Tilly’s, Inc. reported third-quarter earnings and sales that came in well above guidance. Total comparable sales compared to the pre-pandemic third quarter of fiscal 2019 increased by 27.4 percent.

“Fiscal 2021 continues to be a record-setting year for us so far, which we believe has been driven by our strong product assortment, an improved consumer spending environment, and the hard work and dedication of our entire team. Each of the first three quarters have produced record net sales and earnings per share,” commented Ed Thomas, President and Chief Executive Officer. “The fourth quarter is off to a strong start and, despite all of the challenges in the current environment, we remain optimistic about our business prospects for the remainder of fiscal 2021 and into fiscal 2022 at this time.”

Fiscal 2021 Third Quarter Operating Results Overview
The following comparisons refer to the company’s operating results for the third quarter of fiscal 2021 versus the third quarter of fiscal 2020 ended October 31, 2020:

  • Total net sales were $206.1 million, an increase of $65.8 million or 46.9 percent, compared to $140.3 million last year.
    • Net sales from physical stores were $165.3 million, an increase of $60.7 million or 58.1 percent, compared to $104.6 million last year, which was primarily due to a much more normalized back-to-school season this year that was free of pandemic-forced closures. Net sales from stores represented 80.2 percent of total net sales compared to 74.5 percent of total net sales last year. The company ended the third quarter with 243 total stores compared to 238 total stores at the end of the third quarter last year.
    • Net sales from e-commerce were $40.8 million, an increase of $5.1 million or 14.3 percent, compared to $35.7 million last year. E-commerce net sales represented 19.8 percent of total net sales compared to 25.5 percent of total net sales last year.
    • Total comparable net sales for the third quarter of fiscal 2021 compared to the pre-pandemic third quarter of fiscal 2019 increased by 27.4 percent. Comparable net sales from physical stores increased by 18.3 percent, with increases across all geographic markets, and e-commerce net sales increased by 80.5 percent. In the third quarter of fiscal 2019, total net sales from physical stores represented 85.3 percent of total net sales while net sales from e-commerce represented 14.7 percent of total net sales.
  • Gross profit was $76.7 million, or 37.2 percent of net sales, a record in the company’s history as a public company, compared to $40.7 million, or 29.0 percent of net sales, last year. Buying, distribution and occupancy costs improved by 690 basis points collectively, despite increasing by $2.7 million in total, due to leveraging these costs against higher net sales. Occupancy costs improved by 540 basis points despite increasing by $0.5 million with 5 net new stores. Distribution costs improved by 110 basis points despite increasing by $2.1 million. Buying costs improved by 40 basis points despite increasing by $0.1 million. Product margins improved by 130 basis points versus last year and by 200 basis points compared to fiscal 2019’s third quarter due to lower markdowns.
  • Selling, general and administrative (“SG&A”) expenses were $47.7 million, or 23.2 percent of net sales, compared to $37.1 million, or 26.5 percent of net sales, last year. SG&A improved by 330 basis points as a percentage of net sales, despite increasing by $10.6 million, due to leveraging these costs over higher net sales compared to last year. Primary causes of the SG&A dollar increase included higher store payroll and related benefit costs of $7.6 million, primarily due to operating all stores for the entirety of the quarter and serving significantly higher net sales, corporate bonus accruals of $1.8 million due to the company’s strong operating performance thus far in fiscal 2021, and increased marketing expenses of $1.2 million.
  • Operating income improved to $29.0 million, or 14.1 percent of net sales, compared to $3.5 million, or 2.5 percent of net sales, primarily due to the significant increase in net sales.
  • Income tax expense was $8.2 million, or 28.1 percent of pre-tax income, compared to $1.4 million, or 39.8 percent of pre-tax income, last year. The decrease in the effective income tax rate was primarily due to the prior year impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provided for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates.
  • Net income improved to $20.8 million, or $0.66 per diluted share, which are third quarter records for the company as a public company, compared to $2.1 million, or $0.07 per diluted share, last year. Weighted average shares were 31.4 million this year compared to 29.8 million last year.

Tilly’s had projected third-quarter net sales to be in the range of approximately $187 million to $193 million and earnings per diluted share to be in the range of $0.30 to $0.34.

Fiscal 2021 Year-to-Date Results Overview
The following comparisons refer to the company’s operating results for the first thirty-nine weeks of fiscal 2021 versus the first thirty-nine weeks of fiscal 2020 ended October 31, 2020:

  • Total net sales were $571.2 million, an increase of $217.8 million or 61.6 percent, compared to $353.4 million last year.
    • Net sales from physical stores were $457.6 million, an increase of $222.2 million or 94.4 percent, compared to $235.4 million last year, primarily due to the various periods of government-mandated store closures during the first thirty-nine weeks of last year as a result of the pandemic. Net sales from stores represented 80.1 percent of total net sales compared to 66.6 percent of total net sales last year.
    • Net sales from e-commerce were $113.6 million, a decrease of $(4.4) million or (3.7) percent, compared to $118.1 million last year, primarily due to the anniversary of last year’s substantial increase in e-commerce net sales during the period of government-mandated store closures. E-commerce net sales represented 19.9 percent of total net sales compared to 33.4 percent of total net sales last year.
    • Total comparable net sales for the first thirty-nine weeks of fiscal 2021 compared to the first thirty-nine weeks of pre-pandemic fiscal 2019 increased 22.5 percent with comparable net sales from physical stores up 13.7 percent and e-commerce net sales up 74.5 percent. In the first thirty-nine weeks of fiscal 2019, total net sales from physical stores represented 85.4 percent of total net sales while net sales from e-commerce represented 14.6 percent of total net sales.
  • Gross profit was $206.3 million, or 36.1 percent of net sales, compared to $83.9 million, or 23.7 percent of net sales, last year. Buying, distribution and occupancy cost improved by 1050 basis points collectively, despite increasing by $5.9 million in total, due to leveraging these costs against higher net sales. Product margins improved by 190 basis points due to reduced markdowns.
  • SG&A expenses were $136.0 million, or 23.8 percent of net sales, compared to $101.1 million, or 28.6 percent of net sales, last year. The 480 basis point improvement in SG&A as a percentage of net sales was primarily due to leveraging these expenses against higher net sales as a result of all stores being in operation for the entirety of the first thirty-nine weeks of the current year. Of the $34.9 million increase in SG&A, $24.0 million was attributable to store payroll and related benefits due to operating all stores for the entirety of the current year and serving significantly higher net sales, $6.0 million was attributable to corporate bonus accruals associated with the strong operating performance so far in fiscal 2021, $2.4 million was attributable to increased credit card fees associated with higher net sales, $2.2 million was attributable to increased marketing expenses, and $2.2 million was attributable to increased corporate payroll and related benefits due to being more fully staffed this year compared to significant furloughs and temporary management pay reductions during last year’s store shutdown period. Partially offsetting these SG&A increases is a net year-to-date decrease of $3.4 million attributable to a $1.7 million disputed California sales tax assessment originally recorded in the third quarter of fiscal 2020, which was subsequently resolved in the company’s favor and reversed in the first quarter of fiscal 2021.
  • Operating income improved to $70.3 million, or 12.3 percent of net sales, compared to an operating loss of $(17.2) million, or (4.9) percent of net sales, last year, as a result of the combined impact of the factors described above.
  • Income tax expense was $17.9 million, or 25.5 percent of pre-tax income, compared to an income tax benefit of $(6.4) million, or 39.2 percent of the pre-tax loss, last year. The decrease in the effective income tax rate was primarily due to deferred income tax benefits of $1.0 million derived from employee stock option exercise activity this year and the prior year impact of the CARES Act, which provided for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates.
  • Net income improved to $52.2 million, or $1.68 per diluted share, which exceeds the earnings of any full fiscal year, compared to a net loss of $(10.0) million, or $(0.34) per share, last year. Weighted average diluted shares were 31.0 million this year compared to 29.7 million basic shares last year.

Balance Sheet and Liquidity
As of October 30, 2021, the company had $155.6 million of cash and marketable securities and no debt outstanding. This compares to $125.3 million at the end of the third quarter last year, which included an aggregate of $12.4 million of withheld store lease payments, and no debt outstanding. The company ended the third quarter with inventories per square foot up 29.4 percent relative to the end of the third quarter of fiscal 2020 as the company seeks to support the current momentum of its business and position itself for the holiday season amid the ongoing supply chain challenges.

On November 18, 2021, the company’s Board of Directors declared a special cash dividend of $1.00 per share, or approximately $31 million in the aggregate, to all Class A and Class B common stockholders of record as of December 7, 2021. This dividend will be paid on December 15, 2021.

Fiscal 2021 Fourth Quarter Business Update and Outlook
Last year’s fourth quarter was the first full period since the pandemic began in which the company was fully operational. Total comparable net sales through November 30, 2021, increased by 19.6 percent compared to last year, with comparable net sales increases from physical stores of 27.6 percent and from e-commerce of 3.9 percent. Based on current and historical trends, and assuming that all of the company’s stores and e-commerce will remain in operation throughout the fourth quarter and that global supply chain challenges will not have a material negative impact on the company’s fiscal 2021 fourth-quarter net sales results, the company would expect its fourth-quarter net sales to be in the range of approximately $210 million to $215 million and earnings per diluted share to be in the range of $0.42 to $0.50. This outlook is based on the company’s expectations that its product margins will improve by 50 to 100 basis points relative to last year’s fourth quarter based on an assumption of a less promotional environment (last year’s fourth-quarter product margins were up 210 basis points compared to fiscal 2019’s fourth quarter), its SG&A expenses will be approximately 26 percent of net sales, its estimated effective income tax rate will be 27 percent, and its weighted average diluted shares will be approximately 31.6 million. The company currently expects to have 243 total stores at the end of fiscal 2021 compared to 238 at the end of fiscal 2020. This outlook range compares to $178 million in total net sales and $0.29 in earnings per diluted share during last year’s fourth quarter.

Fiscal 2022 New Store and Capital Expenditure Plans
During fiscal 2022, we currently plan to open approximately 15 to 20 new stores within existing markets, primarily in California, Texas and the Northeast, assuming we are able to negotiate what we believe to be acceptable lease economics. We expect our total capital expenditures for fiscal 2022 to be in the range of approximately $25 million to $30 million, inclusive of our new store plans, investments in the website and mobile app upgrades, distribution efficiencies, and other information technology infrastructure investments.

Photo courtesy Tilly’s