Anne Rakunas - IR Daniel Griesemer - President and CEO Jennifer Ehrhardt - CFO.

Steph Wissink - Piper Jaffray & Co. Betty Chen - Mizuho Securities USA Dave King - ROTH Capital Partners Lorraine Hutchinson - BofA Merrill Lynch Jeff Van Sinderen - B. Riley Richard Jaffe - Stifel Janet Kloppenburg - JJK Research.

Good day and welcome to the Tilly's Incorporated First Quarter Fiscal 2014 Financial Results Conference Call. Today's conference is being recoded. At this time I would like to turn the conference over to Anne Rakunas of ICR. Please go ahead ma’am..

Thank you. Good afternoon everyone and thank you for joining us today to discuss Tilly's first quarter fiscal 2014 earnings results. On today's call are Daniel Griesemer, President and CEO, and Jennifer Ehrhardt, CFO. A copy of today's press release is available in the Investor Relations section of Tilly's website at tillys.com.

Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's website. I'd like to remind you that certain statements that we will make in this presentation are forward-looking statements.

These forward-looking statements reflect Tilly's judgment and analysis only as of today. The 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 the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter 2014 earnings release which is furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

As for today's call, we have a limit of one hour, so when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed. And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer.

Dan?.

Thank you Anne and good afternoon everyone. Thank you for joining us today. On our call, I'll be providing you with an overview of our first quarter performance and the key factors that drove our results. I will then comment on advancements of our 2014 strategic initiatives during the quarter.

And then Jennifer will review our financial results in more detail and provide our outlook for the second quarter of fiscal 2014. I'll provide a few closing comments. And then we'll open up the call for your questions.

Our earnings for the first quarter were in line with our expectations and reflects the continuation of the tough retail environment and the planned reduction in our clearance merchandise which put pressure on our comp store sales.

Throughout the quarter we remain focused on careful inventory management and operating discipline resulting in strong product margin improvement of approximately 60 basis points.

We delivered earnings per share of $0.02 in the first quarter in line with our outlook and we began the second quarter of fiscal 2014 with inventory well positioned at down 4.5% on a per square foot basis including inventory for future outlet locations.

On our fourth quarter call, we outlined our 2014 growth initiatives that we believe will lay the foundation for increased market share, brand awareness and improved profitability. These are increased product differentiation and innovation, a greater emphasis on our digital platform and evolving our real-estate strategy.

I would like to tell you how we’re advancing these initiatives.

First, in terms of product differentiation and innovation, we increased the products and brands that are new, unique and exclusive to Tilly's, with the goal of driving incremental sales as we continue to provide our customer the relevant merchandise that fits their actions towards inspired lifestyle.

Some examples are, we introduced several new brands including Asphalt Yacht Club and launched Vinyl Records as a new product category to support our lifestyle offering. We expanded our offering of exclusive merchandise with styles exclusive to Tilly's in the band’s Star Wars collection collaboration and with Sector 9 skateboards, to name just a few.

We are also moving forward with broader assortment offering and distribution of new Patrons of Peace brand and our own Full Tilt sport active line for juniors based on performance today.

These and other new brands and brand extensions are resonating well with our customer providing further conviction that we’re moving in the right direction with our brand our strategy. Turning to our digital platform, this is an incredibly important focus of attention in capital investment for us.

We see an extraordinary opportunity to engage and interact to our customer across key digital channels which we believe will increase our market share as well as our brand awareness and recognition.

We continued to build upon our fully integrated digital and omni-channel capabilities and began the process to upgrade our ecommerce and mobile platforms in the quarter. We also drove more direct and targeted communication to our customers with our first ever digital catalogue that was emailed to our data base over 1.4 million members.

We also recently offered our first exclusive event to our Tilly's Hookup loyalty program members and we’re pleased with the results. We have seen a very strong customer acceptance of our loyalty program with sign up at over 0.5 million members since we launched it just five months ago.

We’re also very happy to announce that we began operations in our new dedicated ecommerce fulfillment center at the beginning of May. We believe this state of the art facility will allow us to efficiently capitalize on the opportunity we see for our ecommerce business which we believe will be a key driver of our long-term growth.

I am particularly proud of how we executed this transition with minimal disruption to the business and I want to thank everyone involved for their efforts. Now, I would like to touch upon our real estate strategy. We opened three new stores in the first quarter including one outlet for a total of 198 stores at the end of the quarter.

As of today’s call, we have opened a total of six stores in fiscal 2014 and I am pleased to report that is Group B stores are performing significantly ahead of our expectation.

Strong performance from new stores in new markets such as Fayetteville, North Carolina; Independence, Missouri; and Oklahoma City, Oklahoma support our confidence in the relevance of our new store opportunity. We are also on track to open at least 18 new stores in fiscal 2014 and are on track with our outlet plans as well.

We continue to see strong support and interest from the real estate community who recognized the Tilly’s model is unique. And I am pleased with the caliber of real estate opportunities being presented to us. We remain focused on selecting locations that offer the strongest economics and venues where our new and existing customers want to shop.

And I now would like to turn the call over to Jennifer for more detail on our financial performance in the quarter and to update you on our second quarter fiscal 2014 outlook.

Jennifer?.

Thank you Dan and good afternoon everyone. For the first quarter, net sales increased 1.8% to $111.1 million, compared $109.1 million in the first quarter of 2013. Comparable store sales decreased by 6.8% compared to the same period in 2013, reflecting pressure from strong clearance selling in the first quarter of last year.

Comps were driven by declines in guide (ph) footwear and accessories and nearly flat comps in juniors and kids. Our e-commerce net sales grew 1.2% compared to the first quarter of 2013 and was also impacted by the planned reduction in clearance inventory.

Our first quarter comps reflect decrease in traffic and conversion partially offset by increase average transaction value. Gross profit was $31.3 million or 28.2% of net sales compared to 29.1% of net sales in the first quarter of 2013.

Appropriately positioned and managed inventory resulted in an approximately 60 basis points of improvement in product margin, which was offset primarily by deleverage in occupancy cost as a result of the negative comparable store sales.

Selling, general and administrative expenses were $30.3 million or 27.2% of net sales, compared to an SG&A rate of 25.6% in the first quarter of 2013 and reflect store payroll and other G&A deleverage on lower sales and comp and increased depreciation and other costs related to prior capital investments.

Our operating margin was 1.0% compared to 3.6% in the first quarter of 2013, reflecting the previously discussed deleverage of occupancy and store payroll cost and other SG&A increases, partially offset by higher product margins.

Net income was $0.6 million or $0.02 per diluted share based on a weighted average diluted share count of 28.2 million shares and an effective tax rate of approximately 45% due to a discrete item related to vested stock option forfeitures in the quarter.

This compares to net income in the first quarter of 2013 of $2.3 million or $0.08 per diluted share based on a weighted average diluted share count of 28 million shares.

Turning to the balance sheet, we ended the quarter with cash and marketable securities of $52.4 million, with no borrowings and no debt outstanding under our revolving credit facility.

Cash used for capital expenditures during the quarter totaled $7.9 million, compared to $11.4 million in the first quarter of 2013 and were primarily related to our new e-Commerce fulfillment center, new stores opened, and remodels completed during the quarter and new stores and remodels under construction during the quarter that are scheduled to open in the second quarter of 2014.

Inventory totaled $52.9 million at the end of the quarter, representing a decline of 4.5% on per square foot basis compared to the prior year and included inventory for future outlet openings. We remain focus on delivering healthy product margins and maintain strong management discipline.

Therefore, we have planned inventory per square foot at the end of the second quarter to be down slightly compared to the end of the second quarter 2013. We believe these best positions us in the terms of the level and composition of inventory as we prepared for the upcoming summer and back to school periods.

For fiscal 2014 second quarter outlook, that I will now outline, reflects achieving this level of inventory. Our outlook for the fiscal 2014 second quarter continues to reflect our cautious stance due to a continuation of volatile and weak traffic trends in a highly promotional environment in teen retail.

If these trends continue, we would expect second quarter comparable stores sales to decline in the high-single digits and net income per diluted share to be in the range of $0.03 to $0.07. This assumes an anticipated effective tax rate of 40% and a weighted average diluted share count of 28.2 million shares.

Second quarter 2013 net income was $4.3 million or $0.15 per diluted share based on a weighted average diluted share count of 28.1 million shares. We continue to expect capital expenditures to decline in fiscal 2014 to be between $24 million to $28 million. As we have recently completed our new e-com fulfillment center.

The majority, approximately $22 million, relates to the opening of at least 18 new stores during the year and remodels and refreshes of our existing stores, as well as investments to further improve capabilities across our digital channels as we have discussed. We plan to continue to fund our capital expenditures with cash from operations.

We’ve always had a culture of strong cost discipline and we’ll continue to diligently control our expenses as we continue to invest in our business for the long term growth. Now I’d like to turn the call back over to Dan for some closing remarks.

Dan?.

Thanks Jennifer. Although this is another tough quarter in the keen retail industry I continue to be pleased with how we managed inventory controlled cost and increase the product margin. We maintained a strong debt free balance sheet while extending the Tilly’s brand into new market.

While I remain cautious of the challenging retail environment I feel very good about the fundamental strength of our business as we head into the summer and back to school season.

We have appropriately positioned our inventory with a dominant and differentiated assortment of brands, fashion and style and supported our offering with targeted communication and marketing to further engage our customers across the variety of channels.

We continue to control our cost even as we further expand the Tilly’s brand through new store openings.

We are confident in our ability to capitalize on opportunities to increase our market share, deliver strong product margins and improve profitability in the long term and are focused on executing on our strategic initiatives to achieve our objective. I’d now like to open up the call for your questions.

Operator?.

Thank you. (Operator Instructions) And we’ll take our first question from Steph Wissink with Piper Jaffray..

Hello, everyone. Dan, a couple questions for you, and, Jen, one for you, as well.

First of all, just the decline in conversion that you saw in the quarter, how does that compare to what you've been seeing over the last couple of quarters relative to transactions? And then, Jennifer, if you could just talk with us about the sequence of the months last year in the second quarter, May, June and July.

Are you looking at a more difficult comparison in May which is lending to that conservatism in the comp guidance for the second quarter? Or how should we think about that deceleration from the first quarter on what looks like a bit of easier comparison in the second quarter?.

Okay, on the first on Steph, I think the decline in conversion can be directly explained by the lack of clearance and the increased conversion that would have delivered I think that’s really the primary driver of that in both stores and on e-com..

Yeah, Steph, and with regard to comp deceleration you are right May we are up against the stronger comp in the prior year versus June and July. We began to have negative comps June and July of last year.

So our guidance does reflect those considerations but it also reflects as I mentioned the current trends that we’re experiencing and assuming that we’re not going to see any change in those trends..

Okay. That's helpful.

And then should we think about, as the balance of the year progresses, that the bulk of the pressure on earnings is going to be distorted towards deleverage, that you're still feeling very comfortable that that new store performance is contributing to the overall P&L but just being offset by the declines in comp and the deleverage on the costs?.

That’s right Steph and most of the pressure is predominantly occupancy and store payroll and other G&A deleverage..

Okay. Thank you. I'll take my other questions offline..

Thank you..

We will now go to Betty Chen with Mizuho Securities..

Thank you. Good afternoon, everyone. Certainly, as you talked about, traffic continues to be really tough. And some of your peers are not in as clean an inventory position, and that's why we've continued to see a lot of promotion. I was curious in terms of the private label business.

Is there any way you can remind us what percent of the product mix that is? And, perhaps, are there any opportunities for you to leverage that as a sort of clearance -- not clearance, but marketing tool to entice the customers that way, given I understand your preference to always work with your branded partners to preserve their pricing. Thanks..

Sure. The private label remains approximately 30% of our business and that it’s a little bit higher percent on the junior side and lower percent on the men’s side we’ve talked about that many times in the past.

Our strategy around merchandising and driving traffic is one about having the most compelling product to being fashion right and having a differentiated offering of brands and products and things that complete the whole lifestyle.

So we’re looking at a lot of different opportunities rarely does to involve simply a price play and you could see we continue to execute extreme discipline in that regard as we don’t need to price drive the business given the fact that we are controlled our inventory.

So we’ll continue to look for opportunities it’s really more the focus is on relevant fashion and relevant brands..

And then, Jen, I had a follow-up, if I could. In terms of SG&A it delevered in the first quarter. Just curious for the second quarter at a similar comp profile, should we expect the magnitude of the deleverage to be comparable? Or are there any other moving parts that we should keep in mind? And anything for the back half, as well. Thanks..

Yes, Betty, you should continue in Q2 as well as the back half. We haven’t even guidance for that, but in Q2 you should expect similar deleveraging on a SG&A.

The one thing you need to consider, but that was going to drive a bit more, it’s just with 17 passed to our new e-commerce fulfillment center being completed, we will begin depreciation on that in the second quarter, and that will continue throughout the year..

We will now go to Dave King with ROTH capital..

Thanks. Good afternoon. Just first off, in the quarter it looked like the men's business - I guess or maybe looking at it differently, I'd say the junior's business was a bit of a standout versus the men's side.

Dan, I'm just curious as to your thoughts as to what might be going on there, vis-a-vis maybe some of your competition and some of the outlook for those different businesses, and how those should perform going forward, and some of the strategies maybe to try to help out that men's business a little bit. .

Okay, yes, I think the story for the first quarter was very similar to the story for the second quarter. No real disconnect there in the relationship of men’s and juniors’ business.

We have a variety of initiatives which I would obviously not going to get into detail on the things that we are doing going forward in everyone of our business is to drive the most compelling assortment and customer response and increased market share and improved profitability.

I’ll look at this and we have talked about this before, the river dropping a bit. Some of this is self inflicted. The lack of clearance inventory has weighed quite a bit on the current trends and the trends that we are seeing right now.

We have pretty exciting merchandize strategies across all of the businesses, but as we did see juniors is consistent with the fourth quarter a little bit better performing than the average..

Okay.

Would you say, then, that on the junior's side that you were a little bit more -- I know Tilly's doesn't promote all that much at all, frankly, but just what was helping to drive some of that? Was it better conversion that you were getting there by having some sort of strategies that were helping that junior's business versus the men's? Or what should we be thinking about that's helping that business versus the men's business? Or what's weighing on the men's business, if?.

I think it’s more, some things that are going on in the junior’s business that we seem to be in sync with some really clearly defined trend sets that are driving that business, the shift, we have talked about the shift in the bottoms business and some very clear fashion trends with junior teen.

We’ve done, I think, a very good job on reacting to those and providing those to the customers that they seem to be resonating. And the product there is completely differentiated. It’s a large percentage of our own private label that is really almost fast fashion and a very quick turnaround, and we are being very nimble in that regard.

And I think that’s resonating. Well, it isn’t any -- there's no difference in promotional strategies or clearance. Clearance was kind of across the board in terms of the impact. It’s really I think more around the strength of the junior fashion offering rather than a weakness anywhere else. .

Okay, that helps. And then, Jennifer, looking at the balance sheet now it looks like you guys have roughly $1 in cash.

Thinking about where the stock's trading at these levels and your thoughts toward the buyback, with the offset being obviously the fairly limited liquidity, can you just talk about some of the tradeoffs there and the overall willingness to consider repurchasing stock at these levels?.

Sure. I think, we’re almost about $2, a share on cash.

At this moment that’s not something that we are contemplating a share buyback, we definitely believe that our cash is best spent on our new store investments and as well as some of the things we’re doing to expand our digital capabilities, and that’s where we’re really focusing our cash and investments at the moment..

We will now go to Lorraine Hutchinson with BofA Merrill Lynch.

Thank you. Good afternoon. Dan, it doesn't seem like the promotional environment is going away in the teen space.

So, what would it take to make you change your strategy to maybe reflect a more permanent state of affairs in the competitive environment?.

I think that has to be taken in the context of product margins and long-term profitability and sustainable quality growth. There is clearly something going on in the teen retail space. We manage our inventories and are preserving product margins and preserving integrity of our brand for the long-term, navigating, I think very successfully.

But it is a challenging time period, so we think that what it takes is to continue to focus on the initiatives that we have talked about and is evidenced by the things we’re doing with our product and with our digital focus and with the modified real-estate strategy, that we feel that is the right long term focus and things that we should do, rather than any other..

We will now go to Jeff Van Sinderen with B. Riley..

Just a point of clarification. By the way, great work on merchandise margins.

If you were to back out the shift in clearance merchandise, the penetration of clearance merchandise that you had, and you were sort of, to look at your promotional levels, your markdown rate and such, was there really any -- it sounds like you're saying there really wasn't much difference versus last year, if you were to back out that clearance.

But I just wanted to clarify that?.

Well, the lack of clearance probably contributing too about a third of the comps decline for the quarter, fairly meaningful, self inflected in the knowledge that we talked about it, we called it out as we entered the quarter and we remain committed to maintaining healthy product margin.

So there’s not any major shift other than that, other than significantly controlling the level of clearance and the clearance margin..

Okay. And then just as a follow-up to a prior question, just wondering, I mean at this point -- I understand how you're running your business, but just wondering what you think it will take for comps to turn positive at some point.

I mean, as you think about your business, what do you see as being the drivers to get there? How -- I mean is it going to take, for example, mall traffic to improve? Is it going to take the promotional backdrop to start to abate? Maybe you can just talk a little bit more about how you think about that?.

There’s some things we can control and some things we can’t.

We remained focused on controlling the things we can and that’s why we’ve articulated the strategies around the product that we sell and the way we communicate with our customer how we make this brand available digitally and in existing in a new stores and making all of that is compelling in its relevant as it can be.

Those are the things we can control and those are the things remains intensely focused on. That’s what sustains quality long terms earnings and growth, I don’t see another way to run it..

Got it. Understood. Thanks very much and good luck..

Okay. Thanks, Jeff..

And we will now go to Richard Jaffe with Stifel..

Thanks very much, guys. And again, my compliments on holding the line on margin, or preserving the margin. A surprise, given the appeal of your e-commerce side and the propensity for that customer to be online, to be on their device, that you wouldn't have seen more of a boost from the e-commerce side of things.

I'm wondering what your thoughts are there and what might or might not be working on the e-commerce side that might be different from what's in stores. And then if we could talk about footwear also? Thanks..

Okay.

So e-commerce was more adversely affected by the lack of clearance even in the store were, as we talked about it being a very efficient vehicle to clear the visual inventory, we had very nice regular price comp on e-commerce that and total margins healthier than last year, is really the clearance is putting the pressure or lack of clearance by the e-commerce that’s kind of is the simple explanation.

And in footwear we see the footwear trend consistent with what we talked about in the fourth quarter and I know we’ve heard from other players about kind of a soft footwear trend overall, I am very encouraged by the direction we are taking our footwear offering that we really kind of manifest itself, right prior back to school and the focus that we have around e-brands and kind of, dominant ownership in several of those brands and really putting that forward.

So I feel good about the things we’re doing those in the guys in junior side. But it does appear there’s a kind of a footwear cycle they’re expecting the industry..

Thank you..

Thank you..

And we’ll take our next question from Janet Kloppenburg with JJK Research..

Hi, everybody. I had a question about the comp trend, Dan. I know clearance played a part. But in the non-clearance comp, did you see an improvement as the weather improved in April? And could you call that out here in May, as well, like others have? So just wondering if, as traffic improved, if you saw things pick up in your regular-priced business.

I was wondering if you had any trend change there..

Yes. So weather hasn’t played and we haven’t really called out weather Janet as meaningful influence are here of the business, we have such a large concentration of stores that would not adversely affected by weather those, we’re in places affected by weather had from the fact but it isn’t such a meaningful number to call it out.

The trends that we saw in the quarter are consistent with trends that we’ve seen around better performance around the peak need to buy time period spring break and easier and softer and the nominee to buy but -- and the guidance for second quarter incorporate the things that we’re seeing now and the trends that we’re seeing now is those were to continue how we would end up with the quarter.

But again a lot of that is self inflicted given how much clearer we are with clearance inventory..

And we will take our last question from Steph Wissink with Piper Jaffray..

Hi. Just one follow-up, Dan, for you. I mean you talked a lot about e-commerce and digital initiatives.

Can you just tell us a little bit about some of the outreach that you have planned for the back half to really inject that business with some growth potential?.

Yes. Good. So there is several that we’re going to be doing. One is, the re-platforming of our e-commerce desktop and mobile access, it’s pretty significant and going to be best to breed, we’re very excited about that and that will influence but probably the latter part of the back half of the year.

We have a loyalty program that is, I am extremely proud of how the customer has responded it is and we will begin utilizing that as a tool and it incremental and additional tool to communicate.

We have direct to customer fulfillment that we’re doing in our store that we’ve talked about we have this digital catalog capability that is a much enhanced rich experience clickable and drillable that is an added component to kind of, core mailing catalog capability that we have blogging and posting full social complement it is robust and recognizes the what we believe is a requirement for a long term sustainable growth which is a fully integrated digital in omni-channel approach..

Thank you..

Thank you.

And this concludes today’s question-and-answer session. Mr. Griesemer at this time I will turn the conference back to you for any additional or closing remarks..

Okay. Thanks again for joining us and we look forward to discussing our results with all of you in last August. Have a good evening..

Ladies and gentlemen, this concludes today’s conference we thank you for your participation..