Q1 2021 Tillys Inc Earnings Call
Greetings and welcome to the Tilly's incorporated first quarter 'twenty 'twenty 1 earnings results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation at the numbers.
You should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host Gar Jackson you may begin.
Good afternoon, and welcome to the Tilly's fiscal 'twenty 'twenty, 1 first quarter earnings call Ed Thomas.
Thomas President and CEO and Michael Henry CFO will discuss the company's results and then host the Q&A session for of coffee of Kelly's earnings Press release. Please visit the Investor Relations section of the company's website at <unk> 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. The reflect tilly's judgment and analysis only as of today June 3rd 2021, and actual results may differ materially from current expectations based on various factors affecting sales.
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 2020, 1 first quarter earnings release, which was furnished to the S. E. C. Today on form 8-K.
As well as our other filings with the S E T referenced in that disclaimer.
Today's call will be limited to 1 hour and will include a Q&A session. After our prepared remarks, I will now turn the call over to Ed.
Thanks Gar.
Good afternoon, everyone. Thank you for joining us today.
Fiscal 2021 is off to a record setting start with.
With our best first quarter net sales and earnings per share since becoming a public company in 2012.
This follows ending fiscal 2020.
With record quarterly net sales and our most profitable fourth quarter in the last 8 years.
We believe these yourselves of being driven by compelling merchandise offering and excellent execution by our corporate and store teams.
As well as several favorable environmental factors, including increased consumer activity generally the impact of federal stimulus checks on consumer spending a return to in person of learning and many schools the reopening of public venues.
I'm going to discuss our fiscal 2021 performance relative to the fiscal 2019 pre Pat that makes the first quarter as a better indicator of how our business performed well.
We expect that our results to be significantly better than last year due to the pandemic related store closures, we experienced in the later half of last year's first quarter.
But we were pleasantly surprised at how strong our business performance was relative to any quarter of the last several years.
Both physical stores and.
E Com produced double digit positive comps in the first quarter compared to fiscal 2019.
Store comps were positive in all regions relative to 2019.
In terms of merchandising all departments Comped positive.
In the first quarter compared to fiscal 2019, with womens mens and girls posting double digit percentage.
The increases and boys footwear and accessories posted single digit percentage increases.
The atypical of back to school of timing during the first quarter resulted and then the aggregate increase in backpack and denim sales of nearly $5 million over 2019.
First quarter.
Hard goods produced $2 million in total net sales during the first quarter still very small as a percentage of our total business by continuing to grow hard goods were in the 70 stores at the end of the first quarter and I plan.
As for them to be in the half of our stores by the end of the second quarter.
We launched our sustainability program during the first quarter, which highlights the work we've been doing with our third party brands take care of the collection of more sustainable products that ever reduced impact on the environment.
So far we have introduced over 700 products on.
On our website from brands like the North face Billabong Levi's Jan sport obey hydro flask, the Teva and I lead us.
That contain sustainability of features that increase the use of recycled materials or support of a positive outcome.
We plan to grow this assortment of more than 1 thousands of products by the end of the third quarter.
We are also currently working with our proprietary brand suppliers to encourage the use of recycled materials and certain of our rescue branded products.
That's an update on real estate, we continue to believe there are significant opportunities for us to grow out of store footprint over time.
We have added 2 additional new stores 2 of fiscal 2021.
Since our last earnings call, bringing the total net store count for the year to.
The 9 from 7.8.
8 of these stores have already opened 1 store opened in early March 1 opened in late April of the remaining 6 opened in May the nice store is scheduled to open in early November we are encouraged by the early results of these new stores and intend to continue to open a mix of both mall and off mall store.
Over time remaining very selective as we do and only with what we believe to be appropriate rent economics relative to the retail environment that continues to produce.
Negative customer traffic to 2019.
Turning to the second quarter of fiscal 2021 again relative to fiscal 2019.
Due to the varying periods of the pandemic store closures, we experienced last year.
Total comparable net sales increased 30% through may 31st.
We have experienced the significant shift in business towards stores and away from E. Com over the last several weeks, which has resulted in E comm comps.
Turning negative since April week, 2 compared to last year, but still up nearly 85% relative to fiscal 2019.
We are encouraged by the strong performance of our business, thus far in fiscal 2021.
And we remain excited about the long term future of telecom business.
And its prospects for continuing profitable growth.
I will now turn the call over to Mike to provide details on our first quarter operating performance Mike.
Thanks, Ed Good afternoon, everyone details of our first quarter operating performance compared to last year's first quarter were as follows.
Total net sales were a record $163.2 million for first quarter.
An increase of $85.9 million of 111% compared to $77.3 million last year.
Total net sales from physical stores were $127.7 million, an increase of $87 million or 172% compared to $47 million last year.
Primarily due to all stores being closed for the latter half of the first quarter last year as a result of the COVID-19 pandemic.
Net sales from physical stores represented 78, 3% of our total net sales for the first quarter compared to 68 per cent of total net sales last year.
E Commerce net sales were $35.5 million, an increase of $5.1 million or 17% compared to $33 million last year.
E Comm net sales represented 21.7 percentage of total net sales compared to 39, 2 percentage of total net sales last year.
Compared to last year E Comm comps were up 39% in February of 40% in March then down 13% in April as a result of the significant shift in business towards stores that Ed just noted.
We ended the first quarter with 238 total stores compared to 239 total stores at the end of the first quarter last year.
During the first quarter of fiscal 2021, we opened 2 new stores and permanently closed 2 stores.
For additional reference we're also providing comparable net sales results relative to the fiscal 2019 to help clarify how our first quarter business performance compared to pre pandemic levels.
In that light total comparable net sales for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2019 increased 21, 9% with comparable net sales from physical stores up 11, 7% and E Commerce net sales up 84%.
In the first quarter of fiscal 2019 total net sales from physical stores represented 84, 9% of our total first quarter net sales.
Net sales from E. Commerce represented 15, 1% of our total first quarter net sales.
Gross profit, including buying distribution and occupancy expenses was $54.8 million or 33, 6% of net sales compared to $1.6 million or 2.1% of net sales last year.
Product margins improved by 930 basis points, primarily due to the prior year impact of an estimated inventory reserve of $4.7 million recorded during last year's first quarter when all stores were closed.
Setting aside the prior year reserve impact product margins improved by 330 basis points on a comparable basis, primarily as a result of the lower total markdown rate.
Buying distribution and occupancy costs improved by 2220 basis points collectively.
Despite increasing by $1.5 million in total due to leveraging these costs against a much higher level of net sales this year compared to last year's store shutdown period.
Occupancy costs improved by 1700 basis points as a percentage of net sales and were reduced by zero point $5 million compared to last year.
Distribution expenses improved by 450 basis points as a percentage of net sales, despite increasing by $1.6 million.
Buying costs improved by 70 basis points as a percentage of net sales despite increasing by zero point of $5 million.
Total SG&A expenses were $40 million or 24, 5% of net sales compared to $30 million or <unk> 38, 8% of net sales last year.
The <unk> hundred 30 basis point improvement in SG&A as a percentage of net sales was primarily due to leveraging the higher level of expenses against the much higher level of net sales as a result of all stores being in operation for the entirety of the first quarter compared to only half of last year's first quarter.
Of the $10 million increase in SG&A $6.2 million was attributable to store payroll and related benefits due to the operating all stores for the entirety of this year's first quarter.
$1.5 million was attributable to corporate bonus accruals due to exceeding our budgeted targets thus far in fiscal 2021.
$1.2 million was attributable to increased E comm marketing costs $1.2 million was attributable to increased corporate payroll and related benefits due to being fully staffed this year compared to significant furloughs.
The last year's store shutdown period.
Zero point $8 million was attributable to increased credit card fees associated with significantly higher net sales.
And the <unk> 5 million was due to increased insurance premiums.
These increases were partially offset by a $1.6 million reversal of the disputed, California sales tax assessment originally recorded during the third quarter of fiscal 2020 that we were able to successfully resolve in our favor.
Operating income improved to $14.9 million or 9.1% of net sales compared to an operating loss of $28.4 million or 36, 7% 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 <unk> $4 million last year.
Primarily due to the earning lower interest rates on our investments and approximately zero point $2 million and costs associated with our new ABL credit facility.
Income tax expense was $3.8 million of 25, 7% of pretax income compared to an income tax benefit of $10.6 million or 37, 9% of pre tax loss last year.
Net income improved to $11 million or <unk> 36 per diluted share also records for the first quarter for us as a public company compared to a net loss of $17.4 million or <unk> 59 per share last year.
Weighted average shares were $30.5 million this year compared to $29.7 million last year.
Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $157.6 million.
Including zero point $8 million of remaining withheld store lease payments and no debt outstanding.
This compared to $111.1 million at the end of the first quarter last year, which included $13.3 million and withheld store lease payments and $23.7 million borrowed.
Borrowed cash under our then existing credit facility.
We ended the first quarter with inventories per square foot down 2.6% relative to last year, but up 8% relative to fiscal 2019, as we seek to support the current momentum of our business.
Total capital expenditures for the first quarter were $5.5 million compared to $3.5 million last year, the increase being primarily due to new store openings. This year.
Turning to the second quarter of fiscal 2021, as Ed noted earlier total comp sales through May 31 increased 32% versus the comparable period of fiscal 2019.
This result is comprised of the comparable net sales increase from physical stores of 21, 1% and an increase in E. Commerce net sales of 84, 6%.
Based on current trends and given the varying periods of store closures, we experienced during last year's second quarter. As a result of the pandemic and assuming stores and E. Com are able to remain in operation. This year, we would expect our total net sales and earnings per share for the second quarter. This year to be improved relative to the second quarters of both fiscal 2020 and 2019.
We expect to have 244 total stores open at the end of the second quarter, which compares to 238 at the end of last year's second quarter and 229 at the end of fiscal 2019 second quarter we.
We believe that drawing specific conclusions from comparative financial performance against last year's results can be misleading given the various impacts of the pandemic and it is challenging to predict the future performance trends with any certainty due to many continuing unknowable factors in the current environment.
These factors include but are not limited to.
How the pandemic may continue to impact the consumer habits, how the continuation or cessation of federal or state and local stimulus payments may continue to impact consumer spending.
Now store performance will compare relative to fiscal 2020 in 2019 over a longer period of time, particularly against last year's strong results. Upon the initial reopening of stores, which occurred on a staggered basis over several months beginning in mid may last year.
How economy will perform relative to the significant increases in income net sales we experienced during the during periods of store closures during fiscal 2020.
Whether or not we will have a more typical back to school season. This year, which usually begins in late July.
And whether any of the first quarter business. We did it in traditional back to school product categories will represent a pull forward of typical back to school spending or if these first quarter sales will be incremental to what we hope will be a more normal back to school season. This year.
In light of these and other uncertainties, we will not be providing any specific earnings guidance at this time beyond our statement that we expect second quarter results to be improved compared to the second quarters of fiscal 2020 and 2019.
Operator, we will now go to our Q&A session.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May Press Star 2 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 keys.
Our first question comes from Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hey, guys, thanks, and great quarter.
Just wanted to talk about margin flow through on the 38% comp that you're seeing quarter to date, just maybe if you could discuss it.
Around the merchandise margins.
Assume they stay relatively strong relative to Q1, and then maybe just if you could talk about how buying distribution and occupancy costs are kind of moving through the through the quarter here.
Sure so.
There is a couple of odd things as we think about last year.
I noted in my prepared remarks, the first quarter impact of the estimated reserve that we took the $4.7 million when all of our stores were closed we didn't know yet how long most of them would stay closed.
We're going to have to be a heck of a lot more promotional than we ended up being in reality.
So.
During the second quarter last year, our product margins were up I think it was 360 basis points, which was an unusual favorable movement for us you've followed us awhile, usually our product margins don't move around a whole lot true.
Versus prior year, plus or -100 basis points is pretty pretty typical for us we tend to have pretty stable product margins. The last year was up 360 basis points. So.
Given the level of full price selling.
Took place.
Relative to those items, we had already reserved in the first quarter. There is an unusually high level of product margins in last year's second quarter. So I do anticipate that our second quarter product margins will be down.
The last year.
B.
It remains to be seen what happens the rest of the quarter, but it could be as much as that original 360 unusual swing to the positive.
May or may not happen depends on how the rest of the quarter plays out on.
On the occupancy distribution those kinds of things.
We should still see with the level of sales, we're seeing we should still see some leverage on both distribution and occupancy.
On the dollars will be up to some degree the.
The distribution certainly with.
All stores being opened this year versus all stores being closed for the first 2 weeks of May and a lot on into June before they reopened.
Last year, we've got a full quarter of distribution operations. This year. So those dollars are going to be higher.
Have the 8 store openings that have already happened.
It had referenced in his in his remarks, so there'll be raw dollar increases in occupancy because of the added stores.
And again because of the.
Operation of all stores all quarter long occupancy isn't just store rents. It's also things like utilities, and telephone and security and other things like that that will cause the dollar increase in those items.
And then just thinking about SG&A there'll also be a much more substantial dollar increase in SG&A exact.
The exact numbers to be seen and depending on how sales behave the rest of the quarter, which I can't I can't predict but.
It still should be a larger dollar increase in SG&A than what we saw in Q1 again with all stores being in operation the <unk>.
Second quarter is typically a larger revenue quarter than the first quarter.
Even though this this first quarter. We just finished was.
Unusually strong.
That pattern holds in Q2 as the larger revenue than Q1, there is going to be an even larger increase in store payroll than we saw in Q1 there'll be more bonus accruals coming because we are definitely exceeding our budget targets for the year.
So those are some of the puts and takes.
Again, the specifics or just impossible to predict with not knowing all the answers to the list of questions that I called out.
Thank you. Our next question comes from Jeff Van <unk> with B Riley. Please proceed with your question.
Hi, everyone and let me just say first.
Terrific work managing through the worst we hoped was the worst of the pandemic and congratulations on the great metrics for Q1.
Thanks, Jeff Thank you.
I guess my first question just kind of following up on on supply chain is there more color you can give us relevant to what youre seeing in supply chain I guess, where are the challenges if any and what areas are improving.
How are you managing inventory for what is usually the the kind of the traditional back to school period.
Within the confines of of kind of whatever supply chain dynamics, you're you're dealing with at this point.
Well the port delays on the West coast still remain an issue.
In the scheme of things overall material materiality is low.
Compared to what the total receipts are expected to be.
We don't have much color in terms of when.
The port situation improves, but certainly we're monitoring it and we did plan on bringing in some some inventory for back to school a little earlier the nom com.
Compensate for the potential delays, but I feel pretty good about where our inventory is right now on where it's going to land.
Okay. Good.
And then I guess, just it sounds like Youre, starting to see a little bit of a shift here.
From E com back to brick and mortar. So I guess, how are you thinking about that.
For the remainder of Q2, and then I guess as we kind of think more about Q3 also as we wrap up the.
<unk> scope of traditional back to school period, how are you thinking about that.
Think obviously, Jeff we are going against huge increases in E. Comm last year because of the store closures. We got the benefit on E. Com. Some of it was due to the shift in and buying but.
So <unk>.
The expected somewhat of a little bit of a temporary slowdown, but I think both channels.
Well continue to prove us improve as we get through the second quarter and tobacco the school.
I'm pretty confident of that.
And our traffic.
Generally foot traffic in stores is still down, but we're seeing some really good number of decent numbers. There. They continue to improve and I think 1 of the things that surprised me. The most of the new store openings, we didn't know what to expect because it's just not normal out there and the new store is that.
We've opened have exceeded plan.
So far since they opened so I'm really excited about that.
So I think it's going to be a combination of a lot of factors and I <unk>.
Like Mike mentioned I have full price selling has been really good so we're not driving any of our business.
Whether it's the e-commerce store is through anything unusual promotional Lee.
And we've seen quite of bit of the competition online in particular be a lot more promotional than we are we have been but I think full price selling will continue to be very strong.
Well you don't need to promote 1 of your merchandise content is as good as yours is at least not maybe not as much as some others.
So just as a follow up to that because you're seeing the new store openings exceed plan is that shifting your thoughts about I guess your plans for store opening as you think out maybe a year from now.
I know you said you added I think what was the 2 stores to your plan for this year is that is that changing your thinking at all.
There's definitely.
I am more.
We are more optimistic about physical store openings going forward.
We've always had a pipeline, but we really didn't touch much of the pipeline of potential store during the pandemic and certainly we're looking at that now we have a decent pipeline, we want to take advantage of.
Great space is at incredibly low economics.
And where we're going to maintain our discipline on our we're still not going to open any stores on.
Unless the economics of it right.
Currently I think we're probably in a different mindset now in terms of opening stores.
Then we were of 6 months ago for sure.
Uh huh.
Okay, great. Thanks for taking my questions and continued success.
Thanks, Jeff.
Thank you. Our final question comes from Nick <unk> with pivotal research. Please proceed with your question.
Yes. Thanks, Congrats from me as well on thanks for taking my questions I guess I just have a couple of Mike I was hoping you could give us for the quarter the.
The 2 year comp by month.
Do I have that in the.
I don't have that real handy on AR.
Stack basis.
Do you know if the.
March was the strongest month or April and obviously, we have the main number I'm kind of curious how things sort of moved from March April as of May do you happen to know kind of off the top of your head without having the numbers in front of you.
I don't I'd have to look at the others. Okay. So many different versions of the things we've been looking at relative to 2020 relative to 2019 as a normal year that.
Alright, I have to look at the 2 years. So that's 1.
Ed could you could you maybe address how purchasing behaviors change.
Changing if at all as we're kind of starting to come out of Covid. Just in terms of what your consumers are buying is that does it change the can all from 3.6 months ago or is it kind of continuing along the same lines.
I think it's starting to get back to the way it was pre pandemic. So.
I think that the.
Certainly there was pent up demand.
I think for the young of 1000 teenage customer they're hungry for newness.
And we've given them quite of bit of newness in both mens and womens.
I think that's helping so I don't see it materially changing Mitch.
Okay. You mentioned you mentioned the denim in your prepared remarks, I always think of you guys of being.
A good denim resource I'm, just curious are you seeing out outperformance in your in your denim business and you kind of could you kind of remind us how denim performed for you through the pandemic I feel like there was kind of a maybe a little bit of a shift away from denim. The the things like fleets that are maybe more comfortable as the sort of lounging around the home and I'm just kind of curious how those thing.
We are standing right now.
Denim is really strong has been strong it was okay. It was okay to during the pandemic, but it got stronger.
As time went on and.
Our primary of brand denim rescue is hum.
1 of our top 2 brands on the company.
It's part of the proud of merchandise mix on just denim, but it's very strong and it's good.
Good.
So and I expect that to continue through of back to school.
Okay.
Alright, that's all I need of the thanks. Good luck alright. Thank you.
Thank you. Our next question is from Alex <unk> with William Blair. Please proceed with your question.
Yeah, Hey, guys. Thanks, Susan the outs on for share right now thanks for taking the questions and I just had a couple of quick ones.
Firstly could you maybe talk about any of your early read you have into the back to school season, given many regions have announced like a full resumption of classes in the fall anything anything deeper you have there.
I think so far with the back to school dates we have been able to confirm it.
It does look like we may have a fairly normal back to school season. That's that's what we're we're guessing and planning on at this stage.
Most stores, we haven't been able to get confirmed.
Back to school dates yet, but the ones that we have.
<unk> to the stage look like they're pretty darn normal in terms of the timing. So I think just given where we're things are across the country I think it's probably more likely than not that we'll see something.
Much closer to a typical back to school season, Thats My Best guess right now.
Okay, great great.
And then just kind of I guess following up on that 1 given you said that maybe there is not much more you can say here, but given you said that the.
The ones that you have been able to see confirmation is there anything you have.
On more of a region of regional basis, I know you said that.
All of the stores that are comping positively in all regions over 2019, but any anything specific to call out there.
No not really I mean, even within the same geographic region back to school of dates of all over the place. So there is nothing that we can look at and say okay.
Forecast ex based on what we are saying, but what we are seeing enough of an app stores.
And the enough geographic areas, it's relatively positive.
Okay, great well, that's all I have thank you guys.
Okay. Thank you.
Thank you. Our final question is a follow up from Matt Koranda with Roth Capital. Please proceed with your question.
Hey, guys. Thanks for letting me back in the queue here for some reason my call dropped.
So just wanted to get a little more color on your thought process on the special dividend. So it seems clear that cash levels are super healthy here and we've got pretty decent visibility. It seems like maybe a more normalized back to school season.
Are there any further impediments in your mind.
The special dividend beyond just sort of the typical stuff.
The stuff around the the revolver and the constraints you have there and then I noticed I guess the last couple of special dividends. The paid it looked like about a quarter of the cash balance was paid out in terms of the special dividend.
Is that a reasonable rule of thumb to use if we kind of think about if and when you decide to pay 1 the.
Would that be the way to think about it.
So the last 3 special dividends, we've done were each a dollar per share and so the <unk>.
Aggregate number of shares outstanding as of little over $30 million and $30.1 million as we sit here today. So.
If we were to do 1 and it happened to be a similar.
It would it would be somewhere about 30% to $31 million.
If the board chose to keep it at the same level of that that it has been in the last few times.
We are officially.
Precluded from issuing any dividends until the 1 year anniversary of our ABL credit facility, which was November 9.
For the time being.
Our board talks about these things literally every.
Quarterly Board meeting as we look at things so there'll be discussing this again.
Actually next week as our normal quarterly board meeting and it will be a topic of discussion.
Certainly we feel very good about how the businesses performing so far in 2021 and.
Certainly see the strength in our balance sheet. So.
Sure.
There is nothing I can say beyond that at the moment other than I am sure of the topic will be revisited and we'd be able to share more once anything was decided.
Okay I appreciate the color I'll leave it there. Thank you.
Thanks, Matt.
Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Ed Thomas for closing remarks.
Thank you all for joining us on the call today, we look forward to sharing our second quarter results with you in early September have a good evening. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.