Q1 2025 Tilly's Inc Earnings Call

Good day and welcome to the Tilly's, Inc. First quarter 'twenty 'twenty four earnings call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

Operator: Good day, and welcome to the Tillys Inc. first quarter 2024 earnings call. All participants will be in a 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. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Gar Jackson, IR. Please go ahead.

After todays presentation, there will be an opportunity to ask questions.

Speaker Change: To ask a question you May press Star then one on a touchtone phone.

Speaker Change: To withdraw your question. Please press Star then two please.

Please note this event is being recorded.

Speaker Change: I would now like to turn the conference over to Mr. Gar Jackson I R. Please go ahead.

Speaker Change: Good afternoon, and welcome to the Tilly's fiscal 2024 first quarter earnings call, Michael Henry Executive Vice President and Chief Financial Officer will discuss the company's business and operating results and then he and how does he see CAD executive Chairman and interim President and Chief Executive Officer will host a Q&A session for a copy of Tilly's earnings press release, please visit the.

Gar Jackson: Good afternoon, and welcome to the Tillys Fiscal 2024 First Quarter Earnings Call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results. Then he and Hezy Shaked, Executive Chairman and Interim President and Chief Executive Officer, will host a Q&A session.

Gar Jackson: For a copy of Tillys' earnings press 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'll 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 Tillys' judgment and analysis only as of today, June 6, 2024, and actual results may differ materially from current expectations based on various factors affecting Tillys' business.

Michael L. Henry: The Investor Relations section of the company's web site until he's dot com.

Speaker Change: I'm the same section shortly after the conclusion of the call you will also be able to find a recorded.

Speaker Change: 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 June six 2024, and actual results may differ materially from current expectations based on various factors affecting tilly's business occur.

Gar Jackson: 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. It is included in our fiscal 2024 first quarter earnings release, which is furnished to the SEC today on Form 8K, as well as our other filings with the SEC referenced in that disclaimer. This call may also contain certain references to certain non-GAAP measures.

Tilly: 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 'twenty 'twenty four our first quarter earnings release, which was furnished to the SEC today on form 8-K, as well as our other filings with the SEC.

Speaker Change: He referenced in that disclaimer. This call may also contain certain references to certain non-GAAP measures reconciliations of those measures to their most directly comparable corresponding GAAP measure can be found in our earnings press release on our website today's call will be limited to one hour and will include a Q&A session. After our prepared remarks I will now turn the.

Gar Jackson: Reconciliations of those measures to the most directly comparable corresponding GAAP measure can be found in our earnings press release on our website. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Mike.

Mike: Call over to Mike.

Thanks, Gar good afternoon, everyone and thank you for joining us today.

Michael L. Henry: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our first quarter net sales and pre-tax operating results were both within our estimated outlook ranges provided during our March earnings call. After a tough start to the first quarter, our comp sales results remained negative each month but improved on a relative basis in both March and April. With March being the stronger month, the two benefiting from the earlier Easter this year, Like certain others in our competitive space, we continue to face headwinds from the macro consumer environment, yet we are able to generate 130 basis points of product margin improvement relative to last year's first quarter, despite our decline in net sales.

Mike: Our first quarter net sales and pre tax operating results were both within our estimated outlook ranges provided during our March earnings call.

Mike: After a tough start to the first quarter, our comp sales results remained negative each month, but improved on a relative basis in both March and April with March being the stronger of the two benefiting from the earlier Easter this year.

Speaker Change: Like certain others in our competitive space, we continue to face headwinds from macro consumer environment, yet we were able to generate 130 basis points of product margin improvement relative to last year's first quarter. Despite our decline in net sales.

Speaker Change: As we discussed during our last earnings call. We've been challenging every aspect of our business as we work toward improving our operating results.

Michael L. Henry: As we discussed during our last earnings call, we have been challenging every aspect of our business as we work toward improving our operating results. For example, we continue to evaluate initial pricing decisions to better align ourselves with our competition in certain product categories.

Speaker Change: For example, we continue to evaluate internal initial pricing decisions to better align ourselves with the competition in certain product categories.

Michael L. Henry: We have reconsidered certain of our promotional pricing and markdown practices to drive improved average unit retail values. We believe that we are beginning to see the impact of these efforts based on the improvement in our first quarter product margins compared to last year's first quarter. However, while we believe our efforts have the right focus to lead us toward making more meaningful improvements over the longer term, in light of the current environment, we caution that there can be no guarantee that we can continue to produce this kind of improvement in the short term. From a marketing perspective, we have been testing new ideas to focus on creating greater connectivity with our existing customer base and to attract new customers.

Speaker Change: Have reconsidered certain of our promotional pricing and markdown practices to drive improved average unit retail values.

Speaker Change: We believe that we are beginning to see the impact of these efforts based on the improvement in our first quarter product margins compared to last year's first quarter.

Speaker Change: However, while we believe our efforts have the right focus to lead us toward making more meaningful improvements over the longer term in light of the current environment. We cautioned that there can be no guarantee that we can continue to produce this kind of improvement in the short term.

Speaker Change: From a marketing perspective, we've been testing new ideas to focus on creating greater connectivity with our existing customer base and to attract new customers.

Michael L. Henry: We believe these new efforts give us a chance to build a greater customer following and generate a positive business impact over time. We believe it may take six to nine months before we are able to truly see and understand how these new efforts are impacting our business, but we believe they are the right steps to help us improve over the longer term. Despite short-term challenges, we continue to invest in our business for the long term.

Speaker Change: We believe these new efforts give us a chance to build greater customer following and generate a positive business impact over time.

Speaker Change: We believe that it may take six to nine months before we were able to truly see and understand how these new efforts are impacting our business, but we believe they are the right efforts to help us improve over the longer term.

Speaker Change: Despite short term challenges, we continue to invest in our business for the longer term.

Michael L. Henry: We implemented a new merchandise planning and allocation tool in early April, followed by the implementation of our new warehouse management software for our Stores Distribution Center in early May. We experienced some complications in the immediate aftermath of these implementations that slowed product replenishment to stores during May, but we believe we are now starting to get back to a normal level of distribution productivity for our stores. We plan to complete the implementation of this same warehouse management software in our e-com distribution center this month.

Speaker Change: We implemented a new merchandise planning and allocation tool in early April.

All of it by the implementation of our new warehouse management software for our stores distribution center in early May.

Speaker Change: We experienced some complications in the immediate aftermath of these implementations that slowed product replenishment to stores during may but we believe we are now starting to get back towards the normal level of distribution productivity for our stores.

Speaker Change: We plan to complete the implementation of the same warehouse management software in our E Comm distribution center this month.

Speaker Change: Additionally, we plan to implement new markdown optimization software and improved search engine optimization capabilities.

Michael L. Henry: Additionally, we plan to implement new markdown optimization software and improve search engine optimization capabilities ahead of the holiday season. We believe these new tools are important to help generate greater operational efficiencies and improve our business over time. Over the short term, we continue to believe it will be challenging for us to improve our sales results amid the reported weakening consumer environment. It will likely take time for this cycle to pass before we see a bounceback in consumer activity among our core customer demographic.

Speaker Change: Today season.

Speaker Change: We believe these new tools are important to help generate greater operational efficiencies and improve our business over time.

Speaker Change: Over the short term, we continue to believe it will be challenging for us to improve our sales results in mid two reported weakening consumer environment.

Speaker Change: It will likely take time for this cycle to pass before we see a bounce back in consumer activity among our core customer demographic.

Michael L. Henry: In the meantime, we continue to make every effort to seek improvements in our business and make changes that we believe can lead to better results. Our focus remains steadfast on improving our business for the long term.

Speaker Change: In the meantime, we continue to make every effort to seek improvements in our business and make changes that we believe can lead to better results.

Speaker Change: Our focus remains steadfast on improving our business for the long term.

Speaker Change: Now turning to our operating results for the first quarter of fiscal 2024 compared to last year's first quarter results were as follows.

Michael L. Henry: Now turning to our operating results for the first quarter of fiscal 2024, compared to last year's first quarter, results were as follows. Total net sales were $115.9 million, a decrease of 6.3%. Total comparable net sales, including e-commerce, decreased by 9.4%, with an 8.6% decrease from physical stores and a 10.8% decrease from e-commerce relative to the comparable 13-week period last year. Net sales from physical stores represented 80.1% of total net sales compared to 79.1% last year, while e-commerce net sales represented 19.9% of total net sales compared to 20.9% last year. We ended the first quarter with 246 total stores, a net decrease of two stores compared to last year. Source margin, including buying, distribution, and occupancy expenses, was flat to last year at 21% of net sales.

Speaker Change: Total net sales were $115 $9 million a decrease of six 3%.

Michael L. Henry: Product margins improved by 130 basis points compared to last year, primarily due to the combination of a lower total markdown rate and improved initial markups. However, this improvement was offset by the leverage of buying, distribution, and occupancy costs, despite these costs being $800,000 below last year in the aggregate due to carrying these costs against lower total net sales. Total SG&A expenses were $45.1 million, an increase of $1.9 million, primarily due to increased non-cash store asset impairment charges of $1.5 million, and an increased store payroll and related benefits costs of $1 million. Our average hourly rate for store payroll rose 5% over last year and was 31% higher than in pre-pandemic 2019.

Michael L. Henry: A variety of smaller expense reductions partially offset these two primary expense increases. SG&A de-leveraged by 400 basis points as a result of carrying these costs against lower total net sales. Pre-tax loss was $19.6 million or 16.9% of net sales compared to $16.2 million or 13.1% of net sales last year as a result of the combined factors just noted. The income tax benefit was negligible at $13,000, essentially a zero tax rate, due to the continuing impact of a full non-cash deferred tax asset valuation allowance.

Speaker Change: Comparable net sales, including e-commerce decreased by nine 4% with an eight 6% decrease from physical stores and a 10, 8% decrease from e-commerce relative to the comparable 13 week period last year.

Speaker Change: Net sales from physical stores represented 81% of total net sales compared to 79, 1% last year.

Speaker Change: E Commerce net sales represented 19, 9% of total net sales compared to 29% last year.

Speaker Change: We ended the first quarter with 246 total stores.

Speaker Change: Decrease of two stores compared to last year.

Speaker Change: Gross margin, including buying distribution and occupancy expenses was flat to last year at 21% of net sales.

Speaker Change: Product margins improved by 130 basis points compared to last year, primarily due to the combination of the lower total markdown rate and improved initial markups.

Speaker Change: This improvement was offset by deleverage of buying distribution and occupancy costs. Despite these costs being $800000 below last year in the aggregate due to carrying these costs against lower total net sales.

Speaker Change: Total SG&A expenses were $45 $1 million, an increase of $1 $9 million, primarily due to increased noncash store asset impairment charges of $1.5 million.

Speaker Change: And increased store payroll and related benefits cost a $1 million.

Speaker Change: Our average hourly rate per store payroll rose, 5% over last year and was 31% higher than pre pandemic 2019.

A variety of smaller expense reductions, partially offset these two primary expense increases.

Speaker Change: SG&A Deleveraged by 400 basis points as a result of carrying these costs against lower total net sales.

Speaker Change: Pre tax loss was $19 $6 million or 16, 9% of net sales compared to $16 $2 million or 13, 1% of net sales last year as a result of the combined factors just noted.

Speaker Change: Income tax benefit was negligible at $13000 essentially a zero tax rate due to the continuing impact of a full noncash deferred tax asset valuation allowance.

Michael L. Henry: This compares to an income tax benefit of $4.2 million, or 26.1% of pre-tax loss last year. On a non-GAAP basis, in the absence of the valuation allowance, our income tax benefit would otherwise have been approximately $5.2 million.

This compares to income tax benefit of $4 $2 million or 26, 1% of pretax loss last year.

Speaker Change: On a non-GAAP basis in the absence of the valuation allowance our income tax benefit what otherwise had been approximately $5 $2 million.

Speaker Change: Net loss was $19 $6 million or 65 cents per share compared to $12 million or <unk> 40 per share last year.

Michael L. Henry: The net loss was $19.6 million, or $0.65 per share, compared to $12 million, or $0.40 per share, last year. On a non-GAAP basis, assuming a normalized effective income tax rate of 26.3% in the absence of a valuation allowance, the net loss would have been $14.5 million, or $0.48 per share, the exact middle of our original outlook range for the first quarter. Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $68 million and no debt outstanding under our $65 million asset-backed credit facility, compared to $93 million and no debt at the end of the first quarter last year. Total inventories were up 1.8% at the end of the first quarter this year compared to the end of the first quarter last year.

On a non-GAAP basis, assuming a normalized effective income tax rate of 26, 3% in the absence of the valuation allowance.

Speaker Change: Net loss would have been $14 $5 million of about 48 cents per share.

Speaker Change: The middle of our original outlook range for the first quarter.

Speaker Change: Turning to our balance sheet. We ended the first quarter with total cash and marketable securities of $68 million and no debt outstanding under our $65 million asset backed credit facility compared to $93 million and no debt at the end of the first quarter last year.

Speaker Change: Total inventories were up one 8% at the end of the first quarter this year compared to the end of the first quarter last year.

Speaker Change: We entered this week with total inventories down 3% versus the comparable week last year.

Michael L. Henry: We entered this week with total inventories down 3% versus the comparable week last year. Turning to our outlook for the second quarter of fiscal 2024, all comparable net sales for fiscal May ended June 1, 2024, decreased by 8.4% relative to the comparable four-week period last year. Based on current and historical trends, we currently estimate that our total net sales for the second quarter of fiscal 2024 will be in the range of approximately $160 million to $165 million, translating to a comparable net sales decline of the range of approximately 10% to 7%, respectively, for the comparable 13-week period last year.

Speaker Change: Turning to our outlook for the second quarter of fiscal 'twenty 'twenty four comparable net sales for fiscal May ended June one 2024 decreased by eight 4% relative to the comparable four week period last year.

Speaker Change: Based on current and historical trends.

Speaker Change: Currently estimate that our total net sales for the second quarter of fiscal 'twenty 'twenty four will be in the range of approximately $160 million to $165 million.

Speaker Change: Leading to a comparable net sales decline in the range of approximately 10% to 7% respectively for the comparable 13 week period last year.

Michael L. Henry: We expect our SG&A to be in the range of approximately $48 million to $49 million in the absence of any non-cash store asset impairment charges, and our effective income tax rate to be near zero due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets. We estimate our after-tax results to be in the range of a net loss of approximately $3.9 million to $0.9 million, respectively, and per-share results to be in the range of a net loss of $0.13 to $0.03, respectively.

Speaker Change: We expect our SG&A to be in the range of approximately $48 million to $49 million in the absence of any noncash store asset impairment charges.

Speaker Change: The income tax rate to be near zero due to the continuing impact of a full noncash valuation allowance on our deferred tax assets.

Speaker Change: We estimate our after tax results to be in the range of a net loss of approximately $3 $9 million zero point $9 million, respectively and per share results to be in the range of a net loss of 13 cents to three cents respectively.

Michael L. Henry: We currently expect to have 247 total stores at the end of the second quarter compared to 246 at the end of last year's second quarter. One additional note, while we are not providing any specific outlook for the third quarter today, it should be noted, as I mentioned during our last earnings call, that due to the impact of the 53rd week in fiscal 2023, there will be a meaningful shift in net sales into the second quarter from the third quarter when compared to last year.

We currently expect to have 247 total stores at the end of the second quarter compared to 246 at the end of last year's second quarter.

Speaker Change: One additional note, while we're not providing any specific outlook for the third quarter today. It should be noted as I mentioned during our last earnings call that due to the impact of the 53rd week in fiscal 2023, there will be a meaningful shift in net sales into the second quarter from the third quarter when comparing to last year.

Michael L. Henry: Using last year's weekly net sales results, what was a $26.2 million back-to-school net sales week for the first week of last year's third quarter will now become the comparable week for the final week of this year's second quarter. The first week of last year's fourth quarter, which was a $7.8 million net sales week, becomes the final comparable week of the third quarter this year, creating a $18.4 million net sales decline for the third quarter this year relative to last year's third quarter before consideration of any comp sales assumptions.

Speaker Change: Using last year's weekly net sales results, what was a $26 $2 million back to school net sales week for the first week of last year's third quarter will now become the comparable week for the final week of this year's second quarter.

Speaker Change: The first week of last year's fourth quarter, which was a $7 $8 million net sales week becomes the final comparable week of the third quarter. This year.

Speaker Change: Creating a $18 $4 million net sales decline for the third quarter of this year relative to last year's third quarter before consideration of any comp sales assumption.

Operator: Operator, we'll now go to our Q&A session. Thank you. We will now begin the question and answer session.

Speaker Change: Operator, well now go to our Q&A session.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. The first question comes from Marni Shapiro with the Retail Tracker. Please go ahead.

Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Marni Shapiro: but I'm curious if you were able to impact a more significant percentage of the inventory for the back half of the year and what this could look like. I'm not standing on my head, but just trying to see where this is going.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from Marni Shapiro with the retail tracker. Please go ahead hey.

Marni Shapiro: Guys. Thanks for taking my question I'm curious I know sales are going to be challenged and you've had some issues with the distribution centers in this quarter, but if somebody who spent a lot of time in your stores. There are definitely some noticeable changes and find that start, particularly on the junior side and I'm curious if you are seeing any green shoots at this point.

And you know how it because what I'm seeing is it selling quickly it's very on trend. It is a small part of the inventory, but I'm curious if you were able to impact them more significant percentage of the inventory for the back half of the year and what this can look like.

Speaker Change: I am not getting ahead of myself, but just trying to see where this is going.

Hezy Shaked: It's fine. Short of telling you exactly what's going on, I'll try to address that. So, what you're seeing is part of the initiatives that we started back in the beginning of February. It's going to get more and more meaningful, obviously, as some of the decisions have already been filtered in. I can tell you that we see positive signs. But we cannot extend too much on them because we don't want to get ahead of ourselves. Overall, you see more and more of the right trend in our inventory.

Speaker Change: Science short of telling you exactly what's going on I try to address that so [laughter].

Speaker Change: What you're seeing is part of the initiatives that started back in the beginning of February.

Speaker Change: He's going to get more and more meaningful obviously is some of the decisions have already been 13.

Speaker Change: I can tell you that we see are positive signs.

Speaker Change: But you cannot extend too much on it because we don't want to get.

Ahead of ourself.

Speaker Change: Overall, you can see more and more of the right trend and our inventory.

Speaker Change: Yeah.

Marni Shapiro: Thank you. I mean, it feels great.

Speaker Change: Thank you I mean, it feels it feels great and we just also talk about as things begin to improve.

Hezy Shaked: And can we also talk about as things begin to improve, because you guys have a long history with your customers. When they're in the fold, they're very loyal to you. How are you thinking about bringing in last shoppers, or more importantly, bringing in younger shoppers? Will you start to drive marketing as things improve, or kind of hold back until? until you can drive traffic to something that you feel really proud of? Is that how we should think about marketing?

Speaker Change: Because you guys have a long history of customer when they're in the phone they're very loyal to you.

Speaker Change: How are you thinking about sort of bringing in lapsed shoppers are more importantly, bringing in younger shoppers have you. When do you start to drive marketing as things improve you know kind of hold back until.

Speaker Change: Until you can drive traffic into something that you feel really proud of is that how we should think about marketing.

Speaker Change: No not at all.

Hezy Shaked: We started a new campaign, the way we believe we should be presenting ourselves, a couple of months ago. As we go, it's going to be more and more meaningful, and more and more things will be seen in the public. You know, we are still at the exploration stage of exactly what the age of our customer is, what the age of the customer we want to have is. Remember, we started all this process in February, and we're in June now. So we're getting toward the end of figuring out what we need to do, and we start implementing a lot of things. But you'll see the results in the third and fourth quarters.

Speaker Change: We started our.

Speaker Change: Our new campaign the way, we believe we should be presenting ourself.

Speaker Change: A couple of months ago, as we grow it's going to be more and more meaningful and more and more.

Speaker Change: I think that would be seen in the public.

Speaker Change: You know we are in the exploration stage of exactly what is the age of aircraft from air.

Speaker Change: What the age of the customer we want to have ease.

Speaker Change: Remember we started all these process February mhm in June now so we're getting towards the end of a figure out to what we need to do and we started implementing a lot of it.

Speaker Change: You'll see the results third and fourth quarter.

Marni Shapiro: Fantastic. I'm telling you, the front of your stores already looks so much better. The merchandise is turning so fast. I wish I could just, you know, bring it in myself. It looks great, so best of luck, guys.

Speaker Change: Fantastic I I'm, telling you the funding your stores already looks so much better the merchandise is turning so fast I wish I could just you know bring it in myself it looks great. So best of luck guys.

Hezy Shaked: You actually, I don't know how you know that, but you're absolutely spot on. We have increased several categories, and we're chasing it constantly.

Speaker Change: You actually I don't know, how you know that but you have some of these spot on.

Speaker Change: We increased several categories and we were chasing it consequently, yeah it looks fantastic.

Marni Shapiro: Yeah, it looks fantastic. Thank you. Thank you. Thank you.

Operator: Thank you.

Speaker Change: Thank you. Thank you.

Speaker Change: Thanks morning.

Speaker Change: Yeah.

Speaker Change: The next question comes from Jeff Van <unk> with B Riley FBR. Please go ahead.

Operator: The next question comes from Jeff Van Sinderen with B. Reilly, F.B.R. Please go ahead.

Speaker Change: Yeah.

Jeffrey Wallin Van Sinderen: Hi everyone. So I guess my first question, just to follow up on the line of thinking on merchandise and performance there, I don't know if you gave or spoke to the relative performance of the guy's side of the business versus the girl's side of the business, men's and women's. Any color you can add there? Just wondering what kind of relative performance between the two genders.

Speaker Change: Oh, hi, everyone. So I guess my first question just to follow up on a lot of thinking on on merchandise and performance there.

Speaker Change: I don't know if you gave the relative or spoke to the relative performance of the guy that side of the business versus the girls side of the business mens and womens.

Speaker Change: And is there any color you can add there just wondering kind of relative performance between the two genders.

Hezy Shaked: Yeah, I can give you a little bit. So one of the questions that we face, right, is what is the balance between man and woman, male and female, what it is today, and what it is we want to have. I think we're in the right spot right now, so the balance we have today, which I'm not going to quote exactly how much it is, is where we're going to go forward for the remainder of the year.

Speaker Change: Yeah.

Speaker Change: Give you a little bit.

Speaker Change:

Speaker Change: So one of the question that are we face right is what is the balance between men and women male and female.

Speaker Change: What it is today what it is we want to have.

Speaker Change: I think we're in the right spots right now so.

Speaker Change: The balance we have today, which are not going to quote exactly how much DS.

Speaker Change: Is where are we going to go forward for the.

Speaker Change: Remainder of the year.

Hezy Shaked: There's always a discussion internally, you know, do you lead with men, do you lead with women? Obviously, there are many different opinions. I believe that we lead with men, and my line is always the same, that guys don't shop in girls' stores, but girls will shop in guys' stores. Now, granted, in the last five years, it's changing a little bit. But this is where our head is.

There's always a discussion internally you know do you lead with Mandy live with ladies.

Speaker Change: Obviously, there's many different opinions I believe that we lead with men's and you know my my My line is always the same.

Speaker Change: Good guys going shopping girls store, but girls from shopping guys store now granted in the last five years, it's changing a little bit.

Speaker Change: But this is where our hedges.

Speaker Change: Okay.

Jeffrey Wallin Van Sinderen: And then, any update you can give us on the plans for the CEO search, where that stands, and then any changes to the merchant team?

Speaker Change: And then any update you can give us on the plans for the CEO search where that stands and then any changes to the merchant team.

Speaker Change: Yeah, No change this a plan in either our positions.

Hezy Shaked: No changes are planned for either position.

Jeffrey Wallin Van Sinderen: Okay, and there's one more if I could squeeze it in, and I was just wondering where you stand on lease negotiations for 2024 and how many stores you might end up closing this year.

Speaker Change: Okay, and then one more if I could squeeze it in just wondering where you stand on lease negotiations for 2024, and how many stores you might end up closing this year.

Speaker Change: Yeah.

Hezy Shaked: I don't think we have an update that we can give you right now. As you know, we are both renegotiating leases and hoping to shut down any...uh, losing locations. We don't have a lot of them, but we still have some. There's no update on that yet.

Speaker Change: I don't think we haven't updated if he can give you right now.

Speaker Change: As you know, we booked renegotiating leases and hoping to shut down any.

Speaker Change: Losing locations, we don't have a lot of them, but we still have some.

Speaker Change: There's no update on that yet.

Jeffrey Wallin Van Sinderen: Okay, thank you for taking my questions. Jeff, it's hard to pin down to a specific number when we have so much still in play to negotiate, but what I can tell you at the moment is we have two remaining new stores to open, one in July and one in mid-November, and then we have four to five known store closures at this point that'll happen towards the end of the year. But those numbers can change, obviously, as a result of, you know, we have dozens Okay.

Okay, Yeah, Jonathan it's hard to Jeff.

Jeffrey Wallin Van Sinderen: Okay, and I'm sorry, the total that you still have to deal with is roughly what?

Speaker Change: Jeff it's hard to pin down to a specific number when we have so much still in play to.

Jonathan: To negotiate but what I can tell you at the moment is we have two remaining a new stores to open one in July one in mid November and then we have four to five known store closures at this point that will happen towards the end of the year.

Jonathan: But those numbers can change obviously as a result of you know we have dozens and dozens of leases left to deal with for this year. So that's the best we can tell you at this moment.

Speaker Change: Okay, and I'm sorry, the total that you still have to deal with is roughly what.

Speaker Change: I don't have a specific number in front of me.

Hezy Shaked: I don't have a specific number in front of me. OK.

Speaker Change: Okay, alright, thanks for taking my questions.

Jeffrey Wallin Van Sinderen: Okay, all right, thanks for taking my questions.

Speaker Change: Thank you.

Mitchel John Kummetz: The next question comes from Mitch commits with Seaport Research. Please go ahead.

Operator: The next question comes from Mitch Kummetz with Seaport Research. Please go ahead. Uh, yeah.

Mitchel John Kummetz: Mike, you mentioned the $18.4 million hit to the third quarter on sales. Can you say, or maybe what you think that might translate from an earnings standpoint?

Speaker Change: Yes, excuse me thanks for taking my questions. Mike you mentioned, the $18 $4 million hit to the third quarter on sales.

Can you say or maybe what you think that might translate from an earnings standpoint.

Mike: I can't until we figure out how back to school starts and what comp assumption I might think we're headed for in in three Q am I I don't know what that's going to look like the start at the back to school season.

Michael L. Henry: I can't until we figure out how back-to-school starts and what comp assumption I might think we're headed for in 3Q. I don't know what that's going to look like.

Michael L. Henry: The start of the back-to-school season is going to be in the last three weeks of July; the last three weeks of the second quarter is when we're going to start to see the early reads on the back-to-school season. The three largest sales weeks of the second quarter are actually the final three weeks of the second quarter for that reason. And as I mentioned, that very final week last year was the start of the third quarter and shifted forward because of the impact of that 53rd week in fiscal 2023.

Mike: There is gonna be in the last three weeks of July the last three weeks of the second quarter is when we're gonna start to see.

Mike: The early reads on the back to school season are the three largest sales weeks of the second quarter actually the final three weeks of the second quarter for that reason.

Mike: And as I mentioned that.

Speaker Change: Very final week last year was the start of the third quarter and shifted forward because of the impact of that <unk> 50.

Speaker Change: The 50 <unk> week in fiscal 2023 so.

Michael L. Henry: So until I have a preliminary read on what back to school means and what direction we're headed, I can't be any more specific at this time, but it certainly is going to create something of an earnings hit when you're starting from an $18 million hole compared to last year's fiscal third quarter.

Speaker Change: Until I have a prelim read on what back to school means.

Speaker Change: What direction, we're headed I can't be I can't be any more specific at this time, but.

Speaker Change: It certainly is going to create something of an earnings hit when you're starting from $18 million hole compared to last years fiscal third quarter.

Michael L. Henry: And how much of a sales benefit are you anticipating in the second quarter given that shift?

Speaker Change: And how much of a sales benefit are you anticipating in the second quarter given that shift.

Speaker Change: It's approximately a $15 million benefit to the second quarter, because just as I noted for the third quarter.

Michael L. Henry: It's approximately a $15 million benefit to the second quarter because, just as I've noted for the third quarter, you have the same dynamic from last year's start of the second quarter into second quarter shifting. So on the one hand, when you look at our outlook for a total sales number of $160 to $165 million, last year's second quarter was $160. So you know, in raw numbers, you say, oh, that's growth. Isn't that a positive comp?

Speaker Change: You know you have the same dynamic from last years start of second quarter end of second quarter shifting so are on the one hand, when you look at our outlook of a total sales number of $160 million to $165 million last year's second quarter was $1 60. So.

Speaker Change: And Ron number you say Oh, that's that's growth isn't that positive comp, but as we noted it's actually not it's a it's a negative comp.

Michael L. Henry: But as we noted, it's actually not. It's a negative comp in our outlook range of 7% to 10%. But because of the impact of that back-to-school week shifting into the second quarter, it adds a significant amount of sales.

Speaker Change: In our outlook range of 7% to 10%.

But because of the impact of that back to school week shifting into the second quarter and.

It adds a significant amount of sales.

Michael L. Henry: And then I noticed that, you know, you're quartered at 8 com, minus A4 is pretty much right in the middle of your quarterly range. I'm just curious how you feel about going back to school. It seems like, over the last, I don't know, maybe a year, that the consumer is showing up for events more than they are between events. And obviously, back to school is an event. Are you essentially assuming that your comp on back to school is kind of within that, you know, down seven to 10 range, or is there reason to believe that it could be better than that, given that that's an event period?

Speaker Change: Yeah, and then I noticed that you know your your quarter to date comp.

Speaker Change: Mine is eight four is pretty much right in the middle of your quarterly range.

Speaker Change: And I'm just curious how you think about back to school. It seems like over the last I don't know maybe a year that the consumer is showing up for events more than they are in between events and obviously back to school isn't events.

Speaker Change: Or are you are you essentially assuming.

Speaker Change #100: That your comp on back to school I was kind of within that you know down seven to 10 range or is there a reason to believe that it could be better than that given that that's been period.

Speaker Change #101: It could end up being better than what we're suggesting you know sitting here I have no visibility to what back to school behavior is going to be like.

Michael L. Henry: It could end up being better than what we're suggesting. You know, sitting here, I have no visibility into what back-to-school behavior is going to be like. So, you know, we're not counting on something that we can't see.

Mitchel John Kummetz: What we have is May is down 8.4. That's consistent with our comp run rate for the last four quarters. If you look back, our comp has been in this minus 8 to 9 range, and this is now starting the fifth quarter in that realm. So our range contemplates that it could get a little better, particularly towards the end. I do not expect it to deteriorate back into negative double digits. I do think there's opportunities for us to potentially outperform this negative 7 to negative 10 range, but that would require back-to-school getting off to a good start, and I just don't know what that's going to look like. As I sit here, I'd love to think that I can predict the future, but I darn sure cannot.

Speaker Change #101: So you know we're not counting on something that we can't see.

Speaker Change #102: What we have is may is down 8.4, that's consistent with our comprehend rate of the last four quarters. If you look back our comp has been and this minus eight to nine range.

Speaker Change #102: Range. This is now starting to fifth quarter he in that in that realm.

Speaker Change #102: So our range contemplates that it could get a little better, particularly towards the end and I do not expect it to deteriorate back into negative double digits.

Speaker Change #103: I do think there's opportunities for us to potentially outperform this negative seven to negative 10 range, but that would require back to school getting off to a good start and I just don't know what that's going to look like as I sit here I I'd love to think that I can predict the future, but I darn sure it cannot.

Mitchel John Kummetz: Okay. All right. Thanks, guys. Good luck.

Speaker Change #104: Okay, Alright, thanks, guys. Good luck.

Speaker Change #104: The next question comes from Matt Koranda with Roth Capital. Please go ahead.

Operator: The next question comes from Matt Koranda with Roth Capital. Please go ahead.

Matthew Butler Koranda: Hey, guys, maybe just following up on the second.

Matthew Butler Koranda: Hey guys, maybe just following up on the second quarter outlook and the May to date comps. Anything you can call out, Mike, in terms of weekly cadence that you saw that was notable? Any help there in terms of just anything you saw around the Memorial Day holiday, if that was notable at all?

Matthew Butler Koranda: Second quarter outlook in the May to date comps.

Matthew Butler Koranda: Anything you can call out Mike in terms of weekly cadence that you saw that was notable.

Matthew Butler Koranda: Any help there in terms of just.

Mike: I think it's all around the memorial day holiday, if that's if that was knowable at all.

Mike: Sure. So I noted in her prepared remarks that you know upon the implementation of our new merch allocation tool and the new warehouse management system. We did have some complications in the immediate aftermath of that so may bounce around quite a bit the first week in the last week of May were both negative single digits in the in between weeks.

Michael L. Henry: Sure. I noted in our prepared remarks that, you know, upon the implementation of our new merge allocation tool and the new warehouse management system, we did have some complications in the immediate aftermath of that. So, May bounced around quite a bit. The first week and the last week of May were both negative single digits, and the in-between weeks were negative low double digits, as we were having some problems with replenishment to stores with the new systems communicating with each other properly.

Speaker Change #106: We're at negative low double digits.

Speaker Change #107: As we were having.

Speaker Change #108: Some some complications with replenishment to stores with the new systems are communicating with each other properly. So are we we did experience some slowdown in the middle two weeks of the month, but believe we're back on track we did see better results in the final week of fiscal May and have seen a little bit better results. This week.

Michael L. Henry: So we did experience some slowdown in the middle two weeks of the month, but we believe we're back on track. We did see better results in the final week of fiscal May and have seen a little bit better results this week, starting off June, now that products have started to reflow back out to stores. So we'd like to think the worst of it is behind us in terms of any of the implementation impacts and that, you know, if anything, we should stay consistent with potentially having an opportunity to see some better results going forward.

Speaker Change #109: Turning off June now that product just started to re flow back out to stores in and get out there. So we'd like to thank the worst of that's behind us in terms of any of the implementation impacts and that you know if anything we should stay consistent to potentially having an opportunity to see some better results going forward, but again with.

Michael L. Henry: But again, with those large three weeks at the end of the quarter, basically a third of the quarter's sales volume is going to be in those last three weeks of the quarter. So really difficult to know sitting here, as far away from that as we are, what exactly that's going to look like. But we're cautiously optimistic, as Hezy noted earlier, that we'll continue to see better and better things out of our assortment as we go.

Speaker Change #109: Those large three weeks at the end of the quarter basically a third of the quarters sales volume is going to be in those last three weeks of the quarter. So.

Speaker Change #110: Really difficult to know sitting here.

Speaker Change #110: As far away from that as we are what exactly that's going to look like but.

Speaker Change #111: We're cautiously optimistic as has he noted earlier that will continue to see a better and better things out of our assortment as we go forward.

Speaker Change #112: Okay, that's fair, but I guess, where else I'm not counting on necessarily pick up relative to what we saw in aggregate in may in terms of the comps not much of one of the least okay and then.

Matthew Butler Koranda: Okay, that seems fair, but I guess we're also not counting on a pickup relative to what we saw in aggregate in May, in terms of the counts, not much of one at least. Okay. And then in terms of inventory, I'm curious, was the warehouse management system one of the reasons for the slightly heavier inventory per store that we're seeing on a year-over-year basis, or is there something else going on in terms of inventory that you can call out, and then maybe just Hezy, where are we heavier than we want to be? I was curious, based on one of the earlier questions, just what are you chasing in particular that's really moving for you, that's working?

Speaker Change #112: In terms of.

Speaker Change #113: Sorry, I'm curious, what's the what's the warehouse management system, one of the reasons for the slightly heavier inventory per store that we're seeing on a year over year basis or is there something else going on in terms of inventory.

Speaker Change #114: You can call out and then maybe just has anywhere or we heavier than we want to be I was curious are.

Speaker Change #115: Based on one of the earlier questions. Just what are you chasing in particular, that's really moving for you that's working it'd be helpful to get them.

Matthew Butler Koranda: It'd be helpful to get a little more information on those. Yeah. Yeah. Yeah. We're chasing

Speaker Change #116: Yeah, Yeah, Yeah, we're chasing the best sellers.

Speaker Change #117: [laughter] yeah.

Hezy Shaked: Yeah, so let me also address the inventory for a second. These two things.

Speaker Change #118: [laughter] Yeah, Yeah. So let me also address the inventory for a second.

Two things here.

Hezy Shaked: As far as merchandise goes, we change a little bit how we look at things and how we do them. I can give you a little bit. We are bringing inventory a little earlier, and instead of spreading it, let's say, over three or four months, we're bringing a larger portion earlier so we're never out of sight. That's one of the things we do, and that's maybe part of the reason you see more inventory in the store.

Speaker Change #118: As far as the merchandise and we changed it a little beep on how we look at things and how we do it.

Speaker Change #119: I can give you a little bit we are bringing inventory a little earlier.

Speaker Change #120: And instead of spreading it let's say three or four months, we're bringing a larger portion earlier. So we never out of Cypress. That's one of the things we do and that's maybe part of the reason you see more inventory in the store.

Hezy Shaked: The inventory thing will actually be something that we're focusing on this coming week, which is, as we changed the way we look at gross margins, we looked at two things or three things. As I told you guys before, we looked at the initial cost and the negotiation there. We looked at the initial IMUs, and then how we do markdowns. In the past, unfortunately, we gave the merchandise away way under cost.

Speaker Change #121: The inventory thing will actually be something that we're focusing on this coming week, which is as we changed the way. We look at gross margin. We look at two things or three things as I told you guys before.

Speaker Change #121: If we look at the.

Initial cost and the negotiation there we looked at the initial use.

Speaker Change #121: And then how we do mark them in the past.

Speaker Change #122: Unfortunately, we gave the merchandise away.

Speaker Change #123: Wait on the cost.

Hezy Shaked: There was no reason for that, but it happened. We're looking at it differently today. It's not necessary at all times to sell things at a fire sale. Due to that, there'll be some changes and some fluctuation in the inventory until we fine-tune it. But that will produce...

Speaker Change #124: There was no reason for that but it happened when looking at differently today, it's not necessary at all times to sell things at a fire sale.

Speaker Change #125: Due to that there'll be some changes in some fluctuation in the inventory until we fine tune it but.

Speaker Change #126: But that really produce better margins.

Speaker Change #126: Okay. The other thing I did it pick up Mike the other thing I'd add to that Matt is some of it was a little bit of a timing difference too because when youre looking purely at the balance sheet again because of that weird 50, <unk> week that happens every six to seven years.

Michael L. Henry: Okay, that's helping. The other thing I'd add to that, Matt, is some of it was a little bit of a timing difference for you, because when you're looking purely at the balance sheet, again, because of that weird 53rd week that happens every six to seven years, you're comparing two offset weeks. They're not comparable weeks.

Speaker Change #126: You're you're comparing to offset weeks, they're not comparable weeks.

Speaker Change #127: So it was a temporary timing difference Ah, it's why I added to.

Speaker Change #128: The notation that as we entered this week, our inventories are actually down 3% on a like for like week and.

Michael L. Henry: So it was a temporary timing difference. It's why I added the notation that as we entered this week, our inventories were actually down 3% on a like-for-like week. So it was just a little bit of a timing difference there, especially ahead of the implementations that we knew were coming. We did consciously try to help offset any potential risk as we went through those. So it was just a temporary condition, nothing of significant concern. Okay, fair enough.

Speaker Change #129: So it was just a little bit of a timing difference there, especially ahead of the implementations that we knew were coming.

Speaker Change #129: You know we did consciously tried to help offset any potential risk as we went through those and so it's just a temporary condition nothing of significant concern.

Speaker Change #129: Okay fair enough.

Matthew Butler Koranda: Maybe if I could just ask one more on what I guess I'm imputing in the outlook from a gross margin standpoint. It almost seems like we might see flat to higher gross margins in the second quarter, based on my math at least. Maybe just talk about what you're seeing on sort of the margin front and product markdowns. It sounds like maybe we got a little bit better there. So that's a good guy offsetting the BD&O deleverage that we may still experience, but maybe just to piggyback on a little bit more about that.

Speaker Change #130: Just ask one more on what are the what I guess on computing and the outlook from a gross margin standpoint, it almost seems like we might see flat to up gross margins in the second quarter.

Speaker Change #131: Just on my math at least maybe just talk about what you're seeing on the margin front and in product markdowns. It sounds like maybe we got a little bit better there. So that's a good guy offsetting some of the beat you know deleverage that we may still experience, but maybe just if you could.

Speaker Change #131: A little bit more.

Hezy Shaked: Yeah, Mike, let me answer that. So we do expect gross margin improvement. This is exactly what we're working on. We can't estimate yet what it will be for the second quarter, and uh, everything is up in the air right now. We are working on so many different things that it'll be very hard to predict the future. You can expect that it will be flat to up. I just can't tell you how much it will be.

Mike: Yes, Mike let me answer that so we do expect gross margin improvement this.

Speaker Change #132: This is exactly what we're working on with.

Speaker Change #133: We can't.

Speaker Change #134: Estimate yet for what needs to be for second quarter.

And everything's happening to you right now.

Speaker Change #135: We are working on so many different things that it'll be very hard to predict until the future. So.

Speaker Change #135: You can expect that to either be flat to up I just can't tell what much how much you could be up.

Speaker Change #136: Okay, great appreciate it guys. Thanks.

Matthew Butler Koranda: Okay, great. I appreciate it, guys. Thanks.

Speaker Change #136: This concludes our question and answer session I would like to turn the conference back over to Mike Henry for any closing remarks.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Mike Henry for any closing remarks.

Michael L. Henry: Thank you all for joining US today, we appreciate your interest and we look forward to sharing our second quarter results with you in early September Thanks, and have a good evening.

Michael L. Henry: Thank you all for joining us today. We appreciate your interest, and we look forward to sharing our second quarter results with you in early September.

Speaker Change #137: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: Thanks, and have a good evening. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change #137: Yeah.

Speaker Change #137: [music].

Speaker Change #137: Yes.

[music].

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