Q4 2021 Tillys Inc Earnings Call
Greetings and welcome to the Tilly's, Inc. Fourth 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. Please note. This conference is being recorded I will now turn the conference over to your host Gar Jackson of Investor Relations you may begin.
Good afternoon, and welcome to the Tilly's fiscal 2021 fourth 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 today's earnings press release. Please visit the Investor Relations section of the company's website at <unk> Dot com from the same set.
And 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 10, 2022, 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 fourth quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings with the SEC.
You see 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 was our most profitable year ever.
Our fourth quarter comparable net sales grew by 12, 5% and our earnings per share of 38 cents.
Represented our best fourth quarter earnings and our public company history.
From a product perspective, all departments comped positive in the fourth quarter with accessories men's and boy's, especially strong with double digit percentage increases.
As we began fiscal 2022, we have seen.
A good early reads from our spring assortment offerings insurance dresses and more fashionable tops.
Graphic Tees with retro content from the 19 nineties and and Y two K era are growing in popularity.
We've launched our print on demand T shirt initiatives through a third party service provider that is off to a nice start and we expect this initiative to grow over the course of <unk>.
2022 and beyond.
Footwear global brands are driving growth for us, although adequate and timely supply remains a moving target with the ongoing supply chain challenges.
Swim is awesome.
Hit disproportionately by the supply chain delays, but.
But we still expect this category to be meaningful a meaningful contributor to the spring summer season.
The return of in person school festivals and travel has driven a strong bags business.
Long bottoms continues to do well with a combination of new fits proportions colors and fabrics. We believe the newness that is available across several departments.
We will continue to be important in driving sales.
The positive momentum in our business for the past five quarters continued into the early part of the first quarter of fiscal 2022.
Although our comparable net sales have recently started to decline relative to last year.
Given the unique impacts of last year's pent up demand exiting 2000, twenty's pandemic restrictions and further federal stimulus payments, which created a significant acceleration in our business for the later half of the first quarter of last year. We expect this recent decline relative to last year to continue.
And get more pronounced.
While we continued on account of risks and uncertainties relating to the COVID-19 pandemic supply chain difficulties labor challenges and increasing costs generally we remain cautiously optimistic at this time about our business prospects for fiscal 2022 as a.
Hold to our pre pandemic performance due to the newness in merchandise trends that are available.
In terms of real estate.
We continue to expect to open 15 to 20, new stores during fiscal 2022, 10 of which are nearing lease execution at this time.
We expect six of those stores to open during the second quarter and for it to open during the third quarter and.
Any additional new stores are expected to open in or around November .
On existing leases, we are roughly halfway done with our fiscal 2022 lease decisions. We have Jeff we have been generally pleased with the with the results of our negotiations overall, yet and a few cases, we have decided to close stores do the proposed rent increase.
Yes.
I'll start traffic is still down relative to 2019, continuing a multiyear decline that started well before the pandemic hit and.
And lastly, we remain focused on ensuring our leases make economic sense to us.
In that environment.
As we noted during our last earnings call our capital expenditure priorities for fiscal 2022 beyond new stores include upgrading our mobile App and website platforms I T infrastructure and cyber security investment.
And improving distribution efficiencies.
In order to position ourselves for long term anticipated future growth. We have also begun evaluating additional potential distribution investment to support that growth.
We do not have any specific details to share at this time.
But anticipate we'll have more to share.
This at a future date.
In closing we remain cautiously optimistic about the current momentum in our business relative to pre pandemic, sometimes and I've long term growth opportunities I will now turn the call over to Mike to provide additional details on our fiscal 2021 fourth quarter operating performance.
Enter introduce our fiscal 2022 first quarter outlook Mike.
Thanks, Ed Good afternoon, everyone. The fourth quarter of fiscal 2020 , one produced our best fourth quarter earnings per share and our public company history in fiscal 2021 as a whole produced a company record earnings per share of $2.06 far surpassing any previous fiscal year.
Details of our fourth quarter operating performance compared to last year's fourth quarter by line item, whereas follows.
Total net sales of $204 $5 million increased by $26 $6 million or 14, 9% compared to $177 $9 million last year.
Total net sales from physical stores were $152 $2 million, an increase of $29 $6 million or 24, 2% compared to $122 $5 million last year.
Net sales from physical stores represented 74, 4% of our total net sales compared to 68, 9% of total net sales last year.
E Commerce net sales were $52 $3 million, a decrease of $3 $1 million or five 6% compared to $55 $4 million last year, but still 57% above the fourth quarter of fiscal 2019.
E Comm net sales represented 25, 6% of total net sales compared to 31, 1% of total net sales last year.
Consumer behavior in 'twenty, and 'twenty, one favorite stores over E com compared to last year during which stores were more constricted in hours in customer occupancy limits than this year.
We ended the fiscal year with 241 total stores, a net increase of three stores compared to the end of fiscal 2020.
Gross profit, including buying distribution and occupancy expenses improved to $74 million or <unk> 34, 4% of net sales.
Compared to $58 $3 million or <unk> 32, 7% of net sales last year.
Buying distribution and occupancy costs improved by 190 basis points collectively despite increasing by $1 $9 million in total.
Due to leveraging these costs against higher net sales.
Product margins declined by 20 basis points, primarily due to higher sales return reserves and reduced inventory shrink favorability than last year. The comment about the combination of which more than offset a lower markdown rate compared to last year.
Total SG&A expenses were $53 $1 million or 25, 9% of net sales compared to $44 1 million or 24, 8% of net sales last year.
Primary dollar increases in SG&A were higher store payroll and related benefit costs of $4 $5 million.
Increased marketing expenses of $1 $7 million, primarily associated with E com.
And higher corporate bonus accruals of zero point $6 million due to our strong operating performance throughout fiscal 2021.
Operating income improved to $17 3 million or eight 5% of net sales compared to $14 $1 million or seven 9% of net sales last year, primarily due to the significant increase in net sales.
Income tax expense was $4 $9 million or 28, 7% of pretax income compared to $5 $1 million or 36, 6% of pretax income last year.
The decrease in the effective income tax rate was primarily due to a normalization of the tax rate. After last year's effective tax rate was distorted by low pretax losses for the year as a whole.
Net income improved to $12 $1 million or <unk> 38 cents per diluted share, which is a fourth quarter record for us and our public company history compared to $8 9 million or 29 cents per diluted share last year.
Weighted average shares were $31 4 million this year compared to $30 1 million last year.
Turning to our balance sheet, we ended the fiscal year with total cash and marketable securities of $139 million and no debt outstanding compared to $141 million and no debt last year.
This is after we paid an aggregate of approximately $62 million in special cash dividends to our shareholders during 2021.
We ended the fiscal year with inventories per square foot up 17% over last year generally in line with our 15% fourth quarter net sales growth rate in our early first quarter net sales results.
Entering this current weak inventories were up 7% to last year.
We continue to contend with product delays through the southern California ports and believe this condition will continue to be a challenge for several more months.
Our merchant team has worked incredibly hard to manage and adjust our overall inventory levels through an extremely volatile and unpredictable period.
Total capital expenditures for fiscal 'twenty, 'twenty, one were $13 $4 million compared to $8 5 million last year, the increase being primarily due to new store openings.
Looking ahead, the current business environment remained subject to many unpredictable risks and uncertainties with respect to among others. The COVID-19 pandemic the current inflationary environment.
<unk> supply chain difficulties geopolitical concerns and how consumer behavior may change relative to any of these factors as well as last year's historic anomalies of pent up demand coming out of pandemic related restrictions and federal stimulus payments.
On top of that we also have a later Easter this year.
As a result, it is extremely difficult to predict our business results with any certainty given that nothing has been so called normal for two full years now.
That being said, turning specifically to the first quarter of fiscal 2022.
Comparable net sales through March 6th increased by 10, 4% compared to last year with an increase from physical stores of 14% and a decrease from e-commerce of one 3%.
During last year's first quarter comparable net sales were negative during February turned positive in March and then accelerated significantly from March week three through the end of the first quarter. Following the relaxation of pandemic restrictions and the release of federal stimulus payments the.
The opposite has occurred thus far in the first quarter of fiscal 'twenty two.
With a strong February followed by negative comps in early March.
We anticipate a further deceleration in our business relative to last year for the latter half of the first quarter as we go up against the peak performance of last year's first quarter that was driven by the unique environment at that time and the current headwinds I just described.
Based on current and historical first quarter trends, we estimate that our total net sales for the first quarter of fiscal 2022 will be in the range of approximately $143 million to $148 million translating to a comparable store net sales decline of 10% to 13% for the first quarter of fiscal 2022 compared to last year.
<unk>.
We currently expect our earnings per diluted share for the first quarter of fiscal 'twenty, two 2022 to be in the range of breakeven to five cents per diluted share with an estimated income tax rate of 27% and weighted average diluted shares of $31 6 million.
We currently expect to have 241 total stores at the end of the first quarter compared to 238 at the end of the first quarter of fiscal 'twenty one.
This outlook compares to $163 million in total net sales and 36 cents in earnings per diluted share for last years first quarter, which were first quarter records for us by far and $130 million in total net sales and <unk> and earnings per diluted share for fiscal 2019 pre pandemic first quarter.
Well now go to our Q&A session.
Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Jeff Van <unk> with B Riley. Please proceed with your question.
Oh, hi, everybody.
Maybe if we can just circle back to supply chain for a second I guess kind of your view as Youre looking at your supply chain dashboard of how that looks now I know there understand theres still some delay has gone through the ports.
And then maybe if you can give us more color on kind of how you're thinking about the inflationary influences on your business, maybe what youre seeing from vendors.
The price increases from them and how youre thinking about passing those increases on to your customer.
Okay, Hi, Jeff.
As far as that supply can go because there's a couple of categories that have been.
Impacted more than most of the categories shoes is one where we've seen.
And she was happens to be a very hot category for us, but we've seen some slowdown in the shoe.
Replenishment area from multiple brands not just one brand.
And then probably to a lesser lesser extent some of the seasonal categories, particularly shorts and swim we've been delayed in getting those receipts. So we have some but we don't have as much as we normally have.
It appears to be opening up a little but as Mike said earlier, we're expecting that the supply chain challenges will remain.
For several more months, but it certainly doesn't seem to be as extreme as it had been for the last several months.
So that's kind of where we are with supply chain I'm sorry, what was the second question was inflation.
Okay. So from the brands and stuff I think we've seen some price increases from some of the brands, but it hasn't been.
Across the board, we expected it and you know but.
Because most of our branded goods are all on the map pricing, it's kind of like we're on the same.
Anybody that tells these brands is going to be in the same category, but.
We haven't seen anything that's really material and certainly will adjust when necessary.
Our pricing when necessary to minimize the impact on gross margins.
Yes, I'd just add you know as you think about the expense side of things from an inflationary standpoint, particularly.
We're seeing something of a return to a normalization, perhaps and so if we compare to pre pandemic 2019, we certainly have a number of areas where costs are just significantly higher than they were three years ago.
Obviously minimum wage is a big piece of that.
In 2019, it was $12 an hour here in California, where now at 15% to 25% increase in the wage rate.
Insurance costs are more than double what they were three years ago.
In the first quarter alone that's going to cost us about 900000 additional dollars than it did in 2019.
Freight costs are significantly higher than they were three years ago. So there's a number of number of cost pressures. In addition to to the product.
Cost increases that we've seen from some of the brands in yet.
With a greater sales productivity that we're expecting for this first quarter relative to the 2019.
The first quarter, we still have a chance to produce earnings that are as good or better than we did in 2019. If we're at the better end of our of our outlook range and hopefully hopefully we will be but.
Admittedly for all the reasons that I laid out in our prepared remarks. It is just extremely difficult to predict anything with any certainty just as it has been for two years running now.
It's no easier with all these different factors in play.
Right understood and then just a follow up on the shorts and swim area.
Do you think having kind of a lean.
Assortment or kind of lean inventory there is earning business in March as we're kind of approaching you.
No.
Typical seasonal.
Spring break time, and all that or do you think that's not so much of a factor.
Its building so I think it's getting better and we will certainly impact.
Spring geographically it varies because of weather.
So as we get further into the spring with the late Easter and a later Easter.
I think it will get better and I'm expecting that slide supply chain for those categories to improve.
Okay, and then I think you said inventory was roughly up 7% per foot at the end of the end of the month, maybe like you said.
No that was entering this week. So we were up 7% at the end of the fourth quarter entering this week that was down two up 7%.
Okay.
Okay, So and just in thinking about that.
I mean, I would expect everybody think everybody's gotta go more marshalls, especially if they are a little more inventory has slowed down.
Is it fair to say that you would you now plan to be a little more promotional than you are at this time last year.
Certainly the I guess how are you.
Yes.
Yep.
I don't think it's not going to be drastically different than what we historically do.
Our inventory is really a very very clean and current.
For sure.
I'd rather have these.
Supply chain delays earlier in the spring then late so I don't think there's much exposure there and our category performance.
Quote of the day, there's positive across the board.
So there's no real major weaknesses in any one category of our business. Yeah, we are expecting product margins to be down relative to last year, but they should be still better than they were in 2019. So it's a little bit different answer depending on the relativity of which period, we're talking about right. We do expect it.
We do expect to have a little.
A little bit better product margins that we had in 2019, but but there'll be a.
Somewhat below last year, just because we're not anticipating to have.
The level of full price selling that we had with the robust environment that existed at this time last year and we do expect the need to need to be incrementally more promotional.
To keep inventories controlled.
Mhm and then and then just one last one if I could squeeze it in just thinking about how you're planning.
Inventory going forward.
Assuming the business is down I know cause whatever 10% comp basis. This year last year, you know start to plan inventory to run to run negative year over year.
On a square foot basis.
That is a constantly moving target so it's difficult to answer that with any feature because quite honestly our merchant teams have jumped through.
<unk> of hoops.
Continually adjust our inventory levels relative to what we expected.
Over the over the past year, plus I'll tell you, there's we've gone through periods, where one given weak we're thinking oh, we need to race to go get more you'll get more you'll get more seriously.
A week later oops, we need to quickly reverse gears and go the other way and so that does supply chain.
Issues, where they're early on we made a concerted effort to pull goods forward.
To combat that and I think that helped us for sure.
You know, it's like Mike said, it is a moving target and <unk> sales.
Sales versus inventory.
And as you know, Jeff we've our comp inventories have been down for a long time kelsen sales.
So we certainly have room to play out, but we're going to watch it very much.
It very carefully in relation to the sales forecast.
Okay. Thanks, so much for taking my questions I'll take the rest off line and best of luck for the rest of the quarter.
Alright, Thanks, Jeff.
Our next question comes from the line of Matt Koranda with Roth.
Foreseeable two question.
Hey, guys. Thanks.
Just as we think about modeling out the rest of 'twenty two.
I guess I just wanted to maybe a few thoughts from you guys just in terms of any other <unk>.
Notable areas of exceptional strength in 'twenty, one I guess back to school maybe comes to mind. So I'm just trying to figure out like cadence of the year and how to think about comps for the rest of this year on the topline and then I've got another one on margins after that.
Yeah. Good. Good question. Your guess is as good as ours quite frankly.
At this point, it's difficult to predict the current weak much less any further out. So you know what we're doing currently is tracking our business relative to 2019, because that was the last pre pandemic period debt that had stability.
Last year was a complete aberration.
Normally to the positive following 2020, which is complete aberration to the negative obviously.
So if our business continues to track along the cadence of 2019, that's what leads to the outlook range that we have currently for the first quarter.
Looking at our performance relative to 2019, and then kind of carrying that forward through the rest of the quarter.
So that cadence of things continues sales will be meaningfully below last year every quarter. They just have to be it's almost common sense. So.
Where exactly that lands out who knows there's just too many variables right a lot of it will depend on them.
Grow environment and.
We're seeing enough positive category performance, where if the consumer is in decent shape in line to spend I think we'll be in a good position to maybe.
<unk> outperformed where we think we were going right now, but it's just too much uncertainty.
I think just in the broadest context, I'd say, we expect to do better than we did in 2019 at this time, but it's just certainly not realistic to think we're going to do what we did in 2021 .
Got it just following up on the consumer comment really quickly and then I'll get to the margin question, but.
Just any discernible behavioral change that you guys can see in the last couple of months, just obviously like a lot of headlines about inflationary pressure weighing on the lower end of the consumer but just anything discernible that you guys have noticed in terms of product mix or behavioral change that'd be helpful.
No we haven't seen anything anything.
Like that at all and so.
Traffic has been okay.
And.
Conversion is it was down.
And I think that might be somewhat related to.
Some of the labor challenges we've had but.
I haven't seen anything unusual.
If anything it just broadly we continue to see a channel shift preference for stores relative to E com.
That seems to be continuing.
You know our store traffic relative to last year is considerably up.
So far in the first quarter.
But it's down relative to 2019 so.
Kind of interesting that again, it's one of those things it depends on what specific periods you focus on the store.
Store traffic relative to three years ago was beneath where it was then but it is meaningfully up relative to last year and I. Just think it's with enough time, having been removed from the initial the initial re openings coming out of pandemic restrictions.
People prefer to be out in stores, rather than continue to just sit home and order online generally speaking.
Yeah got it makes sense and then just last one on the margin assumptions embedded in the EPS Guide for Q1, just wondering if you might be able to help out a little bit less sort of gross margin expectations versus SG&A that's embedded in there.
I got the point on sort of merch margins coming down a little bit year over year I would expect also probably some deleverage on the D&O. Yeah. And then just you did note I think in the prepared remarks, some some payroll and wage pressure. So where's the bulk of the pressure coming from is it more on the gross margin side or on that.
Excellent.
Everywhere through the model quite frankly.
You know relative to last year, we're looking at a sales range that might be.
Up to as much as $20 million below last year, while having increasing cost pressures, obviously, that's going to create quite a bit of deleverage with those facts in place. So.
We do think product margins relative to last year are going to be down somewhere in the 100 150 basis points.
But still up to 2019 by as much as about 50 basis points. So depending on how you're modeling, whether youre referencing 2019 or or 'twenty 'twenty. One there's different answers relative specifically to last year. There there will be deleverage in the BDO costs.
<unk> as a function of the lower sales.
What are in our range that assumption on BDO costs as it could be up to as close to 300 basis points of deleverage in the BDO combination of course, it's in gross margin.
SG&A is going to be somewhere around 29% of sales give or take a little bit here or there.
Again with increasing costs on minimum wage insurance costs that I referenced and things of that nature on the lower sales, it's going to create some sizable deleverage there through the SG&A line that could be.
450, 480 basis points.
Just a function of the math.
Got you very detailed thank you, Mike and thanks, I'll jump back in queue. Thanks.
Yes.
And as a reminder, if anyone has any questions you may push star one on your telephone keypad.
The next question comes from the line of Marni Shapiro with retail tracker. Please proceed with your question.
Hey, guys.
Congratulations the stores in spite of your apparent delivery issues have looked really good persons really right and it looks fantastic.
I'm curious you talked about sales, having fallen off compared to levels last year, but I'm curious you know what that really looks like are you seeing the traffic teams significantly since January and February or is it just the compares are a lot tougher is she coming into the store.
And buying less than she was buying a year ago sort of more of the complexion of it like I'm trying to assess if your customers demand has gone away or the demand just looks depressed compared to exceptional demand last year.
Yes, it's all about compares as you think about as you think about last year.
Our February comps last year were negative and then they started to turn they started to turn positive in the first weekend two of March and then they really jumped starting in the week three of March and through the rest of the quarter.
So just for example relative to 2019 now because obviously relative to 2020 doesn't make any sense like February was down for last year March was up 39 and April was up 20, and then in March in particular, we went from a plus four to plus 11 to plus 59 plus 49.
To plus 72 so.
There's there's the explosion in rate of business that we're seeing like okay, that's not going to be likely to happen. This year when stimulus isn't in play pent up demand isn't in play so that that relativity. We're not we're not expecting the same kind of flow and then of course with the later Easter for a business like ours in the age range, we serve that is.
Pushed some business from March into April as it typically does when Easter is late.
It just so happens fiscal 19 was pretty close within four days of the date of Easter So.
That's why we continue to look at 2019.
As a baseline to evaluate our business so far the average transaction value has been roughly flat.
Year over year, so it isn't that they're necessarily spending less.
In the transactions that are going on and we've actually had more transactions is just the conversion rate is down on higher traffic than a year ago in stores.
Because people are actually browsing again as opposed to coming in and personally I am leaving you mean, yes.
It's actually been better than what we anticipated so well.
And that's very attractive so.
Which is a good and then over time that their people are coming back and monitoring around again, it's a good thing because you have more opportunity for transactions, if they actually walk in the door.
Exactly and we're seeing that throughout the whole country, it's not.
Limited to any one area. So that's good too.
And then just quick follow up on the footwear conversation because I know this has been a problem all year I guess when you think about it in plenty to do you see is there any visibility as to when deliveries in footwear could start to normalize and is it across all the brands I know in the past you've called out some of the Nike deliveries being tough as many people have just.
Curious if you could put a little color behind that.
And we're getting a little bit more clarity from some of the brands are I wouldn't call out any one particular brand.
And.
We're getting more clarity on it so it's kind of it's definitely going to get better.
I just don't know when it all comes together with the timing of that yet.
Right that makes sense well best of luck for the next couple of weeks because it sounds like it's going to be the toughest hurdle to get through.
Thanks, Thank you.
And we have reached the end of the question and answer session I will now turn the call back over to Ed Thomas for closing remarks.
Thank you all for joining us on the call today, we look forward to sharing our.
First quarter results with you in early June have a good evening.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you.
You for your participation.
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