Q3 2021 Tillys Inc Earnings Call
Greetings and welcome to Tilly's, Inc. Third quarter 2021 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now I'd like to turn the conference over to your host Gar Jackson Investor Relations.
Good afternoon, and welcome to the Tilly's fiscal 2021 third quarter earnings call, Ed Thomas President and CEO and Michael Henry CFO will discuss the company's results and then host a Q&A session for a copy of Tilly's earnings press release. Please visit the Investor Relations section of the company's website at <unk> Dot com for 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 December 2nd 2021 and actual results may differ materially from current expectations based on various factors affecting tilly's business.
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 2021 third quarter earnings release, which is furnished to the SEC today on form 8-K, as well as our other filings with the SEC.
He referenced in that disclaimer today's call will be limited to one hour and will include a Q&A session. After our prepared remarks, I now turn the call over to Ed.
Thanks, Gar good afternoon, everyone and thank you for joining us today.
Fiscal 2021 continues to be a record setting year for us with record net sales and earnings per share for each quarter, thus far.
We have already surpassed total net sales for all of last year.
And our year to date third quarter earnings per share.
Have set a record relative to any full fiscal year.
Our third quarter net sales grew by 47% over last year with us being fully operational this year.
And a more normalize back to school season.
And our comparable net sales grew by 27% over fiscal 2019 pre pandemic third quarter.
Our strong operating results over the past year improved our third quarter, ending cash and investments position by $30 million.
Compared to last year, which led our board of directors to approve it.
Special cash dividend, a second special cash dividend of $1 per share.
To share holders of record as of December seven 2021.
With payments scheduled for December 15th 2021.
Our first special cash dividend of the year also $1 per share was paid on July nine.
The back to school season in the third quarter were our strongest ever driven by our compelling overall merchandize.
Offering and a much improved consumer spending environment.
Relative to the pre pandemic third quarter of fiscal 2019 comparable sales of women's men's girls and accessories increased by double digit percentages.
While footwear and boys increased.
By high single digit percentages hard goods.
Which we did not have as immaterial part of our assortment in 2019.
Produced $1 6 million and total net sales during the third quarter. We now have portions of this assortment and roughly 200 of our stores.
We expanded our sustainability shop on our website during the third quarter with him. The introduction of over 40 styles of proprietary rescue branded merchandise with sustainable features to supplement our extensive selection.
Such products from over 40 of our third party brands.
We also launched a collection of over 200 vintage an upcycle.
Product choices that have been well received by our customers.
In terms of stores, we opened our ninth and final new store for fiscal 2021 in early November and we will close one store in late December.
We are actively negotiating new store opportunities for fiscal 2022, and tentatively planned to open 15 to 20, new stores next year or so.
I mean, we can negotiate what we believe to be appropriate lease economics.
These stores will primarily be located within existing markets, primarily California, Texas and North East.
We also have approximately 75 existing lease up decisions till they make.
To make during fiscal 2022.
That are coming up on X exploration I have lease kick out options.
We intend to use this opportunity to continue to improve.
Upon our existing occupancy cost structure with these pending lease decisions where possible.
During our last earnings call, we mentioned several customer facing investments that were underway in November we upgraded our mobile app.
To offer greater mobile functionality, including loyalty and in store experience features that we did not have.
Previously.
We expect to continue to invest in improving and enhancing our mobile app experiences throughout 2022.
We also expect to complete an upgrade of our web site platform to a more mobile responsive version in early 2022.
We will also continue to improve our omnichannel capabilities and reinvest.
And distribution efficiencies to expand capacity.
For anticipated future growth.
We currently estimate that our total capital expenditures for fiscal 2022 to be in the range of $25 million to $30 million.
Inclusive of these initiatives.
Initiatives construction of new stores.
And continuing I T infrastructure investments.
Turning to the fourth quarter of fiscal 2021.
We are very encouraged by our strong start to the holiday season, especially considering that last year was our most profitable fourth quarter.
Since 2012.
While we continue to contend with delivery delays throughout southern California ports.
The aggregate retail value.
Delayed products currently represents less than 10% of our total inventory already on hand.
Our merchants have made every effort to position us well for the holiday season.
And we believe we have plenty of inventory to produce a successful holiday season.
These delivery delays may cause the supply of particular items to run low from time to time, but we have been contending with these delays all year long not just in the holiday season, and they have not stopped us from producing record results each quarter.
Despite ongoing concerns about COVID-19, the COVID-19 pandemic supply chain difficulties labor challenges and increasing costs generally we remain optimistic about our business prospects for the remainder of fiscal 2021 and Intel into.
<unk> fiscal 2022 at this time.
I will now turn the call over to Mike to provide additional details on our third quarter operating performance.
And to introduce our fourth quarter outlook.
Thanks, Ed Good afternoon, everyone. The third quarter produced record quarterly net sales for us and tight our best quarterly earnings per share, which was just set a quarter ago.
Details of our third quarter operating performance compared to last year's third quarter by line item were as follows.
Total net sales of $206 $1 million increased by $65 $8 million or <unk> 46, 9% compared to $143 million last year.
Total net sales from physical stores were $165 3 million, an increase of $67 million or 58, 1% compared to $104 $6 million last year with a much more normalized back to school season. This year that was free of pandemic for store closures.
Net sales from physical stores represented 82% of our total net sales compared to 74, 5% of total net sales last year.
E Commerce net sales were $40 $8 million, an increase of $5 1 million or 14, 3%.
Compared to $35 $7 million last year.
E Comm net sales represented 19, 8% of total net sales compared to 25, 5% of total net sales last year.
We ended the third quarter with 243 total stores, a net increase of five stores compared to the end of the third quarter last year.
Total comparable net sales relative to fiscal 2019 as pre pandemic third quarter increased 27, 4% with increases from physical stores of 18, 3% with positive comp sales growth across all markets and for e-commerce of 85%.
In the third quarter of fiscal 2019 physical stores represented 85, 3% of our total net sales while E. Commerce represented 14, 7% of our total net sales.
Gross profit, including buying distribution and occupancy expenses improved to $76 7 million or 37, 2% of net sales, which is a record for us in our history as a public company compared to $40 $7 million or 29% of net sales last year.
Buying distribution and occupancy costs improved by 690 basis points collectively despite increasing by $2 7 million in total due to leveraging these cost against higher net sales.
Occupancy costs improved by 540 basis points, despite increasing by zero point $5 million with five net new stores.
Distribution costs improved by 110 basis points, despite increasing by $2 $1 million.
<unk> costs improved by 40 basis points, despite increasing by zero point $1 million.
Product margins were very strong improving by 130 basis points versus last year and by 200 basis points compared to 2019 third quarter, primarily due to lower markdowns.
Total SG&A expenses were $47 7 million or 23, 2% of net sales.
Baird to $37 1 million or 26, 5% of net sales last year.
SG&A improved by 330 basis points as a percentage of net sales, despite increasing by $10 $6 million due to leveraging these cost against higher net sales.
The primary causes of the SG&A dollar increase were higher store payroll and related benefit costs of $7 6 million, primarily due to operating all stores for the entirety of the quarter and serving significantly higher net sales.
Corporate bonus accruals of $1 $8 million due to our strong operating performance, thus far in fiscal 2021 and increased marketing expenses of $1 $2 million.
Operating income improved to $29 million or 14, 1% of net sales compared to $3 5 million or two 5% of net sales last year, primarily due to the significant increase in net sales.
Income tax expense was $8 2 million or 28, 1% of pretax income compared to $1 4 million or <unk> 39, 8% of pretax income last year.
The reduction in income tax rate compared to last year was primarily due to the prior year impact of the cares Act, which allowed for operating losses in fiscal 2020 to be carried back to earlier tax years with higher income tax rates.
Net income improved to $20 8 million or <unk> 66 per diluted share, which are third quarter records for us compared to $2 1 million or <unk> <unk> per diluted share last year.
Weighted average shares were $31 $4 million this year compared to $29 8 million last year.
Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $155 6 million and no debt outstanding compared to $125 3 million and no debt last year, which included $12 4 million withheld store lease payments.
We ended the third quarter with inventory per square foot up 29% over last year to support the current momentum of our business and position ourselves for the holiday season amid the ongoing supply chain challenges.
We believe our overall inventory levels are currently in a good place relative to business performance and an expectation that delivery delays will continue.
Total year to date capital expenditures for fiscal 2021 were $10 9 million.
Compared to $6 $4 million last year, the increase being primarily due to new store openings. This year.
Turning to the fourth quarter, we are off to a strong start compared to last year's period, which was the first full period since the pandemic began and which we were fully operational and which was also our most profitable fourth quarter since 2012.
Total comparable net sales through November 30 increased by 19, 6% compared to last year with comp sales increases from physical stores of 27, 6% and for e-commerce of three 9%.
Based on her it based on current and historical trends.
And assuming all stores and E comm remain in operation and supply chain challenges do not have a material negative impact on our net sales results through the fourth quarter, we would expect our fourth quarter net sales to be in the range of approximately $210 million to $215 million and earnings per diluted share to be in the range of 42 to <unk> 50.
Although last year's fourth quarter product margins were 210 basis points better than 2019 fourth quarter. We currently expect our product margins to improve by another 50 to 100 basis points over last year based on an assumption of a lower overall promotional environment amid the broad based supply chain difficulties this year.
We project SG&A to be approximately 26% of net sales are estimated income tax rate to be 27% and weighted average diluted shares to be approximately $31 6 million.
We currently expect to have 243 total stores at the end of fiscal 2021 compared to $2 38 at the end of fiscal 2020.
This compares to $178 million in total net sales in 2009.
And earnings per diluted share for last year's fourth quarter.
Later, we will now go to our Q&A session.
Thank you.
Ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Formations Homo indicate that your lines in the queue you.
You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Jeff Van syndrome with B Riley. Please proceed.
Hi, everyone and let me say congratulations on the strong metrics.
Good to see.
Maybe you can give us a little bit more color on the digital versus in store sales that you saw over Thanksgiving week, maybe if you could touch on Black Friday, and cyber Monday, just kind of curious any thoughts around that maybe how it deferred versus the same period in 2020 in 2019 and then also.
Kind of as a follow up today, I know youre continuing to grow E com, which is terrific.
I'm just wondering if you think that that is going to stay close to 20% or how we should think about that as kind of a concentration of the business as you open more stores and so forth.
Hey, Jeff how are you.
Alright.
Okay. So I guess I'll start over Thanksgiving weekend, our store sales.
Like really strong so.
The traffic was good sales are strong stronger than E comm business.
E Comm business remains steady.
And.
And Mike can add on to whatever I say, but as.
As far as E Comm I think.
It's going to continue to grow there is no question about it we're still in the very early stages of E com and.
One of the changes we've put in place in the last couple of years have helped grow it.
We definitely get the benefit of the stores being closed.
But still we are seeing decent growth out of there and we expect that to continue my guess is it will be north of 20% of our business going forward I would agree with that Jeff we have to remember as we look at third quarter, we were still dealing with pandemic store closures during that period last year. So there was a heavier shift.
Towards E Comm last year in the reverse has happened.
This year and has been that way.
Really all year long our stores have just re surged so significantly it's been amazing to see.
And the same was true through Black Friday weekend or for the month of November as a whole.
Stores were strong double digits up.
E Com was up single digits relative to just last year.
Relative to two years ago E Comm was nice and strong and robust still so.
I think in a more normalized environment I'd have to agree with with Ed that.
As things settle down and we get back to something Thats normal and I would I would say nothing is still normal as we exist today.
Hard to predict anything with certainty but.
I think it probably will be in the mid 20% somewhere around 25 mix makes sense to me I think the pendulum has swung heavy to stores right now because of just what's gone on in the environment. So you will probably swing back the other way a few points I would I would think.
As we settle in coming out of this pandemic.
Okay. Good.
And then just as a follow up.
Since we're talking about E. Comm I know you mentioned, the new mobile App and it sounds like you still have some more it investments youre planning for 2022.
So I guess, maybe if you can if you can frame for us a little bit the benefits that youre starting to see.
From the mobile App and kind of where we are what inning. We're in I guess around that it sounds like there's still quite a bit more to come.
We're definitely in early we just entered reintroduced a mobile app.
Last week, so we don't have enough.
Experience with it but we made it more user friendly navigation is better we integrated loyalty into it and we will continue we have a number of enhancements that we think.
That we're going to make in 2022 two of the mobile app.
Our own mobile App was pretty antiquated, we haven't upgraded that in a while so that that was the first step was to get it up granted and more responsive and then the other thing that we're investing in that we mentioned was we are upgrading our existing E com platform.
Is what our best way to describe it as more mobile friendly.
So.
That will take place in the first half of next year.
Okay, great. So more positive to look forward to there.
Thanks for taking my questions and continued success.
Thanks sure Thanks, Jeff.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Marni Shapiro with retail tracker. Please proceed.
Hey, guys. Congratulations stores has been just amazing pleasure to be shopping and then lately.
Thanks Marty.
So I'm curious if we could just parse out a little bit on some of the delivery delays I'm curious if I'm looking at your stores and the Assortments are there parts of the assortment that are getting a little bit harder hit.
In particular I'm noticing you guys are turning.
Anything what I would call sexy pretty very fast and I wasn't sure. What I was seeing was you were turning it really fast or the inventory was delayed so it wasn't quite as high as you want so I'm just curious if you could talk a little bit about.
Across the store, where where are you seeing.
That kind of impact the hardest.
Or no impact in just selling out.
Wow.
Women's inventory in general is it's too late right now part of it is because of turning fast and part of it is.
Supply chain issues, but.
We have enough inventory.
Two.
Continue the momentum through.
And past Christmas.
And I would say that.
The port delays are more impact.
<unk>.
Impact on some of the shoes.
In particular, our shoe business would be its good but it'd be a lot better if we were delayed with some of the big brands.
Yes.
I'd say, that's exactly right footwear is the hardest hit from from these delivery delays.
Honestly, if we could get more Nike and converse, we'd take every bit of it we could get we just can't get it.
And they've talked about the challenges they're facing.
We are turning faster at healthier product margins.
I noted in our prepared remarks that we.
<unk> ended the third quarter up 29% on a square on a per square foot basis and inventory.
Our teams did such a great job of trying to pull as much forward as they could.
Make sure that we were prepared to go through Black Friday weekend, and the holiday season as best we could as we sit here today that that inventory is now in the teens. So.
We're running at about plus 20, and the inventories up in the teens. So overall, we have plenty enough apparel to have a good holiday season, we think footwear is that most challenging area that I agree with Ed If we had enough of the right things.
Business will be even stronger than it is it was up plus nine.
It would be even stronger.
That's fantastic and then just I guess following on the footwear.
Like jewelry, except you have a really nice jewelry assortment hair things like that at times I would I was in there and it was beautifully stock times has been there and I was like Oh I wish.
They had more was that part two or was that just it was selling so fast I think it was more of a faster pace of selling than anything else.
I love that answer.
Yeah.
I wouldn't call that out as a major supply chain issue.
So it had some impact across a few of the brands, but overall now.
No that's fantastic well best of luck with the rest of the holiday season season.
Thank you.
Yeah.
Our next question is from Matt Koranda with Roth Capital. Please proceed.
Hey, guys, Thank you and great quarter by the way.
So on the on the outlook for Q4, I guess embedded in the guidance if I'm doing the math right here is that it looks like potentially gross margins do erode a bit quarter over quarter.
In the fourth quarter and I just wanted to clarify is that the case is that the base case assumption and where are the headwinds coming from specifically because it doesn't look like it's coming from sort of that merchandise margins. You said they were gonna be up year over year. So.
Any any additional clarity there would be helpful.
Sure, Matt historically fourth quarter product margins are the lowest of any quarter that that's always been true.
Our business pure.
<unk> because of the level of promotions that happen naturally during <unk>.
Normally during the holiday season.
So sequentially Q3 to Q4.
Product margins are lower in Q4 than Q3, they always are theres nothing unusual about that completely normal completely expected.
In Q4 relative to last year and to two years ago.
As we noted we're expecting another 50 to 100 basis points of improvement in our product margins on top of last year, which was already 210 basis points better than 2019, So we're seeing the.
The healthiest product margins, we've seen in.
Many years, if not ever in the fourth quarter.
And it has been a less promotional environment now there are some.
<unk> costs in this particular fourth quarter that.
Are different than history that impact distribution in particular.
You've probably seen the news about all the shipping surcharges from.
The Fedex in EPS in that crowd and Theres certainly some extra costs. This year that was not there last year.
We've had two.
Institute retention bonuses for labor protection, just to get through the holiday season to make sure we have plenty enough labor to be able to serve the peak need of the holiday season.
And then of course, there is some bonus elements within the buying group that flow through.
The buying costs that hit <unk>.
Gross margin.
And then on the SG&A side. There is some of the same things we've had to <unk>.
Implement retention bonuses for store employees to protect the labor force.
There we've accelerated.
So any minimum wage increases that we knew were coming as of January one we've gone ahead and just implemented them early.
And theres been some other compression type of issues with store payroll that we've addressed as well. So as you look sequentially and Thats why we say, we're expecting SG&A to be about 26%.
All of you the analysts were pretty close before the call. It was I think you all had an average of 26, 5% not far off there, but between corporate bonuses for having such a stellar year.
And then the things that I, just mentioned about store payroll labor challenges.
There are some added some added expenses that were not part of the model in the past.
Fair enough very detailed thank you Mike.
And then just I guess on the dividend cadence I'm curious now that you guys have basically gone to special dividends this year and it looks like youre going to backfill most of the cash that you pay out on the December dividend within this quarter alone.
Should we be expecting like a two time of year cadence on a go forward basis or whats the thought process. There I'm just curious if I could get your latest thinking.
Twice a year is not.
In the plan.
It's something that we discussed as we've told everybody in the past we have discussed it pretty regularly as a board.
And discuss what the options are a proper use of cash. So there is nothing I wouldn't assume that it's going to be twice a year going forward.
But I also wouldn't assume if we do anything it's going to be in the same form so.
I don't know yet.
Yes, I mean, we've had such a stellar year, obviously each quarter has been so incredibly strong beyond anything that any historical data would point you to.
Our board just.
Acknowledged gosh, the cash generation has been so fantastic.
Not do another one and honestly it caught me off guard too that they did another one at this particular time so.
They're just looking at the performance of the business the cash generation in <unk>.
Decided that why not do another one now and reward our loyal shareholders.
For sticking with us through through all of this so that.
Will make their determinations as they go forward and and can't predict for sure what that might look like.
Okay, Great one more for me, maybe if I can.
May be insane to ask this early here, but.
Any early learnings or behavioral changes, but traffic around anything that you've observed around that new area.
Probably just too early to tell but any new I'm sorry, yes.
Uh huh.
This new variant, we can't I can't really tell anything yet it's way too new its not.
It's not as widespread as delta became or.
Just the initial peak of the pandemic, obviously is even before the new area of traffic is still very unpredictable and it can be incredibly good and it can be incredibly bad but.
We're just going to manage our way through it like we have for the last several months overall traffic is up substantially to last year.
I'm looking at some that I have for the month of November.
<unk>.
Traffic for the month of November was up 38% in stores pretty amazing I've never seen a number like that.
Relative to two years ago, it was down 1% for us so.
It's still lags 2019.
But it's very robust compared to last year in stores.
That's great very helpful guys, nice job and I'll jump back in queue.
Thanks, Matt.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Ed Thomas for any closing remarks.
Okay first of all I'd like to just do a shout out to our credible team of employees.
<unk> distribution center and field, what they've done in the past several months has just been amazing and I can't thank them enough for their.
Teamwork lash.
Lastly, thank you for joining us on the call today, we look forward to sharing our fourth.
First quarter results with you in March have a good evening.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation.
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Yeah.
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Greetings and welcome to Tilly's, Inc. Third quarter 2021 earnings results Conference call. At this time, all participants are in a listen only mode.
<unk> 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, this conference is being recorded.
Now I'd like to turn the conference over to your host Gar Jackson of Investor Relations.
Good afternoon, and welcome to the Tilly's fiscal 2021 third quarter earnings call, Ed Thomas President and CEO and Michael Henry CFO will discuss the company's results and then host a Q&A session for a copy of Tilly's earnings press release. Please visit the Investor Relations section of the company's website at <unk> Dot com for 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 December 2021 and actual results may differ materially from current expectations based on various factors affecting tilly's business.
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, one third quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings with the SEC.
He referenced in that disclaimer today's call will be limited to one hour and I will include a Q&A session. After our prepared remarks, I now turn the call over to Ed.
Thanks, Gar good afternoon, everyone and thank you for joining us today.
Fiscal 2021 continues to be a record setting year for us with record net sales and earnings per share for each quarter, thus far.
We have already surpassed total net sales for all of last year.
And our year to date third quarter earnings per share.
Have set a record relative to any full fiscal year.
Our third quarter net sales grew by 47% over last year with us being fully operational this year.
In a more normalized back to school season.
And our comparable net sales grew by 27% over fiscal 2019 was pre pandemic third quarter.
Our strong operating results over the past year and prove that third quarter ending cash.
And investments position by $30 million.
Compared to last year, which led our board of directors to approve.
A special cash dividend, a second special cash dividend of $1 per share.
<unk> to shareholders of record as of December seven 2021.
With payments scheduled for December 15th 2021.
Our first special cash dividend of the year also one dollar per share was paid on July nine.
The back to school season in third quarter were our strongest ever driven by our compelling overall merchandise.
I'll frame and a much improved consumer spending environment.
Relative to the pre pandemic third quarter of fiscal 2019 comparable sales of women's men's girls and accessories increased by double digit percentages.
While footwear and boys increase.
By high single digit percentages hard goods.
Which we did not have as immaterial part of our assortment in 2019.
<unk> at $1 6 million and total net sales during the third quarter. We now have portions of this assortment and roughly 200 of our stores.
We expanded our sustainability shop on our website during the third quarter with the introduction of over 40 styles of proprietary rescue branded merchandise.
We're sustainable features to supplement our extensive selection.
Such products from over 40 of our third party brands.
We also launched a collection of over 200 vintage in up cycle.
Product choices that have been well received by our customers.
In terms of stores, we opened our ninth and final new store for fiscal 2021 in early November and we will close one store in late December.
We are actively negotiating new store opportunities for fiscal 2022, and tentatively planned to open 15 to 20, new stores next year or so.
We can negotiate what we believe to be appropriate lease economics.
These stores will primarily be located within existing markets, primarily California, Texas evident northeast.
We also have approximately 75 existing lease up decisions to make.
To make during fiscal 2022.
That are coming up on exploration I have lease kick out options.
We intend to use this opportunity to continue to improve.
Upon our existing occupancy cost structure with these pending lease decisions where possible.
During our last earnings call, we mentioned several customer facing investments that were underway in November we upgraded our mobile app.
To offer greater mobile functionality, including loyalty and in store experience features.
We did not have.
Previously.
We expect to continue to invest in improving and enhancing our mobile app experiences throughout 2022.
We also expect to complete an upgrade of our website platform to a more mobile responsive version in early 2022.
We will also continue to improve our omnichannel capabilities and reinvest.
And distribution efficiencies to expand capacity.
Our anticipated future growth.
We currently estimate that our total capital expenditures for fiscal 2022 to be in the range of $25 million to $30 million.
Inclusive of these initiatives.
Initiatives construction of new stores.
And continuing infrastructure investments.
Turning to the fourth quarter of fiscal 2021.
We are very encouraged by our strong start to the holiday season, especially considering that last year was our most profitable fourth quarter.
Since 2012.
While we continue to contend with delivery delays throughout southern California ports.
The aggregate retail value.
Delayed products currently represents less than 10% of our total inventory already on hand.
<unk> made every effort to position us well for the holiday season, and we believe we have plenty of inventory to produce a successful holiday season.
These delivery delays may cause the supply of particular items to run low from time to time, but we have been contending with these delays all year long not just in the holiday season, and they have not stopped us from producing record results each quarter.
Despite ongoing concerns about COVID-19, the COVID-19 pandemic supply chain difficulties labor challenges and increase in Cogs generally we remain optimistic about our business prospects for the remainder of fiscal 2021, and Intel and two <unk>.
2022 at this time.
I will now turn the call over to Mike to provide additional details on our third quarter operating performance and to introduce our fourth quarter outlook Mike.
Thanks, Ed Good afternoon, everyone. The third quarter produced record quarterly net sales for us and tight our best quarterly earnings per share, which was just set a quarter ago.
Details of our third quarter operating performance compared to last year's third quarter by line item were as follows.
Total net sales of $206 $1 million increased by $65 8 million or <unk> 46, 9% compared to $143 million last year.
Total net sales from physical stores were $165 3 million, an increase of $67 million or <unk> 58, 1% compared to $104 $6 million last year with a much more normalized back to school season. This year that was free of pandemic for store closures.
Net sales from physical stores represented 82% of our total net sales compared to 74, 5% of total net sales last year.
E Commerce net sales were $40 $8 million, an increase of $5 1 million or 14, 3% comp.
Compared to $35 $7 million last year.
E Comm net sales represented 19, 8% of total net sales compared to 25, 5% of total net sales last year.
We ended the third quarter with 243 total stores, a net increase of five stores compared to the end of the third quarter last year.
Total comparable net sales relative to fiscal 2019 as pre pandemic third quarter increased 27, 4% with increases from physical stores of 18, 3% with positive comp sales growth across all markets and from ecommerce of 85%.
In the third quarter of fiscal 2019 physical stores represented 85, 3% of our total net sales while E. Commerce represented 14, 7% of our total net sales.
Gross profit, including buying distribution and occupancy expenses improved to $76 7 million or <unk> 37, 2% of net sales, which is a record for us in our history as a public company compared to $40 7 million or 29% of net sales last year.
Buying distribution and occupancy cost improved by 690 basis points collectively despite increasing by $2 7 million in total due to leveraging these costs against higher net sales.
Occupancy costs improved by 540 basis points, despite increasing by zero point $5 million with five net new stores.
Distribution costs improved by 110 basis points, despite increasing by $2 1 million.
<unk> costs improved by 40 basis points, despite increasing by zero point $1 million.
Product margins were very strong improving by 130 basis points versus last year and by 200 basis points compared to 2019 third quarter, primarily due to lower markdowns.
Total SG&A expenses were $47 $7 million or 23, 2% of net sales compared to $37 1 million or 26, 5% of net sales last year.
SG&A improved by 330 basis points as a percentage of net sales, despite increasing by $10 $6 million due to leveraging these cost against higher net sales.
Primary causes of the SG&A dollar increase were higher store payroll and related benefit costs of $7 $6 million, primarily due to operating all stores for the entirety of the quarter and serving significantly higher net sales.
Corporate bonus accruals of $1 $8 million due to our strong operating performance, thus far in fiscal 2021 and increased marketing expenses of $1 2 million.
Operating income improved to $29 million or 14, 1% of net sales compared to $3 $5 million or two 5% of net sales last year, primarily due to the significant increase in net sales.
Income tax expense was $8 2 million or 28, 1% of pretax income compared to $1 4 million or <unk> 39, 8% of pretax income last year.
The reduction in income tax rate compared to last year was primarily due to the prior year impact of the cares Act, which allowed for operating losses in fiscal 2020 to be carried back to earlier tax years with higher income tax rates.
Net income improved to $20 8 million or <unk> 66 per diluted share, which are third quarter records for us compared to $2 $1 million or <unk> <unk> per diluted share last year.
Weighted average shares were $31 4 million this year compared to $29 $8 million last year.
Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $155 6 million and no debt outstanding compared to $125 3 million and no debt last year, which included $12 $4 million of withheld store lease payments.
We ended the third quarter with inventory per square foot up 29% over last year to support the current momentum of our business and position ourselves for the holiday season amid the ongoing supply chain challenges.
We believe our overall inventory levels are currently in a good place relative to business performance and an expectation that delivery delays will continue.
Total year to date capital expenditures for fiscal 2021 were $10 9 million compared.
Compared to $6 $4 million last year, the increase being primarily due to new store openings. This year.
Turning to the fourth quarter, we are off to a strong start compared to last year's period, which was the first full period since the pandemic began and which were fully operational and which was also our most profitable fourth quarter since 2012.
Total comparable net sales through November 30 increased by 19, 6% compared to last year with comp sales increases from physical stores of 27, 6% and from ecommerce of three 9%.
Based on her it based on current and historical trends.
And assuming all stores and E comm remain in operation and supply chain challenges do not have a material negative impact on our net sales results through the fourth quarter, we would expect our fourth quarter net sales to be in the range of approximately $210 million to $215 million and earnings per diluted share to be in the range of 42 to <unk> 50.
Although last year's fourth quarter product margins were 210 basis points better than 2019 fourth quarter. We currently expect our product margins to improve by another 50 to 100 basis points over last year based on an assumption of a lower overall promotional environment amid the broad based supply chain difficulties this year.
We project SG&A to be approximately 26% of net sales.
Our estimated income tax rate to be 27% and weighted average diluted shares to be approximately $31 6 million weaker.
We currently expect to have 243 total stores at the end of fiscal 2021 compared to $2 38 at the end of fiscal 2020.
This compares to $178 million in total net sales in 2009.
And earnings per diluted share for last year's fourth quarter.
Operator, we will now go to our Q&A session.
Thank you.
Ladies and gentlemen at this time, we'll be conducting a question and answer session. If you will.
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Our first question is from Jeff Van <unk> with B Riley. Please proceed.
Hi, everyone and let me say congratulations on the strong metrics, it's great to see.
Maybe you can give us a little bit more color on the digital versus in store sales that you saw over Thanksgiving week, maybe if you could touch on Black Friday, and cyber Monday, just kind of curious any thoughts around that maybe how it deferred versus the same period in 2020 in 2019, and then also kind of.
As a follow up today, I know youre continuing to grow E com, which is terrific.
Just wondering if you think that that is going to stay close to 20% or how we should think about that as kind of a concentration of the business as you open more stores and so forth.
Hey, Jeff how are you.
Alright.
Okay. So I guess I'll start over Thanksgiving weekend, our store sales.
Like really strong so.
The traffic was good sales are strong stronger than E comm business.
E Comm business remains steady.
And.
And Mike can add on to whatever I say, but it's.
As far as E Comm I think.
It's going to continue to grow there is no question about it we are still on the very early stages of E com and.
What are the changes we put in place in the last couple of years have helped grow it.
We definitely get the benefit of the stores being closed.
But still we are seeing decent growth out of there and we expect that to continue my guess is it will be north of 20% of our business going forward I would agree with that Jeff we have to remember as we look at third quarter, we were still dealing with pandemic store closures during that period last year. So there was a heavier shift.
Towards E Comm last year in the reverse has happened.
This year and has been that way.
Really all year long our stores have just re surged so significantly it's been amazing to see.
And the same was true through Black Friday weekend or for the month of November as a whole.
Stores were strong double digits up.
E Com was up single digits relative to just last year.
Relative to two years ago E Comm was nice and strong and robust still so.
I think in a more normalized environment I'd have to agree with with Ed that.
As things settle down and we get back to something Thats normal and I would I would say nothing is still normal as we exist today.
Hard to predict anything with certainty but.
I think it probably will be in the mid 20% somewhere around 25 mix makes sense to me I think the pendulum has swung heavy to stores right now because of just what's gone on in the environment. So it will probably swing back the other way a few points I would I would think.
As we settle in coming out of this pandemic.
Okay. Good.
And then just as a follow up.
Since we're talking about E. Comm I know you mentioned, the new mobile App and it sounds like you still have some more it investments you're planning for 2022.
So I guess, maybe if you can if you can frame for us a little bit the benefits that youre starting to see.
From the mobile App and kind of where we are what inning. We're in I guess around that it sounds like there's still quite a bit more to come.
Yes, we're definitely in early we just entered reintroduced a mobile app.
Last week, so we don't have enough <unk>.
This variance with it but we made it more user friendly navigation is better we integrated loyalty into it and we can we'll continue we have a number of enhancements that we think that.
We're going to make in 2022 to the mobile app.
Our old mobile App was pretty antiquated, we haven't upgraded that in a while so that that was the first step was to get it upgraded and more responsive than the other thing that we're investing in that we mentioned was we are upgrading our existing E com platform, which is what our best way to describe it as.
More mobile friendly.
No.
That will take place in the first half of next year.
Okay, great. So more positive to look forward to there.
Thanks for taking my questions and continued success.
Thanks sure Thanks, Jeff.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Marni Shapiro with retail tracker. Please proceed.
Hey, guys. Congratulations stores has been just amazing pleasure to be shopping and then lately.
Thanks Marni.
So I'm curious if we could just parse out a little bit on some of the delivery delays I'm curious if I'm looking at your stores and the Assortments are there parts of the assortment that are getting a little bit harder hit in.
In particular I'm noticing you guys are turning.
What I would call a sexy pretty very fast and I wasn't sure. What I was seeing was you were turning it really fast or the inventory was delayed so it wasn't quite as high as you want so I'm just curious if you could talk a little bit about <unk>.
The store, where where are you seeing.
That kind of impact the hardest.
Or no impact in just selling out.
Well the womens inventory in general is it's too late right now part of it is because they are turning fast and part of it is.
Supply chain issues, but.
We have enough inventory.
Two.
Continue the momentum through an.
In past Christmas.
And I would say that.
The port delays are more impact of a.
More of an impact on some of those shoes.
In particular, our shoe business would be its good but it would be a lot better if we were delayed with some of the big brands.
Yes.
I would say.
Right footwear is the hardest hit from these delivery delays I mean honestly, if we could get more Nike and converse, we'd take every bit of it we could get we just forget it.
And they've they've talked about the challenges, they're facing and we are turning faster at healthier product margins.
I noted in our prepared remarks that we.
<unk> ended the third quarter up 29% on a square on a per square foot basis and inventory.
Our teams did such a great job of trying to pull as much forward as they could.
Make sure that we were prepared to go through Black Friday weekend and holiday season as best we could as we sit here today that that inventory is now in the teens. So.
We're running at about plus 20% and the inventories up in the teens. So overall, we have plenty enough apparel to have a good holiday season, we think footwear is that most challenging area that I agree with Ed If we had enough of the right things.
Our business will be even stronger than it is it was up plus nine.
It would be even stronger.
That's impressive and then just I guess following on the footwear.
Like jewelry et cetera, you have a really nice jewelry assortment hair things like that at times I would I was in there and it was beautifully stock times has been there and I. Thank God I wish they had more it was that part two or was that just it was selling so fast I think it was more a fast pace of selling them anything else.
I love that answer.
Yeah.
I wouldn't call that out as a major supply chain issue.
So it had some impact across a few of the brands, but overall no.
No that's fantastic well best of luck with the rest of the holiday Stephen Stephen.
Thank you.
Yeah.
Our next question is from Matt Koranda with Roth Capital. Please proceed.
Hey, guys, Thank you and great quarter by the way.
So on.
On the outlook for Q4, I guess embedded in the guidance if I'm doing the math right here is that it.
It looks like potentially gross margins do erode a bit quarter over quarter.
In the fourth quarter and I just wanted to clarify is that the case is that the base case assumption and where are the headwinds coming from specifically because it doesn't look like it's coming from.
<unk> margins, you said they were going to be up year over year. So any any additional clarity there would be helpful.
Sure, Matt historically fourth quarter product margins are the lowest of any quarter that that's always been true of our business.
Purely because of the level of promotions that happen naturally during <unk>.
Normally during the holiday season.
So sequentially Q3 to Q4.
Product margins are lower in Q4 than Q3, they always are theres nothing unusual about that completely normal completely expected.
In Q4 relative to last year and to two years ago.
As we noted we're expecting another 50 to 100 basis points of improvement in our product margins on top of last year, which was already 210 basis points better than 2019. So we're seeing the healthiest product margins we've seen in <unk>.
Many years, if not ever in the fourth quarter.
And it has been a less promotional environment now there are some.
Additional costs in this particular fourth quarter that.
Are different than history that impact distribution in particular.
You've probably seen the news about all the shipping surcharges from.
The Fedex in EPS in that crowd and Theres certainly some extra costs. This year that was not there last year, we've had two.
Institute retention bonuses for labor protection, just to get through the holiday season to make sure we have plenty enough labor to be able to serve the peak need of the holiday season.
And then of course, there is some bonus elements within the buying group that flow through.
The buying cost that hit gross margin.
<unk>.
And then on the SG&A side. There is some of the same things we've had to implement retention bonuses for store employees to protect the labor force.
There we've accelerated.
Any minimum wage increases that we knew were coming as of January one we've gone ahead and just implemented them early.
And theres been some other compression type of issues with store payroll that we've addressed as well so.
As you look sequentially.
And that's why we say, we're expecting SG&A to be about 26%.
All of US the analysts were pretty close before the call. It was I think you all had an average of $26 five so not far off there, but between corporate bonuses for having such a stellar year.
And then the things that I, just mentioned about store payroll labor challenges.
There are some added some added expenses that were not part of the model in the past.
Fair enough very detailed thank you Mike.
And then just I guess on the dividend cadence I'm curious now that you guys have basically gone to special dividends this year and it looks like youre going to backfill most of the cash that you pay out on the December dividend.
This quarter alone.
We've been expecting like a two time of year cadence on a go forward basis or whats the thought process. There I'm just curious if I could get your latest thinking.
I don't I'm not until.
Twice a year is not in the plan.
It's something that we discussed as you can tell us.
Everybody in the past we have discussed it pretty regularly as a board.
And discuss what the options are a proper use of cash. So there is nothing I wouldn't assume that it's going to be twice a year going forward, but I also wouldn't assume if we do anything it's going to be in the same form so.
I don't know yet.
Yes.
<unk> had such a stellar year, obviously each quarter has been so incredibly strong beyond anything that any historical data would point you to.
Our board just.
Acknowledged gosh, the cash generation has been so fantastic.
Not do another one and honestly it caught me off guard too that they did another one at this particular time so.
They're just looking at the performance of the business the cash generation in <unk>.
Decided that why not do another one now and reward our loyal shareholders.
For sticking with us through through all of this so.
They will make their determinations as they go forward.
And can't predict for sure what that might look like.
Okay, Great one more for me, maybe if I can.
Maybe I am saying to ask this early here, but any.
Any early learnings or behavioral changes, let traffic around anything that you've observed around the newberry.
Probably just too early to tell but any new I'm sorry, yes.
This new variant now we can't can't really tell anything yet it's way too new its not.
Not as widespread as delta became or noteworthy.
Just the initial peak of the pandemic, obviously is even before the new area of traffic is still very unpredictable.
It can be incredibly good and it can be incredibly bad but.
We're just going to manage our way through it like we have for the last several months overall traffic is up substantially till last year.
I'm looking at something that I have for the month of November.
Traffic for the month of November was up 38% in stores pretty amazing I've never seen a number like that.
Relative to two years ago, it was down 1% for us so.
It's still lags 2019.
But it's very robust compared to last year in stores.
That's great very helpful guys, nice job and I'll jump back in queue.
Thanks, Matt.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Ed Thomas for any closing remarks.
Okay first of all I'd like to just do a shout out to our credible team of employees all of them.
<unk> distribution center and failed what they've done in the past several months has just been amazing and I can't thank them enough for their.
Teamwork.
Lastly, thank you for joining us on the call today, we look forward to sharing.
First quarter results with you in March have a good evening.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation.