays from southern California ports impacting almost 20% of our planned at retail inventory receipts.
During the first several weeks of the quarter delivery delays at ranged up to a full month.
At this time and across a variety of product categories. We do not currently have good visibility as to when the situation will be fully resolved as a result of these delays we may at times temporarily carry higher inventories than last year, we are carefully monitoring events and adjust.
Turning to the best of our ability as we get more information.
In closing we believe we have successfully managed our way through one of the toughest share some recent retail history.
We remain excited about the future of utilities business and dedicated to continuing to push through the challenges posed by the pandemic.
Although so much remains uncertain for now we are hopeful that we can continue to position the business for success.
In the evolving environment as we proceed through fiscal 2021.
We intend.
To remain conservative in our approach to managing our business.
Over the near term in order to protect our longer term prospects in light of the continued volatility and uncertainty in the retail environment.
I will now turn the call over to Mike to provide details on the fourth quarter operating performance and balance sheet Mike.
Thanks, Ed Good afternoon, everyone details of our fourth quarter operating performance compared to last year's fourth quarter fourth quarter were as follows.
Total net sales were $177 $9 million at increase of $5 4 million or three 2% compared to $172 $5 million last year.
At comparable net sales, including both physical stores and E Commerce increased two 5%.
Comparable net sales from physical stores decreased 12, 3% and represented 68, 9% of total net sales compared to 87% of total net sales last year.
E Commerce net sales increased 66, 5% and represented 31, 1% of total net sales compared to 19, 3% of total net sales last year.
We ended fiscal 2020 with 238 total stores compared to 240 total stores at the end of fiscal 2019.
In fiscal 2020, we opened two new stores and permanently closed for stores.
Gross profit, including buying distribution and occupancy expenses was $58 3 million or 32, 7% of net sales compared to $52 1 million or 32% of net sales last year.
Product margins improved by 210 basis points, primarily due to reduced total markdowns.
Buying distribution and occupancy costs improved by 40 basis points collectively.
Occupancy cost improved by $2 3 million and 170 basis points as a percentage of net sales compared to last year.
Distribution expenses increased by $2 8 million and Deleveraged by 140 basis points, primarily due to an increase in E. Comm shipping costs of $3 $1 million associated with the significant increase in e-commerce orders buying.
<unk> costs improved by 10 basis points.
Total SG&A expenses were $44 $1 million of 24, 8% of net sales compared to $43 6 million or 25, 3% of net sales last year.
The 50 basis point improvement in SG&A was primarily driven by of $2 $5 million reduction in store payroll and related benefits expenses of $1 million reduction in print advertising expenses, partially offset by increased E comm marketing and fulfillment costs of $4 million on the aggregate due to the significant increase in E connectivity.
Operating income improved to $14 1 million or seven 9% of net sales compared to $8 $5 million or for 9% of net sales last year as a result of the combined impact of the factors just noted.
Other expense was zero point of $1 million compared to other income of zero point $6 million last year, primarily due to earning lower interest rates on our investments and approximately zero point of $2 million and costs associated with our new ABL credit facility.
Income tax expense was $5 1 million for 36, 6% of pretax income compared to $2 8 million or <unk>, 39% of pretax income last year.
Net income improved to $8 9 million or <unk> 29 per diluted share compared to $6 3 million or 21 per diluted share last year.
Weighted average shares were $30 1 million this year compared to $29 $9 million last year.
Turning to our balance sheet, we ended the fiscal year with cash and marketable securities totaling $141 1 million.
Including $2 $2 million of width.
Store lease payments and no debt outstanding compared to $139 $9 million with no withheld store at lease payments or debt outstanding last year.
We ended the quarter with inventories per square foot down <unk>, 7%.
Total capital expenditures for fiscal 2020 were $8 2 million compared to $14 3 million in fiscal 2019, primarily due to the reduction of new store openings. This year as a result of the pandemic.
As of March nine 2021 of our total cash and marketable securities were $138 7 million, including $2 $1 million of withheld store lease payments and no debt outstanding compared to $115 5 million as of the comparable fiscal date last year at.
As a reminder, in late February 2020, we paid a cash dividend to stockholders of $1 per share for $29 $7 million on the aggregate per.
Per the terms of our ABL credit facility, we are temporarily prohibited from paying dividends of repurchasing our own stock until November 2021.
Turning to the first quarter of fiscal 2021 as Ed noted earlier total comp sales of decreased four 6% through March eight, including a decrease of 13, 3% and comparable store net sales and an increase in e-commerce net sales of 46%.
Comps were negative in February would have been positive so far in March.
Given all stores were closed as a result of the pandemic halfway through the first quarter last year, we would expect our total net sales and earnings per share for the first quarter of this year to be substantially better than the $77 million in total net sales and loss per share of <unk> 59, we reported for last year's first quarter as long as stores and E. Comm can remain in operation.
As we begin to anniversary last year's store shutdown period next week.
Unknowable factors include how store performance will compare relative to pre pandemic performance levels and how E. Com will perform as it goes up against last year's significant increases we experienced during the store shutdown period.
These factors are impossible to predict with any certainty and therefore, we will not be providing any specific earnings guidance at this time.
Operator, we will now go to Q&A.
Thank you at.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad of confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment at may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question comes from Jeff Van <unk> with B Riley income.
Hi, everyone.
First let me say congratulations on the strong Q4 of metrics.
Amazing to see positive comps, there, especially given the back.
Inventory I know your inventories down a little bit of net comp basis.
But I think you said about 20% of your of seeds are impacted by the delays in a variety of categories. I guess I'm wondering how much of that is impacted Q1.
And how much of that do you expect to impact Q2 and are the delays changing of ordering plans going.
Going forward.
Its pretty hard right now Jeff too.
Quantify.
Whether it's Q1 impact at Q2 impact.
Sure, it's kind of attach both quarters.
Shifting of Shen about at shipyard, that's shifting as we go and net really of moving and it really is a moving target. So it's really hard to get any kind of.
Visibility of the brands.
Having just as difficult at the time of getting visibility to when that when it will get better of when that will come in.
So.
Right now our inventories are in pretty good shape. So we are pretty good pretty good about that but obviously.
The long of the delays go on at will have some impact on us.
Uh huh.
Okay.
And then just wanted to I know this is also really hard to predict but just thinking about the E com business given the comparisons.
And I think you are about 30% of your comp penetration in Q4.
Our low thirties.
How do we think about or how are you seeing I know you can't predict it but how are you thinking about where your E com business penetration might go.
30% at the level or do you think it comes down from there as the stores ramp back.
At this point of what's your best guess, what's your latest take on that.
I think that.
As you know we had a pretty under the editor of developed E comm business going in pre pandemic and we've we've created.
A lot of positive momentum in building that business and I don't think its totally just because of stores were closed I think of lot of it was we saw growth in areas that.
Out of areas of states that we don't have any store presence. So we have very little.
So we feel that E com will continue to grow in a good way.
And at a decent pace, even when the stores with the stores fully operating so it still remains a pretty significant opportunity for that business to become big bigger I think we're thinking it's going to stay somewhere call. It maybe the mid 20 percents.
Best guess, yes, no it's not.
It's unlikely to stay at the low thirties with all stores being opened right because at that penetration is going to shift between the two.
Between the two channels, but.
We certainly think it is going to be higher than where we ended fiscal 19. When it was only 16% of total sales.
Don't think it's going to revert all the way back down to where to where it was I think we've made a lot of progress we've invested in technologies and capabilities that we didn't have.
Two years ago.
So we do think it's going to remain a bigger piece of the business and it's good to see that through this past year, while that increase.
Occurred on the topline, we also improved product margins and bottom line profitability of our E com business, so it'll be a healthier contributor.
Two the overall business than it has been traditionally in pre pandemic times.
If I could squeeze in one more.
You put up a really strong operating margin of around 8% for Q4, I think and I'm just wondering how you're thinking about that within the context of things I know that last year. Obviously, there were some unusual things around expenses, but.
I guess, what I'm getting at is do you think 8% is sort of.
On a let's say the new normal for you.
But do you feel like you've moved up I guess in terms of what kind of a normal status quo.
Operating margin might be for you.
Over time, we expect to continue to improve the operating margin performance of this business.
Each quarter is a little bit different under normal circumstances right. If you look back at the history of of Q1, it's the smallest revenue quarter that puts a lot more pressure on costs and leverage points on costs during the first quarter in particular.
No.
8% doesn't automatically become the run rate each and every quarter going going forward because of the change in volume and the mix between stores and E com, but.
But generally speaking we still feel like under normal conditions, if everything can stay operating on all of the Covid caveats.
We would expect to continue to push this business through the mid single digits and into the high single digits and operating margin in the future. We think that's a realistic goal and certainly part of our thinking on how we're trying to manage the business.
Okay, Great day here, Thanks for taking my questions and best of luck. Thanks.
Thanks, Jeff.
And our next question is for Matt Koranda with Roth Capital Partners.
Hey, guys good afternoon.
Thanks for the preliminary commentary as well on I guess of February.
But I was wanted to get a sense for how we should think about transaction values and any color you can provide on sort of how it compares maybe on a two year stack going forward in <unk> versus kind of more normal times.
<unk> 19.
Maybe directionally you can help us with sort of traffic and transaction values relative to that that marker.
Yes, I don't have any two year stacks for for any of that information.
<unk>.
Thus far in the first quarter compared to last year, which would of been the last pre pandemic weeks at at this stage traffic.
Traffic has been down 28% the conversion rate has increased by high single digit percentage and the average transaction value has been up low teens. So.
Traffic is certainly down on top of a meaningful decline last year at <unk> in the prior year at the same time, but it seems that.
We're doing a good job of converting those who come in and they are buying more than.
And then they have in the past when they are coming in.
Got it that's helpful. Mike and then just on the strong gross margins from this last quarter.
It seems like you called out markdown activity relatively low how sustainable do you think that is heading into kind of more of a reopening or maybe youre getting a bit more.
For foot traffic over the next several months.
Can you talk a little bit about the markdown environment and how you see that playing out.
Yes. This is one of those things. It's a question mark in the current environment right depending on.
How close store performances relative to pre pandemic levels with the mix with E. Comm is and then further complicated by the port delays situation that we're dealing with.
That is also unpredictable of what exactly is that going to mean for.
For when the products come in how seasonally appropriate are they when they do come in the.
Good thing between Q1, and Q2 is that as the spring summer assortment. So theres not a massive assortment shift between Q1 and Q2, so as long as we can get those products in somewhere.
In a reasonable amount of time.
We would expect our product margins to remain pretty consistent as they always typically are they don't tend to move around by more than 100 basis points plus or minus historically, our Q4 performance was a bit of an outlier to the good.
So on.
All of those all of those unknowns in play.
I wouldn't expect that we will continue to see plus 200 basis points in product margins going forward I think if anything there might be a little bit of pressure on that.
Because of those factors that we just mentioned, yes, just to add to that.
Better at managing merchandise margins.
And have been for the past year, then on why we were in the past and we've never been bad at it. It's just that we got better end.
The inventory management disciplines within the organization of really good at.
At this merchandize margin and we have not changed nor do we anticipate changing our promotional strategy, where we're just not of promotional company and if you see of promotion out there at most of the time it's of planned promotion at a decent margin.
Got it Okay last one really quickly you mentioned a bit of distribution deleverage and it looks like probably mostly just E com mix, but anything onetime in the quarter to call out just in terms of of like maybe excess cost in terms of outbound shipments of challenges around.
Parcel carriers that kind of caused you a little bit of of headache, there or is that just the mix of E com and that distribution deleverage.
It's primarily the mix of E. Com I mean, if you look back at the last several quarters of our performance at the very same things have been the same impacts whether youre looking at the buying distribution occupancy bucket or youre looking at the SG&A bucket. It's been the same key things that are that are the primary drivers of movement in the $1. So.
While costs were higher from from the carriers.
It's more that the E comm penetration significant increase in income activity is what the primary driver of the increase in the causes.
Okay understood I'll jump back in for you guys. Thank you.
Thank you.
And our last question comes from Mitch <unk> with pivotal research.
Yes, thanks for taking my questions. Mike I think you said on the quarter occupancy dollars were down I feel like that's been the trend can you give us some sense of how you expect that line item to flow in 'twenty one on at from a dollar standpoint.
It'll continue to be reduced because of all of the negotiations that we have completed.
The specific impact from quarter to quarter is really going to move somewhat with depending on where comps lend out.
So I can't get terribly.
Terribly more specific than that not not knowing exactly how stores versus E. Comm is going to shake out but.
We should see year over year, some continuing favorability because if you think back 12 months of lot of these negotiations that we did during this past pandemic year hadn't been accomplished yet so we should continue to see some favorability through that line for each of the next couple of quarters non into the second half I would say.
And then of hard goods I think you said penetration was 2% in the quarter can you maybe speak to how you expect that to ramp through the year end is that largely incremental I mean I imagine there are some force those being pulled from other areas, but do you feel like that's more incremental than not and kind of.
Again kind of where those percentages might go.
It's largely incremental but I don't expect that to ramp up to bigger of a much bigger numbers other than the fact that we're going to expand it into a lot more stores.
So in the spring so that the so far the initial tests, we have done in stores.
It has been good end.
We'll continue to build it from there, but I don't I Wouldnt expect of major overall change in our merchandise mix assortment in the store by just adding by adding hard goods there'll be some tweaks to it but.
Nothing major coming out.
And then I guess lastly.
Maybe on February <unk>.
Some delayed tax refunds, but now we've got stimulus coming did you did the tax refund delays do you think that hit of February and how are you thinking about the business with stimulus will be happening later this month into next month on are you ready to capitalize on the stimulus given worthy of inventories.
I think it's hard to tell whether the stimulus impacted February not at the fact is as we stated the traffic has been down and the shopping is not back to normal yet and that conversion is really healthy as Mike said and industry wide I mean at.
The traffic has been off still significantly off and I think it's kind of be a while before you see traffic start to normalize.
I think that's a bigger challenge and certainly the tax refunds and the stimulus should help in <unk>.
Terms of driving sales on.
On the middle of February where we saw that that really severe winter weather snap hit we did see our business decelerate everywhere. So we were actually positive comp overall in the first week of February and then we were down double digits. Each of the next two weeks on all of that severe weather hit I think we had 43 total stores closed for up to a <unk>.
Weak.
At one point not all of them are close to full week, but varying degrees.
And then the fourth week of February got back into single digit negative and then week one of March was positive so.
We saw a blip there in week, two and week three of February partially because because of the weather, it's really hard for us to tell how tax refunds or for stimulus impacts factor in got it totally understand alright. Thanks, guys. Good luck.
Alright, thank you.
Ladies and gentlemen, we have reached the end of for question and answer session and I would like to turn the call back over to CEO at Thomas for closing remarks.
Thank you all for joining us on our call on the call today, we look forward to sharing our first quarter results with you in early June 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 deal.