Q2 2019 Earnings Call

Greetings and welcome to Tillys Inc. second quarter 2019 earnings results Conference call.

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A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Gar Jackson with Investor Relations.

Please go ahead.

Good afternoon, and welcome to the Tillys, that's called 2019 second quarter earnings call, that's honest, president and CEO and Michael Henry CFO will discuss the company's results and then has secured a sasha.

For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at Tilly's Dotcom 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 to reflect tilly's judgment and analysis only as of today August 28, 2019, and actual results may differ materially from current expectations based on a number of factors affecting tilly's business.

Accordingly, you should not place undue reliance on these forward looking statements for a more thorough discussion of the risks and uncertainties associated with any forward looking statements. Please see the disclaimer regarding forward looking statements that is included in our fiscal 2019 second quarter earnings release, which was furnished to the FCC today on form 8-K, as well as our other filings with the FCC referenced in that disclaimer today's call will be limited to one hour and will include a Q and a session. After our prepared remarks, I will now turn the call over to Ed.

Thanks, Scott Good afternoon, everyone and thank you for joining us today.

Following a tough start to the second quarter in May.

We posted positive comps both in stores and online during each of June and July to finish the quarter with better than expected comps product margin and earnings per share.

The second quarter was our 13th consecutive quarter with flat to positive comps.

Footwear boys accessories, and men's all posted positive comps.

For the quarter, a woman's EM girls weren't negative.

Yeah, so back to the back to school season, our positive momentum has continued and we are most encouraged that our women's business has turned positive and has been one of our better performing departments in recent weeks.

Total company comps are up 4.2% through August 26.

Well, both stores and online Comping positive.

These results give us optimism for the third quarter in the back half of fiscal 2019, despite going up against some tougher comp comparison.

Turning to real estate, we expect to open four new Oh, sorry is totally stores during the third quarter, one of which is already open and seven more during the fourth quarter prior to Thanksgiving for a total of 13, new store openings for the year.

Our store growth continues to be primarily focused on expanding our presence in existing markets.

And which we believe that we can achieve further market penetration.

Particularly within the northeast, Texas and Chicago markets.

We also plan to open our first permanent rescue branded store at the Irvine spectrum here in California in May of 2020.

In terms of existing stores, we have addressed approximately 70% of all these decisions for this year continuing our efforts to improve our go forward occupancy cost structure, considering the current and anticipated retail environment. We have no no store closures for the remainder of the year at this time.

Although it is possible that some may still occur.

As we finalize our remaining leasing decisions.

Turning to technology, we launched and enhance loyalty program during the second quarter that I could <unk> instant redeem feature for customers to take advantage of their rewards faster than before which has been very well received we also expect to launch it. They buy now pay later program before the holiday season, we remain committed to investing in customer facing technologies to further strengthen customer engagement and convenience with the goal of driving more sales.

In closing as I noted earlier, the third quarter is off to a promising start leaving us optimistic about our prospects for the third quarter in the back half of 2019.

Mike will now provide more details on our second quarter operating performance and introduce our third quarter earnings outlook Mike.

Thanks, Ed or fiscal 2019 second quarter operating results compared to last year's second quarter were as follows.

Total net sales of $161.7 million increased by $4.3 million or 2.8% from $157.4 million last year.

Total comparable store net sales, including E Commerce were up 0.6% on top of last year's increase of 4.4%.

E Commerce sales increased 15.7% and represented approximately 14.1% of our total net sales this year.

Compared to an increase of 8.1% and a 12.5% share of our total net sales last year.

Comps in physical stores were down 1.5% for the quarter were positive in each of June and July after having started the quarter with negative high single digits in may.

Stores represented approximately 85.9% of our total net sales this year compared to 87.5% of total net sales.

In a comp increase of 3.8% in stores last year.

We ended the quarter with 229 total stores, including two rescue branded pop up shops.

Compared to 226 total stores last year, which included three rescue shops.

Gross profit, including buying distribution and occupancy expenses was $51.7 million or 32.0% of net sales compared to $50.1 million or 31.8% of net sales last year.

Product margins were flat as a percentage of net sales, which was better than we expected considering our stuff start to the quarter.

Buying distribution and occupancy costs leveraged 10 basis points in total.

Improved leverage of buying and occupancy costs.

Offset is zero point $9 million increase in E com shipping costs associated with the 15.7% E Commerce sales growth.

Regarding the legal settlement coupons, we issued last year.

Approximately 2.1% have been redeemed life to date, resulting in no material impact on our business.

All such coupons expire on September four next week.

Total egina expenses were $39.6 million or 24.5% of net sales compared to $37.6 million or 23.9% of net sales last year.

The $2 million increase and asked you know it was primarily due to a $1.5 million credit in last year's SG nine attributable to the favorable resolution of a previously disclosed legal matter.

The current year also included higher E com marketing and fulfillment expenses of approximately $1 million associated with E Commerce sales growth.

And higher store payroll costs of approximately zero point $9 million or rising from minimum wage and annual merit increases.

These increases were primarily offset by lower bonus expenses of $1.2 million and lower non cash charges zero point $5 million.

Operating income was $12.1 million or 7.5% of net sales compared to $12.5 million or 7.9% of net sales last year.

This slight decline in operating income was primarily attributable to last year's $1.5 million legal matter credit.

Income tax expense was $3.4 million or 26.8% of pre tax income.

Compared to $3.3 million or 25.3% of pre tax income last year.

Net income was $9.3 million or 31 cents per diluted share compared to $9.7 million or 33 cents per diluted share last year.

Last year's net income includes approximately $1.1 million after tax or four cents per diluted share relating to the favorable resolution of the previously disclosed legal matter.

Weighted average diluted shares for the quarter were 29.7 million consistent with last year.

Turning to our balance sheet, we ended the quarter with cash and marketable securities totaling $124.8 million and no debt compared to $124.2 million and no debt last year.

We ended the quarter with inventories per square foot down 3.6% to last year.

Total capital expenditures were $4.8 million compared to $6.7 million last year.

We expect total capital expenditures for fiscal 2019 will not exceed $20 million.

Now turning to our outlook for the third quarter of fiscal 2019.

As I noted earlier, our total comparable store net sales, including E. Commerce are up 4.2% through August 26.

Based on current and historical trends, we expect total net sales to range from approximately $151 million to approximately $156 million based on a comparable store net sales increase of 1% to 4% for the quarter.

We expect operating income to range from approximately $6.5 million to approximately $8.5 million.

And earnings per diluted share to range from 18 cents to 22 cents.

This outlook assumes no noncash store asset impairment charges and effective income tax rate of approximately 27%.

And weighted average diluted shares of approximately 29.8 million.

We expect inventories per square foot to remain consistent with our comp sales performance operator, we'll now go to our Q and a session.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

[laughter].

Our first question comes from the line of Dave King with Roth Capital Partners. Please proceed with your question.

Thanks afternoon, guys Hi.

I guess first off on the operating margins.

At least on a core basis, I think were up 50 basis points or so.

On a slightly positive comp.

Yet the guidance I think assume sort of down margins on a on a stronger comp is that conservatism or just what are some of the puts and takes to that outlook.

You are referring to Q3.

Yeah, sorry.

The guidance for Q3, it looks like Youve got down margins, if I use the seven and a half the midpoint of op income.

No I mean last year's Op income was four six and the range, we're suggesting would get you anywhere from slightly below that too.

Not quite a 100 basis points better than that so there might be just something in individual line items that you need to tweak a bit.

Okay, I mean Thats fair. There was also I think last year, you had some offering costs related to the.

The secondary offering.

And again I was thinking on a core basis, yes, I was saying on a core basis. It looks like yeah I got you.

Yes, and yes, there would be in the GAAP numbers for last year, Yes, I follow what you're saying.

You know again as we've talked about for I think a whole year now.

If you're on the better end of our comp guidance, there would probably be a little over half a million dollars of extra payroll expense because of minimum wage increases.

And again as we've seen for three quarters in a row.

With significant E com.

Growth comes E comm fulfillment.

E Com marketing and shipping costs that go with E com that would roll into there. So on this DNA line in particular, there's probably close to $1 million of added expense year over year from that so those are the primary pieces of expense movement.

Year on top of year that you might not kind of specifically have layered into your model.

Okay that helps and then.

Switching gears.

How is the traffic versus conversion.

Particularly in the maybe the June July timeframe, and then how has that trended.

Into August so far.

Our traffic in total for the quarter was down low single digits.

So for two quarters in a row now it's been slightly down in Q1, it was down less than 1% in.

For the second quarter, it was down not quite 2%.

Conversion was actually up low single digits.

For the quarter and then on the average sale.

It was down slightly down less than 1% as you transition into August all those metrics are in the right direction in a positive direction. So we've seen positive traffic each week, so far in the month of August .

All of our markets are positive in the month of Oregon in the month of August and all departments are comping positive, thus far with the slight exception of accessories being just barely below flat yes.

Okay. That's good to hear it one last one from me add.

Looks like you took down the Capex guidance, maybe maybe a little bit just high level.

How are you thinking about the potential for further capital return, whether that's further special dividends after.

Some of those over the last three years regular dividend just some high level thoughts would be helpful. Thank you well well look at that Dave like we always do we look at it pretty much quarterly with.

As the board.

So well evaluate that there's nothing planned right now, but we'll certainly evaluate it as we get further into the year and well make that probably we will make what we think is the right decision at the proper time.

Okay fantastic. Thanks for taking my questions and good luck addressed there. Thank you.

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As a reminder, if you would like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.

Our next question comes from the line of Jeff Van Sinderen with B. Riley FBR. Please proceed with your question.

Hi, everybody and let me say congratulations on the strong resurgence and trends.

I guess the first thing I wanted to ask you about is just sort of the overall take the job on the strong branded cycle that we've been and just wondering also about the all rescue rescue.

Now the other private label, how that's been trending for you and then maybe you can talk about thinking behind the rescue stores that you're opening in Irvine.

Okay. So first of all the Brent.

The brand performance continues to be very strong for us.

I wouldn't say, there's any major changes and changes and Brad. There's a couple of brands that have emerged as being strong stronger that we didnt have last year Didnt have a major presence like champions champions them up so thats, probably the most significant went out there and some of our top brands are a wrong brands rescue being our best brand. It continues to perform very very well and quite frankly, I think our results would have been a little bit better had we had more inventory and women's rescue going through a back to school. So.

Wherever we are very excited about the prospect of building that brand and that as far as the Standalone store.

It's still in development stages or in terms of what that merchandise mix will.

Finally bay, but we have somebody dedicated to it and.

More to come on that as we get further in the year, it's still very early stage of development.

Okay, Great and then I think you launch the enhanced mobile App in Q2, just wondering responds to that I think you mentioned a couple of things in your prepared comments on loyalty.

Are you seeing that.

Be a driver for back to school and how do you see that impacting your business or remainder of second half. Okay. We havent really launched a new mobile app to enhance one we're still working on that but what we did do is we have a we launched an enhanced feature which is and then redeem of rewards and that has been really really well received by our loyalty customer base. So were excited about that and.

Well were going to continue to invest in anything that's omnichannel related or mobile as of through the balance of this year and probably well into next year too.

Okay and with the instant rewards that means they don't have to they can actually.

Use their rewards at the register for another purchase an incremental purchase the same time or how does that work.

They can do it on that very transaction as they are standing there.

The associated might tell me you have a dollar do you want to use it right now and they can use it right down on that very transaction.

Okay terrific and then you mentioned the buy now pay I think you said by now pay later program for holiday I'm, just wondering how that is going on.

It's it's after paying that where we're going to go with and that many retailers have adopted adapt to that so it's after paying.

We're working on trying to get that up for holiday, but.

It's we're really excited about the prospect of that.

It's kind of like the modern day layaway basically a customer pays for 25% of the purchase upfront and then they make an additional 25% payment every other week.

And the metrics behind it.

Indicate that it really helps average order value increased significantly.

Something psychologically about that buy now pay later.

So it seems that transcend into extra unit purchases.

With with that particular tool so looking forward to getting it implemented and see what it does for us.

Okay, Great and then I just have one final one if I could squeeze it in just looking toward next year. If we were to assume I know, it's early but if we were to assume modestly positive comps does it seem feasible for you to leverage and.

Do you think that the high single digit operating margin target longer term is still still intact.

Yeah, I mean, we still believe that that's that's the goal that's what we've been talking about for the last three four years. Since we've been here is that we consistently believed that we can get the business back into that level of performance. It does require us to continue to drive positive comps both from stores as well as online.

We will have another year of minimum wage increase here in California, and other dollars will go into effect on January one. So there are some additional cost pressures that will come into play.

No one's asked about tariffs yet, but obviously those are out there and whether they actually happen and when seems to change by the weak but.

You know we haven't we haven't really taken a hard look at next next year's model, yet, but I'm wondering if it's fair I think it's very achievable, Jeff So yes.

Okay, great. Thanks for taking my questions and continued success. Thank you.

Okay.

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As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.

I guess, if there are no questions will just wrap it up.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Ed Thomas CEO for closing remarks.

Thanks for joining us today, we look forward to discussing our third quarter results with you in early December have a good evening everyone. Thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.