TLYS - NYSE

Good afternoon, everyone, and welcome to the Tilly's, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. At this time, I would like to turn the floor over to Gar Jackson with Investor Relations. Please go ahead.

Good afternoon, and welcome to the Tilly's, Inc. fiscal 2025 fourth quarter earnings call. Nate Smith, President and Chief Executive Officer, and Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results and then host a Q&A session. A copy of Tilly's, Inc. 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 the call for the next 30 days. Certain forward-looking statements will be made during this call that reflect 2026; actual results may differ materially from current expectations based on various factors affecting Tilly's, Inc. business. Accordingly, you should not place undue reliance on these forward-looking statements. 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 2025 fourth 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. We will include a Q&A session after our prepared remarks. I will now turn the call over to Nate Smith.

Thank you, Gar, and good afternoon to everyone joining us today. We finished fiscal 2025 surpassing our expectations on both the top line and bottom line for the fourth quarter relative to our outlook provided in early December. We ended the fiscal year with six consecutive months of accelerating positive comp momentum and 18 consecutive positive comp weeks. That momentum drove our first profitable fourth quarter and first positive comp sales fiscal year since fiscal 2021. Our momentum has continued to start fiscal 2026 with a 20% comparable net sales result in February. We have meaningfully improved our merchandise assortments and evolved our brand and digital marketing efforts to improve our customer engagement. Additionally, we have closed underperforming stores and sustained solid operational execution, delivering significantly improved results compared to last year. From a merchandising perspective, we began fiscal 2025 looking to reinvigorate our brand mix and to clean up excess aged inventory. With each passing quarter, our comparable net sales results and product margins improved as these changes were being made, ultimately leading to comp sales growth throughout 2025, which is momentum we are carrying into early fiscal 2026. Our merchandising teams put in a lot of effort to make the necessary changes to drive these improved results, and I am confident in their abilities to drive further improvements in fiscal 2026. I would especially like to acknowledge Michael Singulani, who we just promoted to Chief Merchandising Officer, for his leadership and tireless efforts in turning our sales trajectory around over the past year and setting us up for such a strong start to fiscal 2026. Good product offerings need to be supported by effective marketing strategies and tactics to help new customers realize who we are and what we have to offer, to update existing customers on changes we have made, and to reintroduce Tilly's, Inc. to former customers who may have disengaged from our brand. We believe our marketing team's efforts to drive greater consumer awareness and consideration for Tilly's, Inc. have made a significant impact through engaging campaigns, refreshed content, and exciting events, as evidenced by our growing TikTok following and reversing declines in our active customer loyalty program membership. These efforts will continue in various ways throughout fiscal 2026 to build upon the successes achieved in fiscal 2025. In terms of store real estate, with the improved store comp trends we have seen over the last seven months and counting, and because our unit economics support it, we are now pivoting from a store closure posture to a disciplined approach to new store openings in fiscal 2026, with a plan to open four to six new stores. We will remain selective and reasonably conservative in our future expectations for new stores, but it is encouraging to reach an inflection point of feeling the confidence to begin strategically considering store growth again. Fiscal 2025 was a year of significant store optimization, resulting in 21 total store closures. We are proud of the fact that we were able to deliver sales growth in the fourth quarter with 17 fewer net stores. At the present time, we have four known store closures that will take place late in the first quarter, and while that number may change as the year progresses, we do not currently expect to close a significant number of additional stores this year. Our infrastructure investments in a price optimization tool during 2025 and in warehouse management software in mid-fiscal 2024 have now been producing the anticipated benefits we expected. Our price optimization tool has contributed meaningfully to our improved fourth quarter product margins. The new warehouse system is now helping drive significant labor efficiencies within our store and e-commerce distribution centers. Further investments in our business are expected to continue during fiscal 2026, including an AI-driven merchandise allocation tool that we believe will lead to greater operating efficiencies over time. In closing, we are very excited about our prospects for fiscal 2026. We believe our turnaround is real, the fundamentals are fixed, our top line is growing, we are looking to reinitiate store growth, and we must continue to build upon the progress made thus far. The team has done the hard work. Now we are optimizing. We are not yet profitable on an annualized basis, but we see a clear path to get there after generating profit in two of the last three quarters. We built forward momentum in our business throughout fiscal 2025, and that momentum has carried into an unprecedented start to fiscal 2026. Given current trends, we expect to deliver further improvement in both top line and bottom line performance in each quarter of the year. We look forward to discussing our progress with you as the year progresses. I will now turn the call over to Mike to share the details about our fiscal 2025 fourth quarter operating results and to introduce our fiscal 2026 first quarter outlook.

Thanks, Nate. We finished fiscal 2025 with stronger sales and product margins than we anticipated, along with lower expenses, to achieve our first profitable fourth quarter since fiscal 2021. Details of our fourth quarter operating results compared to last year's fourth quarter were as follows: Total net sales of $155,100,000 increased by 5.3% despite finishing fiscal 2025 with 17 fewer stores than a year ago. Comparable net sales for the 13-week period ended January 31, 2026, including both physical stores and e-commerce, increased by 10.1% with increases from both physical stores and e-commerce of 10.3% and 9.8%, respectively. That strong fourth quarter comp performance was enough to pull full-year comp sales slightly positive for the first time since fiscal 2021 at plus 0.3%. Total net sales from physical stores increased by 3.6% despite our 7.1% reduction in year-over-year store count. Net sales from physical stores represented 72.3% of total net sales compared to 73.5% last year. E-commerce net sales represented 27.7% of total net sales compared to 26.5% last year. Gross margin, including buying, distribution, and occupancy expenses, increased to 33.2% of net sales, an improvement of 720 basis points compared to 26% of net sales last year. Product margins improved by 470 basis points as a result of higher initial markups and lower total markdowns associated with operating with reduced and more current inventories than a year ago. Buying, distribution, and occupancy costs improved by 250 basis points, or $1,900,000 in the aggregate, primarily due to lower occupancy costs associated with our reduced store count and partially offset by increased shipping costs associated with our online net sales growth. Total SG&A expenses were $48,900,000, or 31.5% of net sales, a reduction of $3,500,000 or 410 basis points as a percentage of net sales, compared to $52,400,000 or 35.6% of net sales last year. Significant SG&A reductions compared to last year's fourth quarter were attributable to store payroll and related benefits of $1,600,000, primarily related to our reduced store count; lower noncash impairment charges of $700,000; reduced e-commerce fulfillment labor of $700,000; and a variety of smaller reductions across several line items. Operating income improved to $2,600,000, or 1.7% of net sales, from an operating loss of $14,100,000, or 9.6% of net sales last year. Income tax expense was $18,000, or 0.6% of pretax income, compared to $200,000, or 1.8% of pretax loss last year. Both years include the continuing impact of a full noncash valuation allowance on our deferred tax assets. Net income improved to $2,900,000, or $0.10 per diluted share, compared to a net loss of $13,700,000, or $0.45 per share last year, representing an improvement of $16,600,000, or $0.55 per share, versus last year's fourth quarter. Turning to our balance sheet. We ended fiscal 2025 with total liquidity of $87,800,000, comprised of cash of $46,300,000, no debt, and available borrowing capacity of $41,500,000 under our asset-backed credit facility. Net inventories were 10.8% lower, with an improved inventory aging compared to a year ago. Total capital expenditures for fiscal 2025 were $4,700,000 compared to $8,200,000 in fiscal 2024. Turning to 2026. Comparable net sales for the first month of the year ended 02/28/2026 increased by 20.1% relative to the comparable period of 2025. Based on current and historical trends, we currently expect the following for our fiscal 2026 first quarter operating results. Total net sales to be in the range of approximately $119,000,000 to $125,000,000, translating to a comparable net sales increase of 16% to 22%, respectively. We currently expect to generate product margin improvements of 310 to 330 basis points compared to last year's first quarter; SG&A to be approximately $44,000,000 to $45,000,000 before factoring in any potential noncash store asset impairment charges, which may arise; pretax loss and net loss to be in the range of approximately $10,100,000 to $8,000,000, respectively, with a near-zero effective income tax rate due to the continuing impact of a full noncash valuation allowance on our deferred tax assets; and loss per share to be in the range of $0.34 to $0.27, respectively, compared to a loss per share of $0.74 in last year's first quarter, with estimated weighted average shares of approximately 30,100,000. We currently expect to end the first quarter with 220 total stores, a net decrease of 18 stores, or 7.6%, from the end of 2025. We are not in a position to provide annual guidance given we cannot predict our comparable net sales performance for the balance of the fiscal year with any certainty. However, for illustrative purposes regarding our potential to return to profitability in 2026, and subject to various assumptions with respect to product margins, inventory levels, and expenses, we estimate that it would take an annualized comparable net sales increase of approximately 8% to 9% to begin generating profitability for fiscal 2026 as a whole. In closing, as Nate noted earlier, we are optimistic about our prospects in fiscal 2026 based on the sequential improvement in our comparable net sales trend we achieved from quarter to quarter throughout fiscal 2025 and into our strong start to fiscal 2026. Operator, we will now go to our Q&A session.

At this time, we will begin the question-and-answer session. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then one to ask a question. Our first question today comes from Matt Koranda from Roth Capital. Please go ahead with your question.

Hey, guys. Nice work in the quarter. I guess, first off, curious about the composition of the strong comp. The fourth quarter in particular? It looks like, based on the comments from the last time you guys gave public commentary, it probably accelerated in December and January, so I wanted to hear about the acceleration in comp, but also, if you can break down traffic versus ticket for that period, that would be helpful as well.

Sure, Matt. So, going back to the beginning of the third quarter, we did a plus one in August, plus one in September, plus six in October, then a plus eight in November, plus 10.6 in December, plus 12.4 in January, and, as we just said, a plus 20.1 in February, and March is off to an even stronger start than that so far. So really significant acceleration in our comp sales trend from month to month, on top of the quarter-to-quarter performance we were achieving throughout fiscal 2025 from Q1 through Q4. So just really excited to see this kind of performance. Our conversion rate has been super strong. It has been a high-teens, double-digit percentage increase compared to last year. Traffic has been improving, both stores and e-commerce performing, all departments positive. So, pretty much everything is moving in a favorable direction.

Got it. Okay. Good to hear. And then I guess just wanted to hear a little bit about what you think is working in the assortment. Obviously, really strong acceleration all the way through the February commentary you gave, and it sounds like March sounds pretty good. What is working? What do you think is driving higher traffic? And is there something in the assortment in particular? Is it a better marketing posture? Maybe just help us identify the big levers you pulled.

Thanks, Matt. This is Nate. Mike and I were talking last night about this, and, you know, we were constructing what we figured this question would come. It really is across every category. We are not seeing any spike in any particular category. We are seeing strength across the board, both genders, and kids. So, I think, obviously, our private label is working as well. So I think when we think about what was causing some of our struggles, it started with the assortment. We feel very strongly now our assortment across the board, across all categories, is where it needs to be, and we mentioned Michael Singulani coming in and taking charge of that and now being promoted to the CMO role. So I think that was a huge component of it. Let us also note the inventory situation was addressed too. So now we are selling far more full price than we were, say, a year ago, when we were selling a lot of off-price with aged and obsolete inventory. So our inventory levels are healthier. Our assortment is stronger. We have obviously rationalized some of our underperforming stores, and the consequence of all that is now really healthy margins.

Okay. Alright. That is helpful. Thanks, Nate. On the store openings, it sounds like you are telegraphing net opener of stores this year considering the four to six you mentioned in terms of opens and only a handful of closures near term. What determines the path forward on further expansion, I guess? Maybe just help us understand your head at on store expansion over maybe a medium to longer term? And then what are we factoring in, maybe for Mike, on CapEx for the store expansion this year?

So, to your first question, Matt, I think we feel good about our unit economics. We feel good about our ability to execute. For me, it is more the consumer spending environment in the long term. If the macro does turn against discretionary retail spending, certainly double-digit comps will become harder to sustain, no matter how well we execute. But, largely speaking, I would say we are leaning into it this year and can only expect to be more aggressive in 2027, the way we are viewing our business.

Yeah. In terms of total CapEx, we do not expect our CapEx to reach $10,000,000 in the aggregate. It has been less than that each of the last two years, as we noted in our prepared remarks. It should be in a similar neighborhood; I would say not more than $8,000,000 to $9,000,000 would be our expectation as we sit here today. And, you know, look, we are still on the path of recovery. We struggled for a lot of 2025. So we have lost productivity in terms of sales per square foot. Finishing fiscal 2025, we are—

Ladies and gentlemen, we seem to be having a technical difficulty with the main speaker line. Please stay on the line. We will be reconnecting here momentarily, and, again, we do apologize for the audio break. We are reconnecting Mr. Henry's line. One more moment. We should have him back on the line for you. Thank you. This is the conference operator once again. We have reconnected Michael's line into the conference. Michael, we still have Matt on the line for you if you would like to continue with the Q&A.

Yes. Sorry about that, everybody. We had some sort of technical glitch happen here that booted us out of the line. So apologies for that little hiccup. We are back. Hey. Can you guys hear me, by the way?

Yes. We can hear you. Can you hear us? Yes, sir. We can hear you.

Alright. Got it. Just want to make sure. I think, Mike, you may have, you kind of dropped off when you were talking about CapEx for stores—probably no greater than $8,000,000 to $9,000,000—and then it started getting a little choppy. So maybe if you want to finish commentary around that, that would be helpful.

Yeah. I started talking about our sales per square foot—that we are ending fiscal 2025 at roughly about $260 per square foot, which is still well below where we have been as a business in the past—and we would expect ourselves to continue to improve on that metric. And, as we do, it will continue to give us greater confidence in even expanding the rate of store expansion that we have noted for this year to even higher levels in future years, is what we would expect to be able to do. So lots of room yet to continue to improve this business. We struggled a lot through fiscal 2022, 2023, 2024, 2025, and we are just beginning to regain that lost ground that we struggled with for that three-to-four-year period. So we will walk before we run. We will continue to be reasonably conservative in our expectations for new stores. They have to be at the right economics, but it is nice to reach this inflection point where we are starting to look ahead and feel confident about our ability to reinitiate growth.

Okay. Great. Maybe just last one from me. It was helpful to hear commentary on the zone in which you would be profitable from a comp perspective. Just curious if there are any other assumptions that we should be embedding in that profitability outlook, or hypothetical, I guess, profitability outlook? Is there more gross margin leverage embedded in that assumption with an 8% to 9% comp? Is there more you can do on SG&A expense that gets you to the breakeven line, or is it just a simple, sort of comp assumption you are making?

No. So, good question. So Mike talked about the sales per square foot. We have targets we want to hit. But on the other side of that, we are really on the efficiency journey now—what we are calling it. And we see a clear path with things like our price optimization tool, where we will continue to see margin upside. We have our AI solution to planning allocation rolling out here later part of the latter part of this year with Impact Analytics. We will be launching RFID latter part of this year, which will give us, obviously, better inventory accuracy resulting in a reduction of stockouts, and it will also cut our manual inventory counting time by probably 80% to 90%. And then we have a series of back-end efficiency projects as it relates to all of our product handling and fulfillment processes, to include store labor efficiency is another workstream we have underway. So we are approaching this from both sides—not only sales per square foot, but what we would consider to be efficiency on the back end.

Yeah, and just to add on to that, an 8% to 9% comp increase does not correlate to a proportionate increase in SG&A. To the efficiency comments that Nate is making from a variety of angles, the aggregate increase in SG&A, despite continuing minimum wage increases and other cost pressures, would not cause SG&A in the aggregate to go up as much as you might expect with an 8% to 9% comp. We do also expect to continue to improve product margins this year—more in the front half of the year than in the back half of the year. If you follow the cadence of our product margin improvement that we achieved each quarter through fiscal 2025, we are still going to have a meaningful amount in Q1. It will start to moderate, but still be triple digits in Q2, if all goes as planned, and then it would more moderate in Q3 and Q4.

That makes sense. Thanks, Mike, and I appreciate it, Nate.

Ladies and gentlemen, at this time, I am showing no additional questions. I would like to turn the floor back over to management for any closing remarks.

I would just like to say thank you for joining us today, and we look forward to sharing our fiscal 2026 first quarter results with you in early June. Have a good afternoon. Have a good evening.