Q2 2024 Tilly's Inc Earnings Call
and Michael Henry, and Edmond Thomas, in the end of the year. Michael Henry, Edmond Thomas, in the end of the year.
Operator: Good day and welcome to the Tillys Inc. 2nd quarter 2020 for results conference call. All participants will be in lesson-only mode.
Good day and welcome to the T-List Inc. 2, 24, 2020 for results conference call. All participants will be in less than only mode. Shouldn't you assist in sweet signal conference specialists by pressing the star key followed by due?
Operator: Shooting you to systems; please signal a conference specialist by pressing the star key followed by you. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press start, then wait on your telephone keypad. Should we draw your questions, please press start. Then, please note this event is being recorded.
Speaker Change: I'll turn today's presentation to be an opportunity to ask questions.
Speaker Change: to ask the question, you may press star, then warn on your telephone keypad.
Speaker Change: to withdraw your questions. Please press star, then, shoot. Please note, this event is being recorded.
Gar Jackson: I would now like to turn the conference over to Car Jackson about your relations. Please go ahead.
Speaker Change: I would now like to turn the conference over to Gar Jackson and Buster Relations.
Michael Henry: Good afternoon and welcome to the Tillys Fiscal 2024 2nd Quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results.
Speaker Change: Please go ahead.
Speaker Change: Good afternoon, and welcome to the Tilly's fiscal 2024 Second Quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer will discuss the company's business and operating results.
Michael Henry and Hezy Shaked: Then he and Hezy Shaked, executive chairman and interim president and chief executive officer, will host a Q&A session with analysts.
Speaker Change: then he and he and he she cad executive chairman and interim president and chief executive officer will host a Q&A session with analysts for a coffee of tilley's earnings press release please visit the investor relations section of the company's website at tilley.com
Operator: For a coffee 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 will also be able to find a recorded replay of this call for the next 30 days.
Speaker Change: from the same section shortly after the conclusion of the call, you will also be able to find recorded replay of this call for the next 30 days.
Operator: Certain forward looking statements will be made during this call that reflect Tillys judgment and analysis only as of today, September 5th, 2024. An actual results may differ 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.
Speaker Change: Certain forward-looking statements will be made during this call that reflect police judgment and analysis, only as of today, September 5, 2024, and actual results may differ materially from current expectations based on various factors affecting police business.
Speaker Change: Accordingly, you should not place undue reliance on these forward-looking statements.
Speaker Change: for a more thorough discussion of the risks and uncertainties associated with any forward-looking statements.
Operator: Please see the disclaimer regarding forward-looking statements that is included in our fiscal 2024 2nd quarter earnings release, which is furnished to the SEC today on Form 8-K, as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks.
Speaker Change: Please see the disclaimer regarding Ford Living Statements that is included in our fiscal 2024 second quarter earnings release, which is furnished to the SEC today on Form 8K, as well as our other filings at the SEC referenced in that disclaimer.
Speaker Change: Today's call be limited to one hour and will include a Q&A session after our prepared remarks. I now turn the call over to Mike.
Michael Henry: I now turn the call over to Mike.
Michael Henry: Thanks, Scott.
Michael Henry: Good afternoon, and thanks to all for joining us today. Our second quarter net sales were in the middle of our outlook range provided during our first quarter earnings call in early June, and our break even earnings per share beat our outlook range. Although we're comparable, net sales remain negative. This was our best quarterly comp sales result since the end of fiscal 2021. While the macroeconomic environment remains challenging for our core customer demographic of teams, young adults, and young families, we also believe certain merchandising decisions on our part limited us from performing better in the second quarter.
Mike: Good afternoon and thanks to all for joining us today. Our second quarter net sales were in the middle of our outlook range, provided during our first quarter earnings call in the early June, and our break even earnings per share beat our outlook range.
Speaker Change: Although we're a comparable net sales remain negative, this was our best quarterly comp sales result since the end of fiscal 2021.
Speaker Change: While the macroeconomic environment remains challenging for our core customer demographic of teams, young adults and young families. We also believe certain merchandising decisions on our part live to us from performing better in the second quarter.
Michael Henry: We have been working to correct those issues going forward. While sales growth has been elusive for us, we are encouraged by our ability to have produced improved product margins for each of the first two quarters of fiscal 2024 relative to last year's results, which we believe suggests that our revised pricing strategies and assortment adjustments are beginning to gain traction. As we continue to challenge ourselves to find ways to drive better sales results, we have refocused our marketing efforts with the primary goal of giving consumers a reason to care about and choose Tillies. We've established a new brand marketing strategy to redefine our purpose to our target customer.
Speaker Change: We have been working to crack those issues going forward.
Speaker Change: While sales growth has been elusive for us, we are encouraged by our ability to produce improved product margins for each of the first two quarters of fiscal 2024 relative to the last year's results, which we believe suggests that our revised pricing strategies and assortment adjustments are beginning to gain traction.
Speaker Change: As we continue to challenge ourselves to find ways to drive better sales results, we have refocused our marketing efforts with a primary goal of giving consumers a reason to care about and choose tillies.
Speaker Change: We've established a new brand marketing strategy to redefine our purpose to our target customer.
Michael Henry: Our team has implemented this strategy across our social media content, curating a roster of micro influencers to help grow our following and expanding our brand reach into new online media platforms. Additionally, in late July, we launched our first-ever brand campaign with a tagline of "Discover Your Style." Through this campaign, we are emphasizing the importance of personal style as a driving force toward confidence and mental wellness. Until these 42 years of existence, we have always cared deeply about the communities we serve. We have continuously supported the Tillys Life Center Foundation, whose focus is teen mental health and well-being since its inception 12 years ago.
Speaker Change: Our team has implemented this strategy across our social media content, creating a roster of micro-informers to help grow our following and expanding our brand reach into new online media platforms.
Speaker Change: Additionally, in Lake July we launched our first ever brand campaign with the tagline of Discover Your Style.
Speaker Change: Through this campaign, we are emphasizing the importance of personal style as a driving force towards confidence and mental wellness.
Speaker Change: In Tilly's 42 years of existence, we have always cared deeply about the communities we serve. We have continuously supported the Tilly's life center foundation, whose focus is teen mental health and well-being since its inception 12 years ago.
Michael Henry: We are now acting on an opportunity to begin a direct conversation with our customers to express who we are and what we are about, which is something we've never really done in the past. Our campaign is rooted in the core values of confidence, self-expression, California shine, and positivity, which we believe can help us build connection and trust with our consumer community in new and different ways than solely providing products that we think they want. We are proud of what this campaign says about us and our demonstrated commitment to our customers' well-being. The full impact of this campaign won't be known for some time, and it will continue to evolve.
Speaker Change: We are now acting on an opportunity to begin a direct conversation with our customers to express who we are and what we are about, which is something we've never really done in the past.
Speaker Change: Our campaign is rooted in the core values of confidence, self-expression, California shine and positivity, which we believe can help us build connection and trust with our consumer community in new and different ways than solely providing products that we think they want.
Speaker Change: We are proud of what this campaign says about us and our demonstrated commitment to our customers well-being.
Speaker Change: The full impact of this campaign won't be known for some time and it will continue to evolve, but we've been excited to see the positive response to the campaign across all of our digital platforms since launch.
Michael Henry: But we have been excited to see the positive response to the campaign across all of our digital platforms since launch. We are hopeful that this campaign can be the beginning of creating stronger consumer affinity and following for Tillys, and together with our other initiatives lead to better results over time.
Speaker Change: We are hopeful that this campaign can be the beginning of creating stronger consumer affinity and following for tillies and together with our other initiatives lead to better results over time.
Michael Henry: Turning to our operating results for the second quarter of fiscal 2024 compared to last year's second quarter. Net sales were $162.9 million, an increase of 1.8%. Primarily due to the impact of the 53rd week, and last year's retail calendar, which resulted in a timing shift of back-to-school sales volume, pulling a large sales week into the end of the second quarter this year from what was in the start of the third quarter last year. Net sales from physical stores increased by 2% and represented 81.3% of total net sales compared to 81.1% last year. Ecom net sales increased by 1.3% and represented 18.7% of total net sales compared to 18.9% last year.
Speaker Change: Turning to our operating results for the second quarter of fiscal 2024 compared to last year's second quarter.
Speaker Change: Net sales were $162.9 million and increase of 1.8% primarily due to the impact of the 53rd week in last year's retail calendar, which resulted in a timing shift at back-to-school sales volume.
Speaker Change: pulling a large sales week into the end of the second quarter this year from what was in the start of the third quarter last year.
Speaker Change: Net sales from physical stores increased by 2% and represented 81.3% of total net sales compared to 81.1% last year.
Speaker Change: Ecomnet sales increased by 1.3% and represented 18.7% of total net sales compared to 18.9% last year.
Michael Henry: Comparable net sales for the 13-week period ended August 3, 2024, including both physical stores and eCom, compared to the 13-week period ended August 5, 2023 last year, decreased by 7.8%. We ended the second quarter with 247 total stores compared to 246 total stores at the end of the second quarter last year. Gross margin, including buying, distribution, and occupancy expenses, improved by 300 basis points to 30.7% of net sales from 27.7% of net sales last year. Product margins improved by 270 basis points due to a combination of improved initial markups and lower total markdowns. Buying distribution and occupancy costs improved by 30 basis points, primarily due to carrying these costs against a higher level of net sales this year.
Speaker Change: Comparable net sales for the 13 week period in this August 3, 2024, including both physical stores and e-com, compared to the 13 week period in August 5, 2023 last year, decreased by 7.8%.
Speaker Change: We ended the second quarter with 247 total stores compared to 246 total stores at the end of the second quarter last year.
Speaker Change: Grocer margin, including buying distribution and occupancy expenses, improved by 300 basis points to 30.7% of net sales from 27.7% of net sales last year.
Speaker Change: Product margins improved by 270 basis points due to a combination of improved initial markups and lower total markdowns.
Speaker Change: Buying distribution and occupancy costs improved by 30 basis points, primarily due to carrying these costs against a higher level of net sales this year.
Michael Henry: Total SGNA expenses were 50.8 million dollars, or 31.2% of net sales, compared to 47 million dollars, or 29.4% of net sales last year. Primary SGNA increases were from store payroll and related benefits of 1.5 million dollars, digital marketing expenses of 0.7 million dollars, software as a service expense of 0.6 million dollars, and corporate payroll and related benefits of 0.5 million dollars. Pre-tax loss was 73,000 dollars or break even as a percentage of net sales compared to last year's pre-tax loss of 1.5 million dollars or 0.9% of net sales. Income tax benefit was $4,000 or 6.2% of pre-tax loss compared to a benefit of $0.3 million or 23.2% of pre-tax loss last year.
Speaker Change: To the last year, expenses were $50.8 million or $31.2% of that sales, compared to $47 million or $29.4% of that sales last year.
Speaker Change: Primary S.G.A.N. increases were from store payroll and related benefits of $1.5 million. Digital marketing expenses of $0.7 million. Software is a service expense of $0.6 million and corporate payroll and related benefits of $0.5 million.
Speaker Change: Pre-tax loss was $73,000 or break even as a percentage of net sales compared to last year's pre-tax loss of $1.5 million or 0.9% of net sales.
Speaker Change: Income Tax Benefit was $4,000 or $6.2% of pre-tax loss compared to a benefit of $0.3 million or $23.2% of pre-tax loss last year.
Michael Henry: The lower income tax rate this year was attributable to immaterial state tax benefits arising in a quarter with near-break even pre-tax results. Net loss was $69,000 or break even on a per share basis compared to last year's net loss of $1.1 million or 4 cents per share.
Speaker Change: The lower income tax rate this year was attributable to immaterial state tax benefits arising in a quarter with near break even pre-tax results.
Speaker Change: Net loss was $69,000 or break even on a per share basis compared to last year's net loss of $1.1 million or $4 per share.
Michael Henry: Turning to our balance sheet, we ended the second quarter with total cash and marketable securities of approximately $77 million and no borrowings under our asset-backed credit facility. We ended the second quarter with net inventories of 4.1% amid the peak of the back-to-school season. Total capital expenditures for the first half were $4.6 million.
Speaker Change: Turning to our balance sheet, we into the second quarter with total cash and marketable securities of approximately $77 million, and no borrowings under our asset back credit facility.
Speaker Change: We ended the second quarter with the inventory's up 4.1% amid the peak in a back to school season.
Speaker Change: Total capital expenditures for the first half or $4.6 million.
Michael Henry: Turning to the third quarter of fiscal 2024, comparable net sales for fiscal August increased by 1%, which was our first positive monthly comp since February 2022. While that result was encouraging, it should be noted that for each of the past three fiscal years, fiscal August has produced our best comp sales performance of the third quarter, followed by a significant slowing in our business relative to August during each of September and October. We expect a similar trend pattern this year. As we have discussed during each of our past two earnings calls, the impact of the 53rd week and last year's retail calendar created the timing shift of the back-to-school sales volume into the second quarter this year from what was at the start of the third quarter last year.
Speaker Change: Turning to the third quarter of his school 2024, comparable net sales for fiscal August increased by 1%. Which was our first positive monthly comp since February 2022.
Speaker Change: Well, that result is encouraging. It should be noted that for each of the past three fiscal years, fiscal August has produced our best comp sales performance of the third quarter, followed by a significant slowing in our business relative to August during each of September and October.
Speaker Change: We expect a similar turn pattern this year.
Speaker Change: Now as we have discussed during each of our past two earnings calls, the impact of the 53rd week and last year's retail calendar created a timing shift at the back-to-school sales volume into the second quarter of this year from what was at the start of the third quarter last year.
Michael Henry: As a result of this timing shift, total net sales for the comparable third quarter this year start with an $18.4 million deficit versus last year before considering comparable net sales changes.
Speaker Change: As a result of this timing shift, total net sales for the comparable third quarter this year, start with an 18.4 million dollar deficit versus last year before considering comparable net sales changes.
Michael Henry: Based on these factors and other current and historical trends, we currently expect the following for our fiscal 2024 third quarter operating results. Total net sales to be in the range of approximately $140 million to $146 million, translating to a comparable net sales decline in the range of 6% to 2%, respectively. SGNA to be approximately $49 million before factoring in any potential non-cash store-asset impairment charges which may arise. Pre-tax loss and net loss to be in the range of approximately $11.6 million to $8.7 million, respectively, with a near-zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets.
Speaker Change: Based on these factors and other current and historical trends, we currently expect the following for our fiscal 2024-3rd-quarter operating results.
Speaker Change: Total net sales to be in the range of approximately $140 million to $146 million. Translating to a comparable net sales decline in the range of 6% to 2% respectively.
Speaker Change: Estia and A to be approximately $49 million before factoring in any potential non-cash store-affered impairment charges which may arise.
Speaker Change: Pre-tax loss and net loss to be in the range of approximately $11.6 million to $8.7 million respectively with a near-zero effective income tax rate due to the continuing impact of the full non-cash valuation allowance on our deferred tax assets.
Michael Henry: Lost per share to be in the range of 39 cents to 29 cents, respectively, based on estimated weighted average shares of approximately $30 million. We expect to have 246 total stores open at the end of the third quarter and that decrease of three from the end of last year's third quarter. During the fourth quarter, we currently expect to open two new stores and close five unprofitable stores. The number of store closures may likely grow in connection with some natural lease explorations occurring at the end of the fiscal year and depending on the outcome of pending lease renewal discussions.
Speaker Change: Laws per share to be in the range of 39 cents to 29 cents respectively. Based on estimated way you did average shares of approximately 30 million.
Speaker Change: We expect to have 246 total stores open at the end of the third quarter, and that decrease of three from the end of last year's third quarter.
Speaker Change: During the fourth quarter, we currently expect to open two new stores and close five unprofitable stores.
Speaker Change: The number of store closures may likely grow in connection with some natural lease explorations occurring at the end of the fiscal year, and depending on the outcome, pending lease renewal discussions.
Michael Henry: Each decision we make will be rooted in maximizing profitability going forward.
Speaker Change: Each decision we make will be rooted in maximizing profitability going forward.
Michael Henry: In closing, as we said before, we continue to believe it will be challenging for us to improve our sales results in the current consumer environment, but we will continue to challenge ourselves to adapt and improve. We are bringing in new product collaborations, such as our recently launched partnership with NASCAR as an example. We are introducing several new brands over the back after fiscal year, aiming to create new customer interest and sales opportunities. We will continue to work connecting more deeply with our customers in authentic ways and invest in the opportunities that we see to improve our business.
Speaker Change: In closing, as we said before, we continue to believe it will be challenging for us to improve our sales results in the current consumer environment. But we will continue to challenge ourselves to adapt to the improve.
Speaker Change: We are bringing you new product collaborations such as our recently launched partnership with NASCAR as an example.
Speaker Change: We are introducing several new brands over the back-after fiscal year aiming to create new customer interest and sales opportunities.
Speaker Change: We'll continue to work at connecting more deeply with our customers and authentic ways and invest in the opportunities that we see to improve our business.
Michael Henry: Our goal remains to return to generating net sales growth, profitability, and shareholder value, which will take time with the headwinds we are currently facing. But we are making every effort to get there as soon as we reasonably can.
Speaker Change: Our goal remains to return to generating net sales growth, profitability and shareholder value, which will take time with the headwinds we're currently facing, but we're making every effort to get there as soon as we reasonably can.
Michael Henry: Our project will now go to our Q&A session. Thank you.
Speaker Change: Operator will now go to our Q&A session.
Operator: We will now begin the question and intercession. To ask a question, you may press start and want on your telephone keypad. If you are using a speaker phone, please pick up your hands before pressing the key. If you have any time your question has been addressed, and you would like to withdraw your question, please press start and choose.
Speaker Change: Thank you.
Speaker Change: We will now begin the question and answer session.
Speaker Change: You'll ask a question, you may press start the new one on a telephone keypad. If you're using a speaker phone, please pick up your hand side people before pressing the keys.
Speaker Change: It has any time your question has been addressed and you'd like to withdraw your questions, please press start and tune.
Operator: At this time, we will pause momentarily to assemble a roster.
Speaker Change: At this time, we'll pause momentarily to have some more rusters.
Speaker Change: [inaudible]
Michael Jackson: and Michael Jackson.
Bruce Geller: The first question comes from Bruce Geller with Geller Ventures. Please go ahead.
Michael Jackson: i
Speaker Change: The first question comes from Blue Scalor with Galler Ventures. Please go ahead.
Bruce Geller: Good afternoon. Looking back at this company pre-COVID, it was a very consistent company, fairly profitable, strong cash flow generation. There were times where you went through a rough patch, like the one you have recently, but you always came out of it strong and got back to normalized levels. That doesn't seem to have happened this time around.
Blue Scalor: Hey, good afternoon
Speaker Change: Looking back at this company pre-COVID, it was a very consistent company fairly profitable, strong cash flow generation.
Speaker Change: And there were times where you went through a rough patch, like the one you have recently, but you always came out of it strong and got back to
Speaker Change: Normalized Levels.
Speaker Change: That doesn't seem to have happened.
Hezy Shaked: Can you please describe what has changed structurally in the business that is preventing this from happening?
Speaker Change: This time around. So can you please describe what has changed structurally in the business that is preventing this from happening?
Hezy Shaked: I will take this call. Several things. Number one, if you look at the record of the last three years or so, it was declining sales year after year. The fact 21, which was a weird year for everybody. A lot of it, and we are based in Orange County, California, a lot of it had to do with the pandemic and the changes in behavior of employees, etc. We addressed all that stuff since I came in, but there's a lot of work to do in order to get it back on track to where we were. But it seems like something more structural has changed because you guys don't seem to be able to break out of the funk that you've been able to do so historically.
Speaker Change: I'll take this call, this will have me.
Speaker Change: The several things, number one, if you look at the record of the last three years or so, it was declining sales a year after year. This act 21, which was a weird year for everybody.
Speaker Change: A lot of feet and we've based in Orange County, California, a lot of feet have to do weed the pandemic and the changes in behavior of employees etc. We addressed all that stuff since I came in, but there's a lot of work to do in order to get these back on track to where we were.
Speaker Change: But it seems like something more structural has changed because you guys don't seem to be able to break out of the funk.
Speaker Change: that you've been able to do so.
Hezy Shaked: And you're also talking about a very difficult consumer environment, which it is. However, there are plenty of comparable consumer or power retailers that are doing just fine right now. So it seems like, again, there's something more structural. which is what I'm really trying to gain a grasp of.
Speaker Change: Historically, and you're also talking about a very difficult consumer environment, which it is, however, there are plenty of comparable...
Speaker Change: Consumer or Poweral Retailers that are doing just fine right now.
Speaker Change: So it seems like, again, there's something more structural.
Speaker Change: which is what I'm really trying to.
Hezy Shaked: Yeah, I can say that it's something specific I can tell you. I can tell you that many decisions we've made in the past didn't work out. Now we have to change them. It's including systems, etc. But it's not one thing that is broken. There was a lot of things that we had to address, and we are. And like any situation that happened before, it takes time to turn it around.
Speaker Change: skating grass above.
Speaker Change: Yeah, I can't say that it's something specific I can tell you, I can tell you that many decisions we've made in the past didn't work out. Now we have to change them in six moving systems, etc.
Speaker Change: but it's not one thing that is broken.
Speaker Change: It was a lot of things that we had to address and we are and like any situation that happened before it takes time to turn it around.
Hezy Shaked: Yeah, the two things I'll add for you. Pardon me, I've got allergy issues going on, so pardon my voice. Obviously, our sales for square foot in store have dropped quite significantly since 2019.
Speaker Change: Yeah, the two things I'll add for you, pardon me, I've got allergy issues going on, so pardon my voice.
Speaker Change: Obviously, our sales for square foot, its store have dropped quite significantly since 2019, so that's the first structural issue which has been addressing. Any other primary thing is really the cost of labor.
Hezy Shaked: That's the first structural issue which has been addressing. Any other primary thing is really the cost of labor. So, when you compare back to 2019, before the pandemic, our average hourly rate for store payroll is 32% higher than it was in 2019. Strictly because of all the minimum wage increases that have taken place all over the country but predominantly in California where, for several years in the road, went up a dollar per hour per year. This most recent year was 50 cents, and almost half of our stores are in the state of California. So a really big hit there.
Speaker Change: So when you compare back to 2019 before the pandemic
Speaker Change: Our average hourly rate for store payroll is 32% higher than it was in 2019.
Speaker Change: strictly because of all the minimum wage increases that have taken place all over the country, but predominantly in California.
Speaker Change: We're for several years on a road, went up a dollar per hour per year. This is most recent year, it was 50 cents and almost half of our stores are in the state of California.
Hezy Shaked: When you think about a 32% higher average rate for store payroll with sales that are not higher than they were in 2019. That's a that's a big disconnect. And we manage store payroll extremely tightly every single week. But those are the facts; you know, the minimum wage impact is tremendous.
Speaker Change: A really big hit there when you think about a 32% higher average rate for store payroll with sales that are not higher than they were in 2019. That's a big disconnect. And we managed store payroll extremely tightly.
Speaker Change: and every single week, but those are the facts, you know, that the minimum wage impact is tremendous.
Operator: This concludes our question and answer session.
Speaker Change: and Michael Jackson, Gar Jackson, Gar Jackson, Gar Jackson, Gar
Speaker Change: Thank you for watching!
Michael Henry: I would like to turn the conference back over to Michael Harry for any cold new remarks. Well, thank you all for joining us. Have a good evening.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Michael Henry for any closing remarks.
Michael Henry: We'll look forward to sharing our third quarter results with you in early December. Thank you very much.
Michael Henry: Well, thank you all for joining us, have a good evening, we'll look forward to sharing our third quarter results with you in early December. Thank you very much.
Operator: The conference has now concluded. Thank you for attending today's presentation.
Speaker Change: The conference has now concluded, thank you for attending to this presentation. You may now disconnect.
Operator: You may now disconnect. Thank you very much.
Operator: Good day and welcome to the Tillys Inc. 2nd quarter 2020 for results conference call. All participants will be in lesson only mode. Shooting you to systems please signal a conference specialist by pressing the star key followed by you. After today's presentation there will be an opportunity to ask questions. To ask a question you may press start then want on your telephone keypad. Should we draw your questions please press start then to please note this event is being recorded.
Gar Jackson: I would now like to turn the conference over to Car Jackson about your relations. Please go ahead.
Operator: Good afternoon and welcome to the Tillys fiscal 2024 2nd 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 with analysts.
Operator: For a coffee 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 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 Tillys judgment and analysis only as of today September 5th 2024 an actual results may differ materially from current expectations based on various factors affecting Tillys business.
Operator: 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 2024 2nd 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.
Operator: Today's call will be limited to one hour and will include a Q&A session after our prepared remarks.
Scott: I now turn the call over to Mike. Thanks, Scott.
Michael Henry: Good afternoon and thanks to all for joining us today. Our second quarter net sales were in the middle of our outlook range provided during our first quarter earnings call in early June and our break even earnings per share beat our outlook range. Although we're comparable net sales remain negative this was our best quarterly comp sales result since the end of fiscal 2021. While the macro economic environment remains challenging for our core customer demographic of teams young adults and young families we also believe certain merchandising decisions on our part limited us from performing better in the second quarter.
Michael Henry: We have been working to correct those issues going forward. While sales growth has been elusive for us we are encouraged by our ability to have produced improved product margins for each of the first two quarters of fiscal 2024 relative to last year's results which we believe suggests that our revised pricing strategies and assortment adjustments are beginning to gain traction. As we continue to challenge ourselves to find ways to drive better sales results we have refocused our marketing efforts with the primary goal of giving consumers a reason to care about and choose tillies.
Michael Henry: We've established a new brand marketing strategy to redefine our purpose to our target customer. Our team has implemented this strategy across our social media content curating a roster of micro influencers to help grow our following and expanding our brand reach into new online media platforms. Additionally, in late July, we launched our first-ever brand campaign with a tagline of Discover Your Style. Through this campaign, we are emphasizing the importance of personal style as a driving force towards confidence and mental wellness.
Michael Henry: Until these 42 years of existence, we have always cared deeply about the communities we serve. We have continuously supported the Tillys Life Center Foundation, whose focus is teen mental health and well-being since its inception 12 years ago. We are now acting on an opportunity to begin a direct conversation with our customers to express who we are and what we are about, which is something we've never really done in the past. Our campaign is rooted in the core values of confidence, self-expression, California shine, and positivity, which we believe can help us build connection and trust with our consumer community in new and different ways than solely providing products that we think they want.
Michael Henry: We are proud of what this campaign says about us and our demonstrated commitment to our customers well-being. The full impact of this campaign won't be known for some time, and it will continue to evolve. But we have been excited to see the positive response to the campaign across all of our digital platforms since launch. We are hopeful that this campaign can be the beginning of creating stronger consumer affinity and following for Tillys, and together with our other initiatives lead the better results over time.
Michael Henry: Turning to our operating results for the second quarter of fiscal 2024 compared to last year's second quarter. Net sales were $162.9 million, an increase of 1.8%. Primarily due to the impact of the 53rd week, and last year's retail calendar, which resulted in a timing shift of back-to-school sales volume, pulling a large sales week into the end of the second quarter this year from what was in the start of the third quarter last year.
Michael Henry: Net sales from physical stores increased by 2% and represented 81.3% of total net sales compared to 81.1% last year. Ecom net sales increased by 1.3% and represented 18.7% of total net sales compared to 18.9% last year. Comparable net sales for the 13-week period ended August 3, 2024, including both physical stores and Ecom, compared to the 13-week period ended August 5, 2023 last year, decreased by 7.8%. We ended the second quarter with 247 total stores compared to 246 total stores at the end of the second quarter last year.
Michael Henry: Gross margin, including buying distribution and occupancy expenses, improved by 300 basis points to 30.7% of net sales from 27.7% of net sales last year. Product margins improved by 270 basis points due to a combination of improved initial markups and lower total markdowns. Buying distribution and occupancy costs improved by 30 basis points primarily due to carrying these costs against a higher level of net sales this year. Total SGNA expenses were 50.8 million dollars or 31.2% of net sales compared to 47 million dollars or 29.4% of net sales last year.
Michael Henry: Primary SGNA increases were from store payroll and related benefits of 1.5 million dollars, digital marketing expenses of 0.7 million dollars, software as a service expense of 0.6 million dollars, and corporate payroll and related benefits of 0.5 million dollars. Pre-tax loss was 73,000 dollars or break even as a percentage of net sales compared to last year's pre-tax loss of 1.5 million dollars or 0.9% of net sales. Income Tax Benefit was $4,000 or 6.2% of pre-tax loss compared to a benefit of $0.3 million or $23.2% of pre-tax loss last year.
Michael Henry: The lower income tax rate this year was attributable to immaterial state tax benefits arising in a quarter with near-break even pre-tax results. Net loss was $69,000 or break even on a per share basis compared to last year's net loss of $1.1 million or 4 cents per share.
Michael Henry: Turning to our balance sheet, we ended the second quarter with total cash and marketable securities of approximately $77 million and no borrowings under our asset-backed credit facility. We ended the second quarter with net inventories of 4.1% amid the peak of the back-to-school season. Total capital expenditures for the first half were $4.6 million.
Michael Henry: Turning to the third quarter of fiscal 2024, comparable net sales for fiscal August increased by 1%, which was our first positive monthly comp since February 2022. While that result was encouraging, it should be noted that for each of the past three fiscal years, fiscal August has produced our best comp sales performance of the third quarter followed by a significant slowing in our business relative to August during each of September and October.
Michael Henry: We expect a similar trend pattern this year. As we have discussed during each of our past two earnings calls, the impact of the 53rd week and last year's retail calendar created the timing shift of the back-to-school sales volume into the second quarter this year from what was at the start of the third quarter last year. As a result of this timing shift, total net sales for the comparable third quarter this year start with an $18.4 million deficit versus last year before considering comparable net sales changes.
Michael Henry: Based on these factors and other current and historical trends, we currently expect the following for our fiscal 2024 third quarter operating results. Total net sales to be in the range of approximately $140 million to $146 million, translating to a comparable net sales decline in the range of 6% to 2% respectively. SGNA to be approximately $49 million before factoring in any potential non-cash store-asset impairment charges which may arise. Pre-tax loss and net loss to be in the range of approximately $11.6 million to $8.7 million respectively with a near-zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets.
Michael Henry: Lost per share to be in the range of 39 cents to 29 cents respectively based on estimated weighted average shares of approximately $30 million. We expect to have 246 total stores open at the end of the third quarter and that decrease of three from the end of last year's third quarter. During the fourth quarter, we currently expect to open two new stores and close five unprofitable stores. The number of store closures may likely grow in connection with some natural lease explorations occurring at the end of the fiscal year and depending on the outcome of pending lease renewal discussions. Each decision we make will be rooted in maximizing profitability going forward.
Michael Henry: In closing, as we said before, we continue to believe it will be challenging for us to improve our sales results in the current consumer environment but we will continue to challenge ourselves to adapt and improve. We are bringing in new product collaborations, such as our recently launched partnership with NASCAR as an example. We are introducing several new brands over the back after fiscal year, aiming to create new customer interest and sales opportunities.
Michael Henry: We will continue to work connecting more deeply with our customers in authentic ways and invest in the opportunities that we see to improve our business. Our goal remains to return to generating net sales growth, profitability and shareholder value, which will take time with the headwinds we are currently facing. But we are making every effort to get there as soon as we reasonably can.
Michael Henry: Our project will now go to our Q&A session. Thank you.
Operator: We will now begin the question and intercession. To ask a question, you may press start and want on your telephone keypad. If you are using a speaker phone, please pick up your hands before pressing the key.
Operator: If you have any time your question has been addressed, and you would like to withdraw your question, please press start and choose. At this time, we will pause momentarily to assemble a roster.
Bruce Geller: The first question comes from Bruce Geller with Geller Ventures. Please go ahead.
Hezy Shaked: Good afternoon. Looking back at this company pre-COVID, it was a very consistent company, fairly profitable, strong cashflow generation. There were times where you went through a rough patch, like the one you have recently, but you always came out of it strong and got back to normalized levels. That doesn't seem to have happened this time around. Can you please describe what has changed structurally in the business that is preventing this from happening?
Hezy Shaked: I will take this call. Several things. Number one, if you look at the record of the last three years or so, it was declining sales year of the year. The fact 21, which was a weird year for everybody. A lot of it, and we are based in Orange County, California, a lot of it had to do with the pandemic and the changes in behavior of employees, etc. We addressed all that stuff since I came in, but there's a lot of work to do in order to get it back on track to where we were.
Hezy Shaked: But it seems like something more structural has changed because you guys don't seem to be able to break out of the funk that you've been able to do so historically. And you're also talking about a very difficult consumer environment, which it is. However, there are plenty of comparable consumer or power retailers that are doing just fine right now. So it seems like, again, there's something more structural, which is what I'm really trying to gain a grasp of.
Hezy Shaked: Yeah, I can say that it's something specific I can tell you. I can tell you that many decisions we've made in the past didn't work out. Now we have to change them. It's including systems, etc. But it's not one thing that is broken. There was a lot of things that we had to address and we are. And like any situation that happened before it takes time to turn it around.
Hezy Shaked: Yeah, the two things I'll add for you. Pardon me, I've got allergy issues going on so pardon my voice. Obviously our sales for square foot in store have dropped quite significantly since 2019.
Hezy Shaked: That's the first structural issue which has been addressing. Any other primary thing is really the cost of labor. So when you compare back to 2019 before the pandemic, our average hourly rate for store payroll is 32% higher than it was in 2019. Strictly because of all the minimum wage increases that have taken place all over the country but predominantly in California where for several years in the road went up a dollar per hour per year.
Hezy Shaked: This most recent year was 50 cents and almost half of our stores are in the state of California. So a really big hit there. When you think about a 32% higher average rate for store payroll with sales that are not higher than they were in 2019. That's a that's a big disconnect. And we manage store payroll extremely tightly every single week. But those those are the facts, you know, the minimum wage impact is tremendous.
Operator: This concludes our question and answer session.
Michael Henry: I would like to turn the conference back over to Michael Harry for any cold new remarks. Well, thank you all for joining us.
Michael Henry: Have a good evening.
Michael Henry: We'll look forward to sharing our third quarter results with you in early December. Thank you very much.
Operator: The conference has now concluded. Thank you for attending today's presentation.
Operator: You may now disconnect. Thank you very much. [inaudible]