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

Betty Chen - Mizuho Securities Dave King - ROTH Capital Jeff Van Sinderen - B. Riley Liz Pierce - Brean Capital Richard Jaffe - Stifel Sharon Zackfia - William Blair.

Good day and welcome to the Tilly's Incorporated First Quarter Fiscal 2015 Results Conference Call. Today's conference is being recoded. At this time, I'd like to turn the conference over to Ms. Anne Rakunas, at ICR. Please go ahead ma'am..

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly’s first quarter fiscal 2015 earnings results. On today's call are Daniel Griesemer, President and CEO and Jennifer Ehrhardt, outgoing CFO. We are also joined by Michael Henry, who recently joined Tilly's as our incoming Chief Financial Officer.

A copy of today's press release is available in the Investor Relations section at Tilly’s website at tillys.com. Shortly after we end this call, a recording of the call will be available for 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 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 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 2015 earnings release, which was 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. During my discussion, I will provide you with an overview of our first quarter results and share with you the continued progress we are making on our key initiatives.

Then Jennifer will review our financial results in more detail and provide our outlook for the second quarter fiscal 2015. I'll provide a few closing comments and then we’ll open-up the call for your questions. For continuing, I would like to welcome Michael Henry to the Tilly's team.

Michael take over the CFO range from Jennifer Ehrhardt over the coming weeks and brings significant and relevant public company in specialty retail experience and senior financial roles. I'd like to also thank Jennifer for her contributions and support her decision to move closer to family.

During her time in Tilly's, she has further developed our finance and accounting team, and I am confident that Mike has very capable support in his new role as CFO. And I appreciate that Jennifer is staying on during this time to ensure a smooth transition. Now let's turn to a review of our first quarter results.

Our first quarter performance demonstrates that we progressed in our efforts to increase sales and profitability despite further weakness in traffic especially in the post-Easter period. During the quarter we achieved net sales growth of 8.1% and comparable store sales growth of 2%.

These results were driven by our relevant action sports inspired lifestyle merchandise, continued improved response to our marketing initiatives, our improved digital capabilities and strong performance of our new stores opened in fiscal 2014.

Strength in regular price sales, our planned promotional strategy and disciplined inventory management drove expanded product margins and an overall gross profit margin increase of 180 basis points.

I am pleased with how we continued to manage our inventory to ensure a constant flow of newness and excitement, while at the same time exiting the first quarter with clean inventory.

Our inventory composition reflects the implementation of certain low risk key merchandise initiatives and opportunistic buys for summer and back-to-school seasons and increased inventory to support the planned growth in our ecommerce business.

Overall, we delivered diluted earnings per share of $0.05, a significant increase over the first quarter of last year. We also ended the quarter with a debt free balance sheet and cash and marketable securities of over $79 million, a 51% increase over the prior year period.

During the quarter we continued to advance our three key initiatives, and I’d like to update you on each of these now.

As it relates to our first initiative increased product differentiation and innovation, we increased - increases in conversion and average transaction value support that our product offering continues to resonate well with our customer.

During the quarter we invested in dominant on trend products and categories including more products and brands that are new, unique or exclusive to Tilly's. I’m pleased with the performance of brand extensions such as Nike SB and Ray-Ban and new brands like Catch Surf.

We also introduced exclusive products from brand such as LRG, Neff, Element, Rook, and Electric and several new or exclusive collaborations including offerings from Converse, Hurley, O'Neill and Billabong. Turning to our digital platform.

During the quarter we continued to use our new digital platform and our Tilly's Hookup loyalty program two key elements of our digital initiatives to further build the Tilly's brand through customer awareness and loyalty.

We’re making further investments in the digital team with key talent and have begun to implement various enhancements to our marketing and execution under our digital strategy. These efforts are contributing to further improvement in our ecommerce business during the first quarter and to-date.

And I’m pleased with the growth of the Tilly's Hookup as we continue to experience significant signups. In terms of our real estate strategy, we opened two new stores in the first quarter and ended the quarter with 213 stores.

As a group, our new stores opened in 2014 continue to perform well and inline with our store economic model validating our long-term objectives. We also made progress on our plans to refresh at least 25 existing stores in our fleet to further improve comps and profitability by elevating the customer experience.

Although early I’m pleased with the initial results of the stores refreshed to-date. And now I’d like to turn the call over to Jennifer for more detail on our financial performance in the quarter and to provide our second quarter fiscal 2015 outlook.

Jennifer?.

Thank you, Dan, and good afternoon everyone. Turning to our first quarter performance, net sales was 8.1% to $120.2 million compared to $111.1 million in the first quarter of 2014. Comparable store sales, which include e-commerce sales increased by 2% compared to the same period in 2014.

During the quarter all categories delivered positive comps and we experienced increases in conversion and average transaction value partially offset by lower traffic. Gross profit increased 15.3% to $36.1 million or 30% of net sales compared to 28.2% of net sales in the first quarter of 2014 representing an increase of approximately 180 basis points.

This improvement was due equally to increase product margins and leverage on buying, distribution and occupancy cost as a percentage of sales and a favorable rent adjustment related to prior years. Selling, general and administrative expenses were $33.9 million or 28.2% of net sales compared to an SG&A rate of 27.2% in the first quarter of 2014.

Operating income was $2.1 million compared to operating income of $1.1 million in the first quarter of 2014. Our operating margin as a percentage of sales improved approximately 80 basis point in the first quarter of 2015, driven by higher gross profit partially offset by higher SG&A costs as a percentage of sales.

Net income was $1.3 million or $0.05 per diluted share based on a weighted average diluted share count of 28.3 million shares and an effective tax rate of approximately 40%.

This compares to net income in the first quarter of 2014 of $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% reflecting a discreet item related to stock option forfeitures.

Turning to the balance sheet, we ended the quarter with cash and marketable securities of $79.2 million, a 51% increase over the first quarter of last year. We had no borrowings or no debt outstanding under our revolving credit facility at the end of the quarter.

Cash used for capital expenditures during the quarter totaled $5.1 million compared to $7.9 million in the first quarter of 2014, and was primarily related to new stores and refreshes. Inventory totaled $61.7 million at the end of the quarter, up approximately 10% on a per square foot basis compared to a decline of 5% in the prior year.

As Dan mentioned, our inventory composition is clean and also reflects the implementation of certain lower risk key merchandise initiative and opportunistic buys for the summer and back-to-school seasons and increased inventory to support the planned growth in our e-commerce business.

We expect a similar increase in inventory per square foot at the end of the second quarter, compared to the end of the second quarter 2014 as we continue to fund these key merchandise initiatives and planned e-commerce growth. Now turning to our outlook for the second quarter of fiscal 2015.

Since Easter, we've been experiencing much weaker traffic and softness in sales in our key heritage market which maybe driven by poor weather.

Factoring in these trends, we expect second quarter comparable store sales to be in the range of a decline of 2%, to an increase of 2% and net income per diluted share to be in the range of $0.01 to $0.05 per diluted share.

This assumes an anticipated effective tax rate of approximately 40% and a weighted average diluted share count of 28.5 million shares. Second quarter 2014 net income per diluted share was $0.05, based on a weighted average diluted share count of 28 million shares and a tax rate of 46% reflecting a discreet item related to stock option forfeitures.

We continue to expect fiscal 2015 capital expenditures to be between $23 million to $26 million compared to approximately $24 million in fiscal 2014.

The majority relates to the opening of at least 15 new stores during the year, at least 25 refreshes of our existing stores, as well as investments to further improve capabilities across our digital channels as we’ve discussed. Now, I'd like to turn the call back over to Dan for some closing remarks.

Dan?.

Thanks, Jennifer. Our first quarter results were good start to the year and I’m pleased with the progress we continue to make to advance our strategic initiatives. Our differentiated and relevant product offering resonated well with our customers.

We generated healthy product margins and we exited the quarter with clean inventory as we have here to our pricing and promotional plans.

Although we've seen softness in traffic trends since Easter and into May, we believe we have made the right investments in inventory and have the right marketing and promotional strategies in place to achieve our objectives we've set for ourselves this year and in the long-term. I'd now like to open up the call for your questions.

Operator?.

[Operator Instructions] And our first question comes from Neely Tamminga with Piper Jaffray..

Good afternoon. This is [Kelly] [ph] on for Neely..

Kelly, I’m sorry, but we can't understand, you're breaking up quite a bit, I'm sorry..

Can you hear me better now?.

Yes, that’s a little bit better..

So as you guys anniversary your e-commerce fulfillment center, what are you guys seeing from an improved productivity perspective?.

Kelly, I guess we're starting to see some improved productivity what we've talked about in the past as we look to see more productivity as we get later into the year. If you recall last year, we just opened that facility in May, so we’re just now anniversarying the move to that facility, which of course result in transition cost in the like..

Thank you..

Thank you. Our next question comes from Betty Chen with Mizuho Securities..

Thank you, good afternoon, best of luck again, we enjoyed working with you and welcome to Mike.

I was wondering Dan if you can talk a little bit about your thoughts regarding traffic trends since Easter, why perhaps that softened a little bit and then I guess in terms of the inventory certainly makes sense with the investment behind some of those key categories in digital.

Can you share with us anymore color regarding how the website ecommerce is trending, so we can kind of better understand the inventory positions to support that business? Thanks..

Sure. Traffic trends and the business unfolded with actually February being a little bit better than our overall performance, the March, April time period being just slightly below our quarter performance and it really was pronounced softening of the business in our Heritage markets.

We’re actually seeing our other markets and our ecommerce business continue to strengthen but we have such a large concentration in our Heritage markets that’s why we think it could be related to weather.

But we don’t want to be too much playing the weather card which is why we kind of incorporated a little bit wider range than normal for the quarter.

In regards to inventory investments, we’ve been very encouraged by the ecommerce business growth particularly in the latter part of the quarter and that is continued into the second quarter, some of that growth is being funded by inventory investments where we’re trying to further expand the assortment but it’s also from various operational executions and things that we’re doing there.

But there has also been some opportunistic buys bringing in receipts is more of a timing issue and I would expect with in another couple of weeks, we would be at a more normalized rate of increase on a per square foot basis as we begin building inventory for back-to-school.

They were the right things to do for the long-term, so we made the decision to bring them and not worry about that quarter BOM. So we’re in good shape, the inventory is clean, current and well positioned for the balance of the summer season as well as building for back-to-school..

Okay. That’s great, another follow up if I could in terms of the first quarter SG&A was up about 100 basis points or so, it sounds like a lot of it for some of these investments you mentioned earlier.

How should we think about SG&A in the second quarter, should we expect a similar magnitude of deleverage given most likely those investments market will continue?.

Betty, yes we should in the second quarter continue to expect a similar amount of deleverage as you saw in the first quarter related to that and not only if some of the investments that we’re making, we’ve talked about in the past but also when we came out with Q4 earnings and Q1 guidance, we also talked a bit about minimum wage increases that will continue to pressure our store payroll for the first half of this year as well as if we continue to operate at these levels certain other incentive accruals that we will have..

Okay, great. Thank you so much..

Thank you..

Thanks..

Best of luck for the quarter..

Thank you..

Thank you. Your next question comes from Dave King with ROTH Capital..

Thanks. Good afternoon everyone.

I guess in following up to Betty’s question a little bit, so it sounds like in terms of the operating margin guidance that is implied for the second quarter lot of that from the investment side, any thoughts then and I haven't plugged it in yet but any thoughts been in terms of gross margin and then as I’m thinking about gross margin Jennifer are you able to quantify what the rent adjustment was this quarter?.

Yes Dave when you look at overall gross profit what we did in Q1 of 180 basis points of improvements, we mentioned 90 basis points was due to product margin improvement on better regular price selling, lower mark down, the other 90 basis points was due to buying, distribution and occupancy and of that it’s about a third that related to the rent adjustment..

Okay.

That’s fair and then as you think about that over for the second quarter and how we should be thinking about margins, gross margins?.

Yes, when you think about for the second quarter, product margin as we’ve always done in the past, we continue to remain very focused on delivering strong product margins to the magnitude of what we saw in Q1, I wouldn’t sign up for that.

I think you can expect to continue to see modest increases that we’ve seen in the past outside of Q1 and then also just you would expect your normal leverage that you typically get on buying, distribution and occupancy wouldn’t expect additional that was a one-time rent adjustment..

Okay. That’s helpful. Thank you and good luck..

Thank you..

Thank you..

Thank you. Our next question comes from Jeff Van Sinderen with B. Riley..

Good afternoon.

Did you guys break off your ecommerce same-store sales or ecommerce comps were?.

No and we’re not really doing that as it’s kind of we talked about this before Jeff it’s really a pretty seamless and fluid experience between all channels but what we have seen is that the ecommerce business while it began building as early as third quarter of last year has continued to build in its contribution and performance in the first quarter and on into the second.

So it’s very healthy, very encouraging about the product offering and the things that we’re doing there to improve that business..

Okay.

Good to hear and then maybe you can just talk a little bit more about I guess the magnitude difference you’re seeing in the Heritage markets versus some of your newer markets and I know you mentioned weather, are you just thinking that it has to do with maybe being cooler in California versus Wal-Mart in the Northeast, some other areas or any other color you can share there?.

Not a lot other than we did talk about Heritage markets being drivers of some of the stronger business in fourth quarter and was the case in the early part of the first quarter.

We have seen some cooler weather than normal cooler weather than normal that seems to have affected those stores but nothing other than that, it's just a kind of a flip but if you look at overall business response to our marketing efforts conversion, average dollar sales, the strength of the ecommerce business and the strength of the business in other markets, we’re still very confident about our goals for this year and for the long-term..

Okay.

So if traffic is running a little bit more challenging, I guess two questions there one do you do something that try to spur traffic in the near term or do you kind of stick to your guns on margins or do you get a little more promotional, do you take Wal-Mart down now just wondering how you’re thinking about that?.

Well we do what we need to do with the inventory to address any overhang of summer product to make sure we keep our inventory clean and current but that’s all built into our assumptions about the performance in the quarter and the composition of our inventory as we exit the second quarter.

We have seen strong response to our marketing efforts both kind of traditional as well as some of the digital efforts we’ve been doing, so you could expect us to continue to invest in that in an effort to try to take advantage of that improved response but you will not see us turning to a significant promotional position on this, we’re very comfortable with where our inventory is and where it will be an issue that we have in place to drive profitable growth..

Got it. Best of luck for the rest of the quarter..

Thank you..

Okay. Thanks..

Thank you. We move next to Liz Pierce with Brean Capital..

Hello Thanks. Nice job, you guys. Jennifer, we'll miss you and Mike welcome, great to catch up with you, look forward to catching up with you, it has been a while. So I was curious on your hook up program, the loyalty program.

Where I think coming from both online as well as in-store is something that you guys track?.

Yes it is, the majority of our business still comes from stores, the majority of the customers sign-ups are coming from stores but it is very vibrant in both stores and online..

Okay..

And then -.

I’m sorry, you began to say something….

And then what about on the port, what any issues there I don’t believe you mentioned anytime?.

No we said it didn’t really have, it had a small effect but not really material enough for us to call out in the first quarter that’s still the case and we don’t see really any impact in the second quarter at all..

Okay.

And then I guess my final question is on the catalog, what’s your thoughts for if we go into the back-to-school season, is it going to match one for one?.

Yes, we have two very powerful books that we drop, that's traditional, we've been doing that now for several years and we’re constantly looking at what makes sense there but you should expect us to continue to use that as the driver of the business..

Is there two books per quarter per season or as I think I got part time..

Yes, so it all depends on the back-to-school timing and when we would put those in home. We’re not sharing any of those plans at this point but essentially for the back-to-school season which does kind of bridge a couple of quarters there, you would expect us to do what we’ve done in the past..

Okay. All right, thanks, and best of luck..

Thank you..

Thank you. We move next to Richard Jaffe with Stifel..

Thanks very much guys. Based on the geography that you've seen the challenges with your local geography, wondering how that might affect your new store plans, it sounds like the new stores and new markets are doing better than mainly the heritage markets at least - since Easter holiday.

So wondering if there is some more color you could add to that geographically. Thank you..

Yes, I don’t think that what we are viewing that's going on in the later part of the first quarter or in the beginning of second quarter is something fundamental or structural that the stores in our heritage markets continue to be very high volume and a strong driver of profit for the company.

We'll continue to make the decisions on the real estate side that make the most sense for the long term only opening stores that make absolute sense regardless of where those are, so we’ll be very opportunistic but being very judicious as well..

Thank you..

Thank you. We move next to Sharon Zackfia with William Blair..

Hi.

A couple of follow up questions, on the opportunistic buyers this quarter are there any ramifications there in terms of product margin?.

No, these are - we tried to frame it in a way to make sure that everyone understood these are lower risk, not fashion kind of things. They were the right things to do and not worry about it quarter date that would flag a number.

It's the right thing to do for the business, so we will continue to make those decisions we're just kind of calling it out that they were investments that needed to be made in the timing was the timing..

Okay. And then on minimum wage, I’m assuming that the big bulk free was California minimum wage, that cap of last year, so can you talk through from an SG&A cadence standpoint, I assume the second half of the year, the rate of growth would be lesser.

And then can you talk about, I know this is out a while, but the next minimum wage increase in California at the beginning of '16 whether the order of magnitude impact there is greater or lesser and then what we saw this last time around..

Sharon we can't expect – you're correct California is the biggest magnitude there although we do have other states that it we have increased the minimum wage. When you get to the back half post July, we should start seeing a little bit more minimal rate because we will be up against the same as last year.

And as you said in January of '16, there will be another increase that will likely have - I would expect the similar magnitude of that for, again that would be for the full year..

Jennifer do you have what your average hourly wages at this point..

Not something we wouldn't share..

Okay. Great, thank you..

Thank you. And we move to Dave King with ROTH Capital. .

Thanks for taking my follow-up. I guess I was just curious in terms of the store refreshes. I know you said it early Dan, I guess I was just curious about in terms of the initial read there.

I think there are about two thirds of the investment of a new store, any thoughts on the contribution in terms of stores that you’ve already done with in terms of increase productivity anything you can share there is that, at above or below, how is that trending versus what you guys initially thought. Thanks..

Yes, thank you. It is very early as you would acknowledge some of them are just a few weeks old so it’s very early to call but we are encouraged by the response, the customer response, the better and more engaging and more relevant customer experience that they create and are encouraged by the initial results.

So, that's as far as we can go now but we look for further updates as the year progresses. .

Okay. Thank you..

Thank you..

Thank you. And we move to Jeff Van Sinderen with B. Riley..

Hi, just had a follow up, I am just wondering if you could provide any more color on differences that you saw in the various segments of the business. In other words men's, women's, kids, product areas that kind of thing maybe call at any weaknesses or strengths there.

And also did that change at all after Easter did you see a shift in what was working after Easter. Thanks..

Yes, that’s another indication to us that we think it's more temporary then structural. The -- all businesses were positive comped in the first quarter across the board, non negative and no significant out layers one way or another.

So we’re very encouraged again about the balance and stability of the business and the broad based nature of the relevance of the product, and no meaningful call-outs here as we’ve seen slightly a softer business in the post Easter and early May..

Okay. And it appears we have no further questions at this time. Mr. Griesemer, I’d like to 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 second quarter results with all of you in August. Have a good evening..

Thank you..

This does conclude today's presentation. We thank you for your participation..