Q2 2024 Tilly's Inc Earnings Call
Hello, and welcome to Tilly's second quarter 2023 results, earning conference earnings results Conference call.
Speaker 1: Hello and welcome to Tilly's second quarter 2023 results earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw from the question queue you May press.
Speaker 1: To ask a question, you may press star, then 1 on your telephone keypad. To withdraw from the question queue, you may press star, then 2. Please note, this event is being recorded.
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I would now like to turn the conference over to Gar Jackson Investor Relations. Please go ahead.
Speaker 1: I would now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.
Good afternoon, and welcome to the Tilly's fiscal 2023 second quarter earnings call, Ed Thomas President and CEO , and Michael Henry Executive Vice President and CFO will discuss the company's results and then host the Q&A session for a copy of today's earnings release. Please visit the Investor Relations section of the Companys website until you start.
Speaker 2: Good afternoon and welcome to the Tilly's fiscal 2023 second quarter earnings call. Ed Thomas, President and CEO and Michael Henry, Executive Vice President and CFO , will discuss the company's results and then host the Q&A session. For a copy of Tilly's earnings release, please visit the investor relations section of the company's website at Tilly's.com.
Com.
Speaker 2: From this 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.
From this 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.
Speaker 2: Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, August 31, 2023, and actual results may differ materially from current expectations based on various factors affecting Tilly's business.
Certain forward looking statements will be made during this call that reflect tilly's judgment and analysis only as of today August 31, 2023, and actual results may differ materially from current expectations based on various factors affecting tilly's business.
Speaker 2: 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 2023 second quarter earnings release, which is furnished to the SEC today on Form 8K, as well as our other filings that the SEC 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.
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 2023 second quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings with the SEC.
And that disclaimer today's call will be limited to one hour and will include a Q&A session. After our prepared remarks, I'll now turn the call over to Ed.
Speaker 3: Thanks, Gar. Good afternoon, everyone. And thank you for joining us today. Our second quarter results exceeded what I previously announced.
Thanks, Gar good afternoon, everyone.
And thank you for joining us today.
Our second quarter results exceeded our previously announced.
Estimated outlook ranges for both net sales and earnings per share.
Speaker 3: estimated outlook ranges for both net sales and earnings per share.
Speaker 3: The trend of our comps sales results improved.
The trend of our car sales results improved.
Speaker 3: to negative high single digits for each of June and July , following a negative 11.3% start in fiscal May.
Negative high single digits for each of June and July following a negative 11.3% start in fiscal May.
Speaker 3: This improved sequential sales performance coupled with diligent expense management produced better bottom line results than we anticipated for the quarter.
This improved sequential comparable sales performance, coupled with diligent expense management produced better bottom line results than we anticipated for the quarter.
Our spring summer product categories performed better during the second quarter than in the first quarter of this fiscal year, resulting in improved relative performance.
Speaker 3: Our spring summer product categories perform better during the second quarter than in the first quarter of this fiscal year, resulting in improved relative performance across all geographic markets.
Across all geographic markets.
With the most significant improvement coming from my home State of California, we have 40% of our stores reside.
Speaker 3: With the most significant improvement coming from our home state of California, where 40% of our stores reside.
Speaker 3: For the quarter on a percentage basis, comps were positive in the Northwest, single digit negative in eight of our geographic markets, including both Southern and Northern California, and double-digit negative in the remaining five markets.
For the quarter on a percentage basis comps were positive in the northwest single digit negative in eight of our geographic markets, including both southern and northern California, and double digit negative in the remaining five markets.
Speaker 3: In terms of store transaction metrics, on a percentage basis, total transactions were down low double digits while the average transaction value increased by low single digits compared to last year.
In terms of the star transaction metrics on a percentage basis total transactions were down low double digits, while the average transaction value increased by low single digits compared to last year.
Speaker 3: From a merchandising perspective, for the second quarter, girls in footwear comped positive. Women and boys were single digit negative, while men's and accessories were each double digit negative on a percentage base.
From a merchandising perspective for the second quarter girls and footwear Comped positive women's in boys with single digit negative, while men's and accessories, where each double digit negative on a percentage basis.
Speaker 3: All departments improved sequentially from their first quarter performance and most have then improved further from the second quarter performance during our.
All departments improve sequentially from their first quarter performance and most have improved further from the second quarter performance during August .
We are optimistic that our new chief merchandising officer, and new Vice President of the merchandize planning both of who joined US in May well have.
Speaker 3: We are optimistic that our new chief merchandising officer and new vice president of merchandise planning, both of who joined us in May, will help us continue to improve our performance going forward.
It does continue to improve our performance going forward.
Speaker 3: In terms of store real estate, we expect to open three new stores in each of the third and fourth quarters, bringing our total new store count to seven for the year. We closed two stores during the second quarter. We continue to believe that we have ample opportunities to grow our total store count over the next several years. However, these stock values vary.
In terms of store real estate, we expect to open three new stores in each of the third.
And fourth quarters, bringing our total new store count to seven for the year.
We closed two stores during the second quarter, we continue to believe that we have ample opportunities to grow our total store count over the next several years. However.
Speaker 3: As we said in the past, we will be very selective in our approach to new store openings, and we'll only open new stores that reflect what we believe to be appropriate lease economics to drive acceptable profitability relative to the sales environment we expect.
As we've said in the past, we'll be very selective in our approach to new store openings and will only open new stores that reflect what we believe to be appropriate lease economics to drive acceptable profitability relative to the sales environment, we expect.
Turning to the third quarter of fiscal 2023, which includes the peak.
Speaker 3: Turning to the third quarter fiscal 2023, which includes the peak.
The back to school season total comparable net sales through August 29th, including both physical stores and E. Comm decrease by 3.9% versus the comparable period of last year, continuing the sequential improvement in our comp sales trends.
Speaker 3: of the back to school season. Total comparable net sales through August 29th, including both physical stores and e-comm decreased by 3.9% versus the comparable period of last year. Continuing the sequential improvement in our comp sales trends.
In recent months.
We have seen back to school shopping patterns. This year that seemed to indicate that our customers have been shopping later than in prior years.
Speaker 3: We have seen back to school shopping patterns this year that seem to indicate that our customers have been shopping later than in prior years. Been seeing stronger results following what we anticipated to be the peak back to school.
<unk> strong results following what we anticipated it to be.
The peak back to school shopping weeks.
Speaker 3: for certain stores before them seeing results start to soften in the post back to school period.
But certain stores before them, saying without start to soften in the post back to school period.
Speaker 3: Given this backdrop amid the broader economic environment, we are anticipating that our comp sales result may likely revert to pre-back to school levels following what was...
Given this backdrop amid the broader economic environment, we are anticipating that our comps sales results may likely revert.
Two pre back.
The school levels.
[noise] following what was a need based.
[noise] purchasing parity during August overall, we feel good about our back to school and holiday merchandise assortment and despite ongoing macroeconomic challenges. We are cautiously optimistic that we can produce a better comp store sales trends over the back half of the year and what we.
Speaker 3: Overall, we feel good about our Rebecca School on holiday merchandise assortment, and despite ongoing macroeconomic challenges, we are cautiously optimistic that we can produce a better comp store sales trend over the back half of the year than what we produced in the first half.
Produced in the first half.
Speaker 3: We will continue to manage our business diligently, relative to the environment, with the goal of improving performance over time.
We will continue to manage our business diligently relative to the environment with the goal of improving performance over time.
I will now turn the call over to Mike to discuss our second quarter operating results in more detail entered introduce our third quarter outlook Mike.
Speaker 3: I will now turn the call over to Mike to discuss our second quarter operating results in more detail and to introduce our third quarter outlook. Mike.
Thanks, Ed.
Speaker 4: Thanks, Ed. Our second quarter operating results compared to last year were as follows. Net sales were $160 million, a decrease of 5%. Net sales from physical stores decreased by 5.3% and represented 81.1% of total net sales compared to 81.5% last year.
Third quarter operating results compared to last year were as follows.
Net sales were $160 million a decrease of 5%.
Net sales from physical stores decreased by five 3% and represented 81, 1% of total net.
Net sales compared to 81, 5% last year.
E Commerce net sales decreased by three 4% and represented 18, 9% of total net sales compared to 18, 5% last year.
Speaker 4: while e-commerce net sales decreased by 3.4% and represented 18.9% of total net sales compared to 18.5% last year.
Comparable net sales, including both physical stores and e-commerce decreased by $8 five per cent.
Speaker 4: Comparable net sales, including both physical stores and e-commerce, decreased by 8.5%.
Speaker 4: We ended the second quarter with 246 total stores compared to 242 total stores last year.
We ended the second quarter with 246 total stores compared to 242 total stores last year.
Gross margin, including buying distribution and occupancy expenses was 27, 7% of net sales compared to 39% of net sales last year.
Speaker 4: Gross margin, including buying distribution and occupancy expenses, was 27.7% of net sales, compared to 30.9% of net sales last year.
Speaker 4: Buying distribution and occupancy costs do leverage by 170 basis points and increased by $0.9 million collectively, predominantly from occupancy costs as a result of operating additional stores and carrying these costs against a lower level of net sales this year.
Buying distribution and occupancy costs deleveraged by 170 basis points.
<unk> increased by zero point $9 million collectively predominantly from occupancy costs as a result of operating additional stores and carrying these costs against a lower level of net sales this year.
Product margins declined by 150 basis points compared to last year's second quarter, primarily as a result of higher markdowns and estimated inventory valuation reserves, but improved by 90 basis points sequentially from this year's first quarter.
Speaker 4: Product margins declined by 150 basis points compared to last year's second quarter, primarily as a result of higher markdowns and estimated inventory valuation reserves, but improved by 90 basis points sequentially from this year's first quarter.
Speaker 4: Total last G&A expenses were $47 million or 29.4% of net sales, compared to $46.8 million or 27.8% of net sales last year.
Total SG&A expenses were $47 million or 29, 4% of net sales compared to $46 8 million or 27, 8% of net sales last year.
SG&A deleverage as a percentage of net sales due to carrying these costs against lower total net sales.
Speaker 4: SG&A deleveraged has a percentage of net sales due to carrying these costs against lower total net sales.
Speaker 4: The largest SG&A increases were from non-cash store impairment charges of $0.8 million and increased corporate payroll and benefits of $0.4 million, primarily due to the impact of wage increases for employee retention.
The largest SG&A increases work from noncash store impairment charges of zero point $8 million and increased corporate payroll and benefits of zero point $4 million, primarily due to the impact of wage increases for employee retention.
Speaker 4: Partially offsetting these increases were a variety of smaller savings across several expense line items.
Partially offsetting these increases were a variety of smaller savings across several expense line items.
Speaker 4: Operating loss was $2.7 million or 1.7% of net sales compared to operating income of $5.2 million or 3.1% of net sales last year.
Operating loss was $2 $7 million or one 7% of net sales compared to operating income of $5 2 million or three 1% of net sales last year.
Speaker 4: Other income was $1.2 million compared to $0.2 million last year, primarily due to earning higher rates of return on our marketable securities this year.
Other income was $1 $2 million compared to zero point $2 million last year, primarily due to earning higher rates of return on our marketable securities. This year.
Income tax benefit was zero point $3 million or 23, 2% of pretax loss compared to income tax expense of $1 5 million or 28, 4% of pretax income last year.
Speaker 4: Income tax benefit was $0.3 million or 23.2% of pre-tax loss compared to income tax expense of $1.5 million or 28.4% of pre-tax income last year.
The decrease in income tax rate was primarily attributable to the low level of pre tax loss and certain discrete tax impacts associated with stock based compensation.
Speaker 4: The decrease in income tax rate was primarily attributable to the low level of pre-tax loss and certain discrete tax impacts associated with stock-based compensation.
Net loss was $1 $1 million or four cents per share compared to net income of $3 8 million or <unk> 13 per diluted share last year.
Speaker 4: Net loss was $1.1 million or $0.04 per share compared to net income of $3.8 million or $0.13 per diluted share last year, and an improvement of $0.36 per share sequentially from our first quarter results.
And an improvement of 36 cents per share sequentially from our first quarter results.
Speaker 4: Weighted average shares were 29.8 million this year compared to 30.2 million diluted shares last year.
Weighted average shares were $29 8 million this year compared to $30 2 million diluted shares last year.
Turning to our balance sheet, we ended the second quarter with total cash and marketable securities of $104 million and no debt outstanding compared to $116 million and no debt at the end of the second quarter last year.
Speaker 4: Turning to our balance sheet, we ended the second quarter with total cash and marketable securities of $104 million and no debt outstanding compared to $116 million and no debt at the end of the second quarter last year.
We ended the second quarter with inventories at cost up less than 1% per square foot and down 3% per square foot in units.
Speaker 4: We ended the second quarter with inventories that cost up less than 1% per square foot and down 3% per square foot in units.
Total capital expenditures for the first half were $6 $3 million compared to $6 $9 million last year.
Speaker 4: Total capital expenditures for the first half were $6.3 million compared to $6.9 million last year.
We currently expect our total capital expenditures for fiscal 2023 to be in the range of approximately $15 million to $17 million, primarily for new store construction and information technology and distribution systems enhancements.
Speaker 4: We currently expect our total capital expenditures for fiscal 2023 to be in the range of approximately $15 million to $17 million, primarily for new store construction and information technology and distribution systems and
Turning to the third quarter of fiscal 2023 based on our quarter to date net sales results in current and historical trends, including August typically representing just over half of third quarter net sales volume. We currently expect our total net sales for the third quarter of fiscal 2023 to be in the range of approximately $166 million to 107.
Speaker 4: Turning to the third quarter of fiscal 2023, based on our quarter to date net sales results and current and historical trends, including August typically representing just over half of third quarter net sales volume, we currently expect our total net sales for the third quarter of fiscal 2023 to be in the range of approximately $166 million to $171 million. SG&A to be approximately 50.
$91 million SG&A to be approximately $50 million.
Speaker 4: pre-tax loss to be in the range of approximately $1.8 million to $4.3 million.
Pre tax loss to be in the range of approximately $1 $8 million to $4 $3 million, our estimated income tax rate to be approximately 26%.
Speaker 4: Our estimated income tax rate to be approximately 26%, and loss per share to be in the range of $0.05 to $0.11 based on estimated weighted average shares of approximately $29.8 million.
Loss per share to be in the range of <unk> to <unk> 11 cents based on estimated weighted average shares of approximately $29 8 million.
Speaker 4: We expect to have 249 total stores open at the end of the third quarter, an increase of two from 247 total stores at the end of last year's third quarter. Christian says the operator Maeve...
We expect to have 249 total stores open at the end of the third quarter.
The increase of two from 247 total stores at the end of last year's third quarter.
Operator, we'll now go to our Q&A session.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
Speaker 1: Thank you very much. We will now begin the question and answer session.
Speaker 1: To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Matt Koranda with Roth M. K M. Please go ahead.
Speaker 1: Today's first question comes from Matt Caronda with RothMKM. Please go ahead.
Speaker 5: Hey guys, good afternoon. Thanks for the questions.
Hey, guys. Good afternoon, thanks for the questions.
Speaker 5: wanted to see if I could get a bit more color on why the expected drop-off in comps for the rest of the quarter. It just looks like, I know you said maybe we're expecting when need-based buying goes away that we expect a bit of a drop-off, but correct me if I'm wrong, I think comps got a bit easier last year when we think about September , October . Can you maybe just speak to the dynamic?
Just wanted to see if I could get a bit more color on why the expected drop off in comps for the rest of the quarter. It just looks like I know you said.
Said, maybe we're expecting when need based buying goes away that we expect a bit of a drop off but.
Correct me, if I'm wrong, I think comps got a bit easier last year. When we think about September October.
Could you maybe just speak to the dynamics there.
Sure, Matt we're already seeing it so we've been tracking performance before during and after the back to school peaks, depending on when various schools went back.
Speaker 4: Sure, Matt, we're already seeing it. So we've been tracking performance before, during, and after the back to school peaks, depending on when various schools went back.
Speaker 4: And we've seen a consistent pattern that as soon as the peak of the back to school period is over, we are seeing the business slow down.
And we've seen a consistent pattern that as soon as the peak of the back to school period is over we are seeing the business slow down.
Speaker 4: You are right, the compares are easier in the final two months of the quarter, but we're still seeing that same deterioration regardless of the fact that we're going up against easier compares.
You are right that the compares are easier in.
In the final two months of the quarter, but we're still seeing that seen deterioration regardless of the fact that we're going up against easier compares August was actually the toughest compare.
Speaker 4: August was actually the toughest compare and we had our best month. So it's kind of counterintuitive from a purely comparable basis standpoint, but that is the pattern that we're seeing. So we were barely negative in the second week of August , after having a minus 10 in the first week of August . Then we were plus three in the third week of August , and then minus five in the final week of August , and we're down high single digits this week. So we're seeing it in the performance of the stores.
And then we had our best month. So it is kind of counterintuitive from a purely.
On a comparable basis standpoint, but that is the pattern that we're seeing so.
We were barely negative in the second week of August after having a minus 10 in the first week of August than we were plus three in the third week of August and then minus five in the final week of August and we're down high single digits. This week. So we're seeing it in the performance of the stores.
Speaker 4: And as we've heard other companies mention as well, it does appear to us.
And as we've heard other companies mentioned as well.
It does appear to us that.
<unk>.
The back to school shopping patterns were much closer into need.
Speaker 4: The back to school shopping patterns were much closer in to need kind of a tighter peak. And then once that need period has concluded, and at this stage over 90% of back to school is done. There's less than 20 stores that are currently in peak. The rest have already completed their key back to school peak period. So that's just the dynamic that we're seeing in the results and we're contemplating that in our outlook.
Kind of a tighter peak and then once that need period has concluded at this stage over 90% of back to school is done there's less than 20 stores that are currently in peak the rest have already completed their key.
Key back to school peak periods. So.
That's just the dynamic that we're seeing in the results and we're contemplating that in our outlook.
Okay Fair enough and then maybe just could you talk about the what's contemplated in the ticket versus transaction within the comp outlook I mean any changes there maybe just less benefit from ticket are on a year over year basis or anything to call out on that front relative to kind of what you're experiencing.
Speaker 5: Fair enough. And then maybe just could you talk about the what's contemplated in the ticket versus transaction within the comp outlook? I mean, any changes there? Maybe just less benefit from ticket on a year over year basis or anything to call out on that front relative to kind of what you experienced?
Yeah.
Speaker 4: Our comp dynamics have been pretty consistent most of the year. It's been a decline in traffic and a decline in transactions, period. The average transaction value has actually been slightly up, interestingly. So there's just fewer transactions occurring, but they are occurring at a similar or even slightly higher rate.
Our company has actually been pretty consistent most of the year, it's been a decline in traffic and a decline in transactions period the average.
Transaction value has actually been slightly up interestingly. So there's just fewer transactions are occurring but they are occurring at a similar or even slightly higher rates.
Yeah.
Got it and that's coming from a U R or is that kind of from a bigger basket.
It's a low single digit change so theres nothing theres nothing dramatic to call out on either write them.
Speaker 4: It's a low single digit change, so there's nothing dramatic to call out on either item.
Okay got it.
Speaker 5: Okay, got it. And then just one other button for me on the gross margins. I know you don't explicitly put out a gross margin outlook, but you can back into it on an applied basis. And it just seems to look relatively flat in the third quarter versus the second. And I just noted that despite kind of the uptick in revenue. So just wondered if you could maybe speak to the dynamics on V&D and O-cost, maybe Mike, or just more pressure on a merged margin. What's the then?
And then just one other one from me on the gross margins I know you don't explicitly.
Put out a gross smart Alec but you can back into it on an applied basis and it just seems to look relatively flat in the third quarter versus the second and I. Just noted that despite kind of the uptick in revenue. So just wondering if you could maybe speak to the dynamics on D. N. A N O costs, maybe Mike or just more pressure on our merch margin what what's the dynamic there.
Operator: Hello and welcome to Tillys' second quarter, 2023 results earning conference call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.
Operator: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw from the question queue you may press star then two. Please note this event is being recorded.
Speaker 4: Sure, so it's as it has been in recent quarters, it continues to be occupancy is the major part of the leverage within the non product.
Sure. So it's as it has been in recent quarters. It continues to be occupancy is the major part of deleverage within the non product.
Speaker 4: cost of goods sold. We're starting the quarter with four more stores than last year's third quarter, so dollars are added. We're gonna end the third quarter with two more stores than last year, and carrying those costs against what we're expecting to be a negative comp for the quarter, so it's kind of deleveraged. So it's occupancy that causes most of it. We are anticipating product margins to be somewhat lower than last year's third quarter, but...
Cost of goods sold we're starting the quarter with four more stores than last year's third quarter. So dollars are added we're going to end the third quarter with two more stores than last year.
Gar Jackson: I would now like to turn the conference over to Gar Jackson investor relations. Please go ahead.
And carrying those costs against what we're expecting to be a negative comp for the quarter. So it's kind of deleverage so its occupancy that causes most of it.
Edmond Thomas: Good afternoon and welcome to the Tillys fiscal 2023 second quarter earnings call. Ed Thomas, President and CEO and Michael Henry, Executive Vice President and CFO will discuss the company's results and then host the Q&A session. For copy of Tillys earnings release please visit the investor relations section of the company's website at tillys.com. From the same section shortly after the conclusion of the call you will also be able to find a reported replay of this call for the next 30 days.
We are anticipating.
Product margins to be somewhat lower than last year's third quarter, but again.
Speaker 4: again, sequentially improved in third quarter versus second quarter, and second quarter was improved sequentially from first quarter. So, on the worse end of our outlook, it might be 100 basis points of product margin decline. It'll be less than 100 basis points on the better end.
Again sequentially improved in the third quarter versus second quarter, and second quarter was improved sequentially from first quarter.
So on on the worse end of our outlook it might be 100 basis points of product margin decline.
It'll be less than 100 basis points on the better end.
Edmond Thomas: Certain forward looking statements will be made during this call that reflect Tillys judgment and analysis only as of today. August 31, 2023 and actual results made different materially from current expectations based on various factors affecting Tillys 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 2023 second quarter earnings release. Which is furnished to the SEC today on warm 8k is also our other following that the SEC referenced in that disclaimer.
Okay got you I'll leave it there thanks.
Speaker 1: The next question comes from Mitch Comets with Seaport. Please go ahead.
The next question comes from Mitch comments with Seaport. Please go ahead.
Yes, thanks for taking my questions.
Speaker 6: Yes, thanks for taking my questions. I can just talk a little bit about what was working for Back to School for you guys.
Hey could you just talk a little bit about what was working for back to school for you guys.
Okay.
Sure There was no single brand or category that was.
Speaker 3: Sure, there was no single brand or category that was dominant, for sure. We saw improvement from first quarter to second quarter, pretty much across all categories being parallel footwear accessories. We saw improvement there. I would say the improvement continued into August into in the boys and girls category.
Dominant.
For sure.
We saw improvement from first quarter to the second quarter pretty much across all categories being apparel footwear.
Edmond Thomas: Today's call will be limited to one hour and I will include a Q&A session after our prepared remarks.
Edmond Thomas: I now turn the call over to Ed. Thanks car. Good afternoon, everyone. And thank you for joining us today. Our second quarter results exceeded our previously announced estimated outlook ranges for both net sales and earnings per share. The trend of our comp sales results improved to negative high single digits for each of June and July following a negative 11.3% start in fiscal May. This improved sequential comp sales performance coupled with diligent expense management produced better bottom line results than we anticipated for the quarter.
Accessories, we saw.
There are I would say the improvement continued into August 10th.
And the boys and girls category.
But I can't call out anything any single category.
Speaker 3: But I can't call out anything, any single category or brand that drove it. It was across the board.
<unk> that drove it it was across the board.
Speaker 6: And then if I hear you correctly, did you say that girls and footwear were positive top in the quarter?
And then did I hear you correctly did you say that girls footwear were positive comp in the quarter.
For the second quarter, yes, good girls footwear, that's correct.
Speaker 6: Can you just elaborate on that? I mean, that's pretty good strength compared to the rest of the business. What are you seeing within those?
Can you just elaborate on that.
I mean, that's pretty good strength compared to the rest of the business what are you seeing within those segments.
Okay.
Speaker 3: The girls assortment
The girls our assortment.
Edmond Thomas: Our spring summer product categories perform better during the second quarter than in the first quarter of this fiscal year resulting in improved relative performance across all geographic markets. With the most significant improvement coming from our home state of California, we have 40% of our stores reside for the quarter on a percentage basis comes for positive in the northwest single digit negative and eight of our geographic markets, including both Southern and Northern California and double digit negative in the remaining five markets.
Well, it's definitely improved over last year, so that drove that.
Speaker 3: was definitely improved over last year. So that drove that part of the business. Without further adieu, let's get to it.
That part of the business.
Footwear and spam.
Speaker 3: Pretty decent for us all year and it's multiple brands that are driving that. You know some Nike, some Converse that's driving that business.
Pretty decent for us all year and it's multiple brands that are driving that.
Some Nike converse are that's driving that business.
Okay, and when do you think about like the product pipeline going into the holiday.
Speaker 6: Okay, and when you think about like the product pipeline going into holiday.
How are you feeling about that.
I feel really good about it I mean, obviously with the new merchandising leadership.
Speaker 3: I feel really good about it. I mean, obviously with the new merchandising leadership.
Speaker 3: um coming in just a short while ago they're they've made uh they're making whatever changes they have been able to make and um
[noise] coming in just a short while ago, there they've made a theyre, making whatever changes they have been able to make in.
Edmond Thomas: In terms of store transaction metrics on a percentage basis total transactions with down low double digits, while the average transaction value increased by low single digits compared to last year. From a merchandising perspective for the second quarter, girls and footwear counterpositive. Women's and boys were single digit and negative, while men's and accessories were each double digit negative on a percentage basis. All departments improved sequentially from their first quarter performance and most have then improved further from the second quarter performance during August.
Speaker 3: I think they've done a really good job of editing the Go Forward assortment.
I think they've done a really good job of editing the go forward assortment.
Speaker 3: based on what they feel is the right trends, but also opportunities that they've identified in looking at our business. So I think we're going to be in really, we'll have a really good assortment for holidays for sure.
Based on what they feel is the right.
<unk>, but also opportunities that they've identified and looking at our business. So I think we're gonna be and really we'll have a really good assortment for holiday for sure.
Speaker 6: Okay and then lastly I know that um on the last earnings call you were anticipating some pretty heavy promotional uh activity in kind of seasonal category short swim sandals. I'm wondering how that played out how much of a drag that was on the product margin and how were you situated with your seasonal inventory coming out of the quarter.
Okay, and then lastly, I know that I'm on the last earnings call you were anticipating some pretty heavy promotional.
Activity in kind of a seasonal categories shorts swim sandals I'm wondering how that played out how much of a drag that was on the product margin and how are you situated with your seasonal inventory coming out of the quarter.
Edmond Thomas: We are optimistic that our new chief merchandising officer in new vice president of merchandise planning, both of whom joined us in May, will help us continue to improve our performance going forward. In terms of store real estate, we expect to open three new stores in each of the third and fourth quarters, bringing our total new store account to seven for the year. We close two stores during the second quarter. We continue to believe that we have ample opportunities to grow a total store count over the next several years, however, as we said in the past, we will be very selective in our approach to new store openings and will only open new stores that reflect what we believe to be appropriate lease economics to drive acceptable profitability relative to the sales environment we expect.
Speaker 4: I don't think it had a dramatic impact one way or the other. The seasonal categories improved their performance in second quarter sequentially from first quarter and continued to be better in August , generally speaking, than they were in the second quarter.
I don't think it had a dramatic impact one way or the other the seasonal categories improved their performance in the second quarter sequentially from first quarter and continued to be better in August.
And really speaking than they were in the second quarter.
Speaker 4: You'll remember how just terrible the start to the first quarter was, especially here in California with all the torrential rain that we had repetitively through February and March.
You'll remember how just terrible that the start to the first quarter was especially here in California with all of that just the torrential rain that we had repetitively through February and March so.
We did have a really slow start to the spring season, and we do have a little bit more springs spring summer merchandise right now than we did a year ago.
Speaker 4: We did have a really slow start to the spring season. And we do have a little bit more spring summer merchandise right now than we did a year ago.
Speaker 4: But again, we're expecting third quarter product margins to be sequentially improved versus second quarter and for the decline versus last year to narrow in the third quarter than what it was in the second quarter.
But again, we're expecting third quarter product margins to be sequentially improved versus the second quarter and for the decline versus last year to narrow in the third quarter than what it was in the second quarter and what it was in the first quarter. So we've contemplated everything that we think we need to contemplate.
Edmond Thomas: Turning to the third quarter of fiscal 2023, which includes the peak of the back to school season, total comparable net sales through August 29, including both physical stores and ECOM decreased by 3.9 percent versus the comparable period of last year, continuing this sequential improvement in our CompSail strands in recent months. We have seen back to school shopping patterns this year that seem to indicate that our customers have been shopping later than in prior years.
Speaker 4: and what it was in the first quarter. So we've contemplated everything that we think we need to contemplate to deal with.
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Speaker 4: anything that we need to deal with as we close out the spring summer season and get deeper into fall as the third quarter moves on. Yeah, we'll be, just to add to that, we'll be in pretty good shape in terms of the quantity of inventory that we have in shorts and swim.
Anything that we need to deal with as we close out the spring summer season, and get deeper into fall as the third quarter moves on yeah, well be just to add to that we'll be in pretty good shape in terms of the quantity of inventory that we have in shorts and swam M. So and it sounds like it because it helps us most of the country has been 100 degrees the last two weeks, but.
Speaker 3: so on and so forth, because it helps that most of the country has been 100 degrees the last two weeks.
Speaker 3: But those negative trends in the seasonal categories really continued into August .
Those negative trends in the seasonal category, it's really continued into August.
Speaker 3: which we anticipated early on when we made adjustments to inventory flow wherever we could.
Which we anticipated.
Edmond Thomas: We've been seeing stronger results following what we anticipated to be the peak back to school shopping weeks for certain stores before them seeing results start to soften in the post-back to school period. Given this backdrop amid the broader economic environment, we are anticipating that our CompSail's results may likely revert to pre-back to school levels, following what was a need-based purchasing period during August. Overall, we feel good about our back to school and holiday merchandise assortment, and despite ongoing macroeconomic challenges, we are cautiously optimistic that we can produce a better CompSail's trends over the back half of the year than what we produced in the first half. We will continue to manage our business diligently relative to the environment with the goal of improving performance over time.
Early on we made adjustments to inventory flow wherever we could.
Okay, great. Thanks, guys.
Thank you.
The next question comes from Jeff Van <unk> with B Riley. Please go ahead.
Speaker 1: The next question comes from Jeff VanCinderen with B Riley. Please go ahead.
Hi, everyone and let me say congratulations on the improving trend.
Speaker 7: Hi everyone and let me say congratulations on the improving trend. Maybe you can circle back to the CMO situation. Just wondering how much of the holiday assortment is actually going to be owned, so to speak, by the new CMO.
Hum.
Maybe you can circle back to the CMO situation I'm, just wondering how much of the holiday assortment is actually gonna be one so to speak by the new CMO.
I don't know how to put a percentage to it Jeff quite honestly.
Speaker 3: I don't know how to put a percentage to it Jeff, but honestly...
Speaker 3: There's a lot of things that she felt good about that was on order that we've already taken action. Making adjustments really, I would say...
There's a lot of things that she felt good about that was an order that we've already taken action.
Making adjustments really.
Our I would say.
Speaker 3: Diving in deeper into some of the brands that are stronger for us than what we had on order. That would be one area that I would say we think it's going to be.
Diving deeper into some of the brands that are stronger for us than what we had on order that would be one area that I would say, we think it's gonna be.
Michael Henry: I will now turn the call over to Mike to discuss our second quarter operating results in more detail and to introduce third quarter outlook. Thanks Ed. Our second quarter operating results compared to last year were as follows. Net sales were $160 million, the decrease of 5%. Net sales from physical stores decreased by 5.3% and represented 81.1% of total net sales compared to 81.5% last year. While e-commerce net sales decreased by 3.4% and represented 18.9% of total net sales compared to 18.5% last year.
Speaker 3: There are some trends that we were on, but again, adjusting the forecast going forward to maybe doing heavier receipts in areas where we think are going to be, where she thinks that we're going to be stronger.
There are some trends that are we went on but again adjusting.
Our forecast going forward, maybe doing heavy receipts.
In areas, where we think we're gonna be where she thinks that we're going to be stronger.
Okay fair enough.
Speaker 7: Okay, fair enough. And then just wanted to circle back to inventory for a second. If we assume kind of the midpoint of your Q3 guidance, where do you think that we would see inventory per foot be roughly at the end of Q3?
And then just wanted to circle back to inventory for a second if we assume kind of the midpoint of your Q3 guidance.
Word where do you think that we would see inventory per foot be roughly at the end of Q3.
Speaker 4: I think per foot it will be down to some extent. You know, as always, we do everything we can to try to manage inventory as tightly to the sales trends as possible. Q2 sales were down five, our unit inventory per square foot was down three, so pretty close there. And we're going to aim to keep that relationship as tight as we can.
I think per foot per foot it will be down to some extent.
Michael Henry: Comparable net sales including both physical stores and e-commerce decreased by 8.5%. We ended the second quarter with 246 total stores compared to 242 total stores last year. Gross margin including buying distribution and occupancy expenses was 27.7% of net sales compared to 30.9% of net sales last year. Buying distribution and occupancy costs due leveraged by 170 basis points and increased by $0.9 million collectively predominantly from occupancy cost as a result of operating additional stores and carrying these costs against a lower level of net sales this year.
As always.
We do everything we can to try to manage inventories tightly to the sales trends as possible.
Q2 sales were down five our unit inventory per square foot was down 3%, so pretty close there and we're going to aim to keep that relationship as tight as we can.
Speaker 7: Okay, good. And then just as far as the lease decisions, how far are we through those decisions for this year? And then I guess what are you seeing on renewals?
Okay. Good.
And then just as far as the lease decisions how far are we through those decisions for this year and then I guess what are you seeing on renewals.
Yeah.
Hmm.
Speaker 3: We're done for this year pretty much unless we see something unusual that's opportunistic. We have a pretty significant pipeline that we've been working on. And when we decide to accelerate the number of stores as part of our expansion, we're going to be in really good shape to be able to flip that switch pretty quickly.
We're done for this year pretty much unless we see something unusual that top of domestic we have a pretty significant pipeline that we've been working on and when we decide to accelerate.
Michael Henry: Product margins declined by 150 basis points compared to last year's second quarter primarily as a result of higher markdowns and estimated inventory valuation reserves but improved by 90 basis points sequentially from this year's first quarter. Total SGNA expenses were $47 million or 29.4% of net sales compared to $46.8 million or 27.8% of net sales last year. SGNA delivery has a percentage of net sales due to carrying these costs against lower total net sales.
The number of stores as part of our expansion, we're gonna be in really good shape to be able to turn that.
That switch pretty quickly.
Speaker 3: As far as renewals go, we're, you know, so far...
As far as we know it let's go where it all so far.
Speaker 3: So good, you know, the economics have been where we're, you know, we're happy with the economics we're seeing on renewals. And you know, we'll continue to really scrutinize that release renewal to make sure that the economics are what we think is going to have.
So good you know the economics have been where we're at what we're happy with what the economics were saying on Rhinos.
And you know, we'll continue to really scrutinize every lease renewal to make sure that the economics.
Michael Henry: The largest SGNA increases were from non-cash store impairment charges of $0.8 million and increased corporate payroll and benefits of $0.4 million primarily due to the impact of wage increases for employee retention. Partially offsetting these increases were a variety of smaller savings across several expense line items. Operating loss was $2.7 million or 1.7% of net sales compared to operating income of $5.2 million or $3.1% of net sales last year. Other income was $1.2 million compared to $0.2 million last year.
What we think is going to happen in the future.
Okay makes sense, thanks, very much I'll take the rest offline.
Speaker 7: Okay, makes sense. Thanks very much. I'll take the rest offline.
Alright, Thanks, Jeff.
This concludes the question and answer session I would like to turn the conference back over to Ed Thomas for any closing remarks.
Speaker 1: This concludes the question and answer session. I would like to turn the conference back over to Ed Thomas for any closing remarks.
Speaker 3: Thank you all for joining us on the call today. We look forward to sharing our third quarter results with you at the end of November . Have a great evening.
Thank you all for joining us.
On the call today, we look forward to sharing our third quarter results with you at the end of November have a great evening.
Michael Henry: Primarily due to earning higher rates of return on our marketable securities this year. Income tax benefit was $0.3 million or $23.2% of pre-tax loss compared to income tax expense of $1.5 million or $28.4% of pre-tax income last year. The decrease in income tax rate was primarily attributable to the low level of pre-tax loss and certain discrete tax impacts associated with stock-based compensation. Net loss was $1.1 million or $0.4% per share compared to net income of $3.8 million or $13 per diluted share last year and an improvement of $0.36 per share sequentially from our first quarter results.
Speaker 1: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yes.
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Michael Henry: Weighted average shares were $29.8 million this year compared to $0.2 million diluted shares last year. Turning to our balance sheet we ended the second quarter with total cash and marketable securities of $104 million and no debt outstanding compared to $116 million and no debt at the end of the second quarter last year. We ended the second quarter with inventories that cost up less than 1% per square foot and down 3% per square foot in the unit.
Michael Henry: Total capital expenditures for the first half were $6.3 million, compared to $6.9 million last year We currently expect our total capital expenditures for fiscal 2023 to be in the range of approximately $15 million to $17 million for the third quarter of fiscal 2023 to be in the range of approximately $166 million to $171 million, SGNA to be approximately $50 million, pre-tax loss to be in the range of approximately $1.8 million to $4.3 million, our estimated income tax rate to be approximately 26% and lost per share to be in the range of $0.5 to $0.11 based on estimated weighted average shares of approximately $29.8 million. We expect to have 249 total stores open at the end of the third quarter and the increase of two from 247 total stores at the end of last year's third quarter.
Operator: Operator will now go to our Q&A session. Thank you very much.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
Matthew Koranda: Today's first question comes from Matt Caronda with Roth MKM. Please go ahead. Hey guys, good afternoon. Thanks for the questions. I just wanted to see if I could get a bit more color on why the expected drop off in comps for the rest of the quarter. It just looks like a new set maybe we're expecting when need based buying goes away that we expect a bit of a drop off but recommend from Ron. I think comps got a bit easier last year when we think about September, October. Could you maybe just speak to the dynamics there?
Edmond Thomas: Sure, Matt. We're already seeing it. So we've been tracking performance before, during and after the back to school peak, depending on when various schools went back.
Edmond Thomas: And we've seen a consistent pattern that as soon as the peak of the back to school period is over, we are seeing the business slow down. You are right that the compares are easier in the final two months of the quarter, but we're still seeing that same deterioration, regardless of the fact that we're going up against easier compares. August was actually the toughest compare and we had our best months, so it's kind of counterintuitive from a purely comparable basis standpoint, but that is the pattern that we're seeing.
Edmond Thomas: So we were barely negative in the second week of August after having a minus 10 in the first week of August. Then we were plus three in the third week of August and then minus five in the final week of August. And we're down high single digits this week. So we're seeing it in the performance of the stores. And as we've heard other companies mentioned as well, it does appear to us that.
Edmond Thomas: The back-to-school shopping patterns were much closer in to need kind of a tighter peak. And then once that need period has concluded, and at this stage, over 90 percent of back-to-school was done. There's less than 20 stores that are currently in peak. The rest have already completed their key back-to-school peak periods.
Matthew Koranda: So that's just the dynamic that we're seeing in the results and we're contemplating that in our outlook. Okay. Fair enough.
Matthew Koranda: And then maybe just, could you talk about what's contemplated in the ticket-verse transaction within the Comp-Outlook? I mean, any changes there, maybe just less benefit from ticket on a year-rear basis, or anything to call out on that front relative to kind of what you experienced in 2Q. Our comp dynamics have been pretty consistent most of the year. It's been a decline in traffic and a decline in transactions period. The average transaction value has actually been slightly up, interestingly.
Matthew Koranda: So there's just fewer transactions occurring, but they are occurring at a similar or even slightly higher rate. Got it, and that's coming from AUR, is that coming from a bigger basket? It's a low single-digit change, so there's nothing dramatic to call out on I. Okay. Got it.
Michael Henry: And then just one other button for me on the gross margins. I know you don't explicitly put out a gross margin outlook, but you can back into an applied basis. And it just seems to look relatively flat in the 3rd quarter versus the 2nd, and I just noted that despite kind of the uptick in revenue, so just wondered if you could maybe speak to the dynamics on V&A and O-Cost, maybe Mike, or just more pressure on a March margin.
Michael Henry: What's the dynamic there? Sure. So it's, as it has been in recent quarters, it continues to be occupancy is the major part of delivery within the non-product cost of goods sold. We're starting the quarter with four more stores than last year's 3rd quarter, so dollars are added. We're going to end the 3rd quarter with two more stores than last year, and carrying those costs against what we're expecting to be a negative comp for the quarter.
Michael Henry: So it's kind of delivered. So, it's occupancy that causes most of it. We are anticipating product margins to be somewhat lower than last year's 3rd quarter, but against sequentially improved in 3rd quarter versus 2nd quarter, and 2nd quarter was improved sequentially from 1st quarter. So on the worst end of our outlook, it might be 100 basis points of product margin decline. It'll be less than 100 basis points on the better end.
Matthew Koranda: Okay, that's it. I'll leave it there. Thanks.
Mitchel Kummetz: The next question comes from Mitch Comets with Seaport. Please go ahead. Yes, thanks for thinking on the question.
Edmond Thomas: I could just talk a little bit about what was working for back to school for you guys. Sure, if there was no single brand category that was dominant for sure, we saw improvement from 1st quarter to 2nd quarter, pretty much across all categories being parallel footwear accessories. We saw improvement there. I would say the improvement continued into August and the boys and girls category. But I can't call out anything any single category of brand that drove it. It was across the board. And then if, do I hear you correctly, did you say that girls and footwear were positive top in the quarter? For the second quarter, yes, girls and footwear. That's correct.
Edmond Thomas: You just elaborate on that. I mean, that's pretty good strength compared to the rest of the business. What are you seeing within those segments? The girl's assortment was definitely improved over last year. So that drove that part of the business. Footwear is been pretty decent for us all year. And it's multiple brands that are driving that, you know, some Nike, some converse that's driving that business. Okay.
Edmond Thomas: And when you think about like the product pipeline going into holiday, how are you feeling about that? I feel really good about it. I mean, obviously with the new merchandising leadership coming in just a short while ago. They've made, they're making whatever changes they have been able to make. And I think they've done a really good job of editing. I think they go forward assortment based on what they feel is the right trends, but also opportunities that they've identified and looking at our business. So I think we're going to be in really, we'll have a really good assortment for all of this for sure. Okay.
Edmond Thomas: And then lastly, I know that on the last earnings call, you were anticipating some pretty heavy promotional activity in kind of seasonal category short swim sandals. I'm wondering how that played out how much of a drive that was on the product margin. And how were you situated with your seasonal inventory coming out of the quarter? I don't think it had a dramatic impact on one way or the other. The seasonal categories improved their performance in second quarter sequentially from first quarter and continued to be better in August.
Edmond Thomas: Generally speaking, then they were in in the second quarter. You'll remember how just terrible the start to the first quarter was, especially here in California with all of it, just a torrential rain that we had repetitively through February and March. So we did have a really slow start to the spring season. And we do have a little bit more spring spring summer merchandise right now than we did a year ago. But again, we're expecting third quarter product margins to be sequentially improved versus second quarter and for the decline versus last year to narrow in the third quarter than what it was in the second quarter and what it was in the first quarter.
Edmond Thomas: So we've contemplated everything that we think we need to contemplate to deal with anything that we need to deal with as we close out the spring summer season and get deeper into fall as the third quarter moves on. Yeah, we'll be just to add to that. We'll be in pretty good shape in terms of the quantity of inventory that we have in shorts and swim. And so on and so forth, because it helps that most of the country's been 100 degrees the last two weeks, but those negative trends in the seasonal categories really continued into August. First, which we anticipated early on when we made adjustments to inventory flow wherever we could. Okay.
Mitchel Kummetz: Great. Thanks, guys. Thank you.
Jeffrey Sinderen: The next question comes from Jeff van Sinderen with B. Riley. Please go ahead. Hi, everyone. And let me say congratulations on the improving trend. Maybe you can circle back to the CMO situation. Just wondering how much of the holiday assortment is actually going to be owned, so to speak, by the new CMO. I don't know how to put a percentage to a Jeff, but honestly, there's a lot of things that she felt good about that was on order that we've already taken action.
Jeffrey Sinderen: And making adjustments really, I would say diving in deeper into some of the brands that are stronger for us than what we had on order. That would be one area that I would say we think it's going to be there are some trends that we were on, but again, adjusting the forecast going forward to maybe doing heavier receipts. And areas where we think are going to be where she thinks that we're going to be stronger.
Jeffrey Sinderen: Okay, fair enough. And then just want to circle back to inventory for a second. If we assume kind of the midpoint of your Q3 guidance, where do you think that we would see inventory per foot, the roughly at the end of Q3. I think per foot, it will be down to some extent. As always, we do everything we can to try to manage inventory as tightly to the sales trends as possible.
Jeffrey Sinderen: Q2 sales were down five, our unit inventory per square foot was down three, so pretty close there. And we're going to aim to keep that relationship as tight as we can. Okay, good. And then just as far as the least decisions, how far are we through those decisions for this year? And then I guess what are you seeing our renewals? Um, we had done for this year pretty much, unless we see something unusual that's opportunistic, we have a pretty significant pipeline that we've been working on.
Jeffrey Sinderen: And when we decide to accelerate the number of stores as part of our expansion, we're going to be in really good shape to be able to turn that flip that switch pretty quickly. As far as renewals go, we're, you know, so far, so good, you know, the economics have been where we're happy with the economics we're seeing on renewals. And, you know, we'll continue to really scrutinize every lease renewal to make sure that the economics are what we think is going to happen in the future. Okay, make sense. Thanks very much. I'll pick the rest offline. All right. Thanks, chef.
Operator: This concludes the question and answer session.
Edmond Thomas: I would like to turn the conference back over to Ed Thomas for any closing remarks. Thank you all for joining us on the call today. We look forward to sharing our third quarter results with you at the end of November.
Operator: Have a great evening. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.