Q3 2024 Tilly's Inc Earnings Call
Good day and welcome to Tilly's third quarter 2023 results conference call all participants will be in a listen only mode.
Need assistance during todays conference. Please press Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you can press Star then one on your Touchtone phone to withdraw yourself in the question queue Press Star then two please.
Please also note this event is being recorded.
And I'd 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 third quarter earnings call, Ed Thomas President and CEO, and Michael Henry EVP, and CFO will discuss the company's results and then host a Q&A session.
For a copy of Kelly's earnings press release, please visit the Investor Relations section of the company's website at Chili's Dot com from the same section shortly after the conclusion of the call. You will also be able to find a recorded replay of this call for the next 30 days.
Certain forward looking statements will be made during this call that reflect tilly's judgment and analysis only as of today November 32023, 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 2023 third quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings with the SEC referenced in that.
Labor.
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.
Thanks, Scott Good afternoon, everyone and thank you for joining us today.
We continue to believe that inflation remains a significant headwind on discretionary spending for a young family.
Jean and pre teen demographic.
Despite what remains a challenging sales environment for us.
I am proud of our team's efforts towards protecting product margins managing inventory and controlling expenses.
Third quarter results represent a sequential improvement.
From a first and second quarter earnings results and exceeded our expectations, primarily due to achieving stronger product margins and lower operating lowering operating expenses more than we anticipated.
After starting the quarter with a negative 3.7% comp store sales decline in August amid the peak of the need driven back to school period.
Comp sales decelerated sequentially in the post back to school period cause negative double digits in each of September and October.
For the quarter, all geographic markets comp negative within a five point range with reduced customer traffic across all store formats compared to last year.
Total transaction volume was down high single digits while.
While the average transaction value was slightly higher than last year's third quarter.
From a merchandising perspective girls' apparel and footwear comped positive.
All other departments Comped negative during the third quarter.
While acknowledging that the environment remains challenging for our customer demographic.
We believe that we had some product content issues on our part that.
We are working.
As quickly as we can.
Graphic Tees has been an area of weakness for us within both men's and women's apparel.
We have been lacking sufficient fashion newness in women's overall within accessories are strong backpack business wasn't enough to overcome declines in other areas.
We believe we have identified certain opportunities to improve performance across departments. As we finished fiscal 2023 and look.
Into 2024.
In terms of store real estate.
We opened three new stores during the third quarter and an additional three stores just ahead of Thanksgiving.
We currently expect to close four stores near the end of the fiscal year upon natural lease exploration.
Well fiscal 2024, we anticipate we currently anticipate opening four new stores and have only one known store closure at this time.
We have nearly a 100 lease actions.
They can set up for fiscal 2024 affecting almost 40% hardware store.
Our portfolio.
Given where our current operating margins are we plan to be aggressive and exiting stores that are not acceptably.
Active under current conditions, our lease terms are.
Preliminary expectation for total fiscal 2020 for capital expenditures is approximately $15 million inclusive of new stores.
And ongoing distribution and technology enhancements.
Turning to the fourth quarter for fiscal 2023 total comparables.
Net sales, including both physical stores and E comm decreased by six 5% through November 28, 2023 with store comps down 13.6% well E comm was up 11% relative.
Relative to last year's comparable period.
The double digit negative comps, we saw in the post back to school period over the final seven weeks of the third quarter.
It continued into the first two weeks of the fourth quarter. However, the trend of our business began to improve during the final two weeks of fiscal November, including 2.6% comp sales growth for Black Friday weekend.
Five day period from Thanksgiving day through cyber Monday.
We believe this recent positive turn in our business was driven in part by a more aggressive promotional stance than.
And we have historically taken to this period.
Based on recent holiday's seasons, we expect that our comp sales may slow down again.
Again in the early part of December before improving trend wise in the final days leading into Christmas.
We are encouraged by the overall sequential improvement in our business trends over the last two quarters and are working diligently to.
To attempt to accelerate that improvement going forward.
And now I'll turn the call over to Mike to discuss our third quarter operating results and our fourth quarter outlook in more detail Mike.
Thanks, Ed our third quarter operating results compared to last year were as follows.
Net sales were $166 $5 million a decrease of six 4%.
Net sales from physical stores decreased by six 4% and represented 79, 6% of total net sales matching last year, while E Commerce net sales decreased by six 2%.
Represented 24% of total net sales can.
Comparable net sales, including both physical stores and ecommerce decreased by 9%.
We ended the third quarter with 249 total stores a net increase of two stores since the end of last year's third quarter.
Gross margin, including buying distribution and occupancy expenses was 29, 3% of net sales compared to 37% of net sales last year.
Buying distribution and occupancy costs deleveraged by 90 basis points on lower net sales, despite decreasing by $1 million collectively.
Reduced freight costs within distribution were partially offset by higher occupancy costs. As a result of two net additional stores compared to last year and increased common area maintenance expenses overall.
Product margins were just 50 basis points below last year and improved sequentially. This year by 80 basis points compared to the second quarter and by 170 basis points compared to the first quarter.
Total SG&A expenses were $51 $2 million or 38% of net sales compared to $48 $3 million or 27, 1% of net sales last year.
Primary increases in SG&A were attributable to noncash store asset impairment charges of $1 $7 million marketing expenses of $7 million and combined store and corporate payroll and related benefits expenses of $27 million.
Operating loss was $2 $5 million or one 5% of net sales compared to operating income of $6 $3 million or three 6% of net sales last year.
Other income was $1 $3 million compared to $7 million last year, primarily as a result of earning higher rates of return on our marketable securities. This year.
Income tax benefit was $3 million or 28.0% of pretax loss compared to income tax expense of $1 $8 million or 26, 3% of pretax income last year.
Net loss was <unk> $8 million or <unk> <unk> per share compared to net income of $5 $1 million or <unk> 17 per diluted share last year.
Average shares were $29 9 million this year compared to $30 million last year.
Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $94 million and no debt outstanding.
The $106 million and no debt outstanding last year.
We ended the third quarter with inventory at cost, 0.8% per square foot and unit inventory is down three 2% per square foot compared to last year.
Total year to date capital expenditures were $10 $5 million this year compared to $11 $9 million last year.
Turning to our outlook for the fourth quarter of fiscal 2023. Please note that this year's fourth quarter includes an extra week, making it a 14 week quarter compared to 13 weeks last year.
Based on our quarter to date comparable net sales results in current and historical trends. We currently anticipate our total net sales for the fourth quarter of fiscal 2023 to be in the range of approximately $172 million to $178 million.
Translating to an estimated comparable net sales decrease in the range of approximately 6% to 9%.
We expect our SG&A to be approximately $35 million to $56 million pre tax loss to be in the range of approximately $5 million to $8 million, our estimated income tax rate to be approximately 26%.
And loss per share to be in the range of 12 to 20 cents based on estimated weighted average diluted shares of approximately $29 9 million.
We currently expect to end fiscal 2023 with 248 total stores a net decrease of one Stewart from the end of fiscal 2022.
Operator, we'll now go to our Q&A session.
Thank you we will now begin the question and answer session if you'd like to join the question queue Press Star then one.
If you are using a speakerphone you may need to pick up your handset before pressing any kidney and if you want to remove yourself from the question queue you compress to Star then two.
And our first question comes from Jeff Van <unk> with B Riley. Please go ahead.
Hi, everyone and I know you mentioned some things that you're working on in terms of merchandise content and I guess I'm wondering now that your new CMO has been there for a little bit maybe you could just speak more about.
About the opportunities that you're seeing to improve merchandise content I know you mentioned graphic tees, but maybe theres other areas, where you feel like are you.
You know you've got more opportunity maybe concentration of various categories. Just any other color you can add there.
Hi, Jeff.
I would say the single biggest category, where we have opportunity.
Is on women's fashion tops and that was the content actually we have as good. We just didn't have enough. So I think one of the things that she that Laura has been working on is doing a better job of it was timing of the seasonality of certain goods.
But also shifting from categories.
At our underperforming like graphic Tees.
Which has been a very strong category for a long time into.
Into more fashion tops I Wouldnt say, there would be any drastic.
Okay. Good and then I know you mentioned a little bit higher promotional activity. This year around the Black Friday weekend and you were positive comps. So maybe you can just talk about.
Things around inventory, how you're positioned in inventory.
And the areas that are selling well in other words do you have enough of the stuff. That's moving well are moved well in black Friday weekend and.
Maybe you just touched on on the the planned promotional cadence this year versus last year for the remainder of Q4.
I would say the single biggest change we made from what we've done historically is we simplified.
Their promotions and 2% off as opposed to a lot of bogo.
We simplified that and that drove business across pretty much across positive business across all categories for a couple of days.
For sure and we Werent.
And as aggressive as what a lot of our parents were in terms of what that percentage was but it was different approach for us.
And it definitely simplified the buying process with our customers.
Okay inventory.
Inventories are in pretty good shape.
Jeff.
Yeah overall, our inventory age is better than it was at this time a year ago. So.
So feel good about our level of inventory and content of that inventory as we sit here right now.
And then you also asked about Q4 promo cadence and so we have various planned promotions on the biggest days of the season coming up.
Big weekend days that are that are in between here and Christmas that it would be fairly consistent with what we've done traditionally.
Okay are you shifting those are doing more of the percentage off versus the bogo since those worked on Black Friday weekend.
Yeah.
It's mixed Jeff the mix, Okay, Okay fair enough I'll, let someone else jump in and I'll take the rest offline. Thank you.
Okay. Thank you.
Yeah.
The next question comes from Matt Koranda with Roth MKS. Please go ahead.
Hey, guys, it's Mike <unk> on for Matt.
Could you just talk a little bit more about the divergence between quarter to date store comps versus the e-commerce comp.
Jim more promotions through the websites translating to better performance relative to stores, but just any other dynamics to call out here.
Yeah.
Nothing specific.
To point to it's it's.
Covid and kind of surprising to us quite honestly to see that kind of divergence between stores and E. Comm, we normally don't see that wide of a.
The gap.
So honestly im not sure if it's just customer convenience at this early stage of the holiday season of peace.
People deciding to shop online as opposed to physically going to stores.
It's been a surprising.
Divergence there is a little higher level of promotions online.
Then in stores, because we do tend to clear a lot of our <unk>.
In the end of life, our Red tag goods on online.
So there is.
There is pretty consistently a higher level of promos online and in stores generally, but that's the case all year long usually yeah, that's pretty typical.
There's clearly been a.
Challenging physic.
Physical store traffic.
There and part of I think it's been more convenience oriented than not and we are right now.
Full assortment in every store and online so.
The choice choices were very similar I think it was probably customer choice of what channel they want to shop.
Yeah.
Got it it makes sense I guess on the health of inventory any guideposts or just what are we looking to see to get inventory growth back in line with comps.
Okay.
Yes, it's not too far off now I mean, we ended the quarter on a unit basis down 3% unchanged versus the minus 6% comp. So it's not too far apart as we speak and as I mentioned earlier to Jeff's question. The inventories more current right now than it was at this time last year or so.
We always endeavor to get inventory comp is close to sales comp as we can and if we're going to have a negative comp fourth quarter as indicated by our outlook. We would expect to end the year with inventories down.
Okay.
Yes.
Got it makes sense last one from me for fiscal 'twenty. Four can you just help us understand a little bit more what's behind the lower store outlook for <unk>, just seems a little bit behind normal cadence does that represent a more cautious view you might have on the consumer is it more macro.
Or is it more so around the 100 or so lease actions that you referenced earlier in the call.
It's totally driven by what we are we're being cautious.
Because of the uncertainty of what the consumer environment is being gotta be.
We have several stores.
Yeah.
And the pipeline that are targeted for expansion for us.
Being negotiated and when we decide that there's more consistency in the environment out there well be in a good position to accelerate that growth when that time comes.
Makes sense, that's all for me guys. Thanks.
Thank you.
The next question.
Question comes from Marni Shapiro with the retail tracker. Please go ahead.
Betty.
I had a couple of questions I did well enough.
Follow up on the conversation.
You were just having first on the promotions over the holiday season, you moved to more percent off I thought it was by the way of really effective in the stores. It caught my eye and I worried about it and have pictures about it I'm curious if you saw a difference do people buy fewer units or were they the same number of units go out the door and it just made it easier for people to shop.
It was lower units and the average transaction value ended up lower so.
We do get feedback from our store teams and district managers that.
It was well received by customers generally because it is so much easier to think about and manage then.
Bogost throughout throughout the assortment so it seemed to get a good response.
In terms of how the customers viewed it but it did end up eroding our transaction value and units per transaction.
That makes sense I, but I always think that shoppers don't like to do math when theyre in the store. So if you come into that.
He's here for pin it always helps.
Is there a difference in what they are buying because I find when I'm on your site. It's your fashion content on the women's side, even in women's tops, which you had reference is really kind of good and then you have things like the crop puffer vest and things like that which are.
Online is all this stuff is really easy to get to and find and I find in your stores and probably alluding to you know some of the issues coming on in the stores, it's not always easy to find those items and she has to do a little bit of work to find them. So I'm curious if you're seeing more fashion go out the door online than in stores or if that might be driving more.
What's going on online versus in stores.
No actually it's been a star in the women's side, though so as everybody can definitely better than online.
But it's improved because we've made some.
Very targeted changes to our improving how we merchandise online they're not done yet, but certainly we've made and we've seen positive results as a result of that.
But I really think it was just a matter of where the customer chose to shop.
As opposed to the particular visual merchandising.
Or the assortment because it's just been in the month of November that we've seen this divergence.
When you look back at the third quarter stores and E. Comm comps were within 1% of each other so we have very consistent performance between stores and E. Comm throughout the third quarter and then suddenly we get to November and this diversions.
Merged in and it was a little surprising to us honestly.
Yeah, that's definitely always change.
And then I'm just also curious you know some of the pressure that you've seen especially on the junior side, but even just over all the junior side has had some good sell throughs.
Are you seeing better sales coming out of your own brand purses.
Are there other brands because you're.
Especially on the junior side I I think your fashion on your own brands has been pretty good like really good and so I'm. Just curious if your April are there kind of gaps in the market with branded goods St. We're able to make up with your own brand and it is that outpacing what you're you know what the market that they're doing.
Yes.
Our best brand continues to be rescue our own brand right.
And it crosses over them multiple categories. That's good.
And that's intentionally developed and designed to.
Fill in where we think they're avoids from what the brands have offered us what we're able to secure from outside our brands.
So it's always a balancing act.
There's never any one point in time, where it's it stays the same forever.
That never changes.
And you know.
I think we have a pretty experienced.
Team.
The women side.
They've been around for a while and they know the market well they just accordingly.
Alright. Thank you so much best of luck for holiday then.
Thank you. Thank you.
Okay.
The next question comes from Nick <unk> with Seaport Research. Please go ahead.
Yes, Thanks for taking my questions Hey, Ed on your assortment you mentioned.
Women's fashion tops doing well, but you don't have enough graphic tees being a week like how quickly can you adjust and if so why is that potentially.
Once you get that sorted out.
We can adjust pretty quickly in almost every category I mean bottoms and shoes.
Lead times are a lot longer than apparel and so but the you know where we saw the opportunity was really again in tops, where we then adjust on the fly and.
We think that you know we think we've made a lot of.
Changes.
That will positively impact the business in the categories, where we felt we were maybe under represented.
Any concerns on graphic Tees in terms of that inventory, that's been weak that that might require some more markdowns or.
Any issues there.
Not really I mean, I think that we shifted our focus on some of the types of licenses that we went after.
We will in all of these categories like music and sports.
And.
We just we didn't probably didn't move quick enough to get into some of these fresh categories because the graphics business had been so so positive for us for so long.
We were somewhat surprised at some of the changes, but we can adjust we will adjust and I don't there's no real markdown liability there.
Okay and then on.
On footwear.
Positive comp in the quarter.
What's driving that is there just better trend in footwear now or is it more about product availability I know that some of the vendors there.
<unk> supply chain issue that I know that's been kind of cleared up so it's just that you have.
Better inventory or are you seeing better trend there as well.
I think it tomorrow availability of.
Certain brands like Nike.
And Reebok.
We've seen yeah, no balance we've seen.
Brought in a couple of new brands.
Which is not a major part of the assortment and certainly no to us.
Recently, new to US and then brands that we've carried for a long time like Nike we saw improvement in the.
Inventory.
We all ability.
And then lastly, Mike on the product margin I think you said it was down 50 bps in the quarter. How are you thinking about that for Q4.
Wheel, if we're at the better end of our outlook, we would actually expect our product margins to be slightly up.
We're at the bottom end of our range, we might be slightly down not much different than what we just saw in the third quarter at this time based on what we currently know.
Yeah.
Alright, Thanks, guys. Good luck.
Thank you.
This will conclude our question and answer session I'll turn the conference back over to Thomas for any closing remarks.
Thank you all for joining us on the call today, we look forward to sharing our fourth quarter results with you in mid March 2024 have a good evening everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.