Greetings, and welcome to the Tilly’s Incorporated Third Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Gar Jackson. Thank you, Gar. You may begin..

Good afternoon, and welcome to the Tilly’s fiscal 2020 third quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company’s results and then host a Q&A section. For a copy of Tilly’s earnings press release, please visit the Investor Relations section of the company’s website at tillys.com.

From this section, shortly after the conclusion of the call, you will 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 that reflect Tilly’s judgment and analysis only as of today, December 3, 2020, and actual results may differ materially from current expectations based on various factors affecting Tilly’s business, including impacts of and the company’s actions in response to the ongoing COVID-19 pandemic.

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 2020 third quarter earnings release, which was 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 and I will include a Q&A session after our prepared remarks. I will now turn the call over to Ed..

Thanks Gar. Good afternoon, everyone, and thank you for joining us today. We continue to adapt to this rapidly evolving COVID-19 environment and its impact on retail.

We have gone from having our stores open for only 50% of total available operating days in the first quarter to 65% in the second quarter to 94% in the third quarter all with restrictions on operating hours and customer traffic upon store reopenings that began during the second quarter.

We entered the third quarter with 33 of our California indoor mall stores closed for the entire month of August, began reopening these stores throughout September and reopened the final eight stores on October 7.

As we announced in early September, back to school days were meaningfully delayed, compared to prior years, which got us off to a very weak start to the quarter in August. However, as schools announced their later reopening dates, our business began to rebound to a degree later in the quarter.

Compared to the respective fiscal months of last year August net sales decreased 35%, but then September net sales increased 22%, and October net sales increased 10%.

Altogether this resulted in a total net sales decrease of 9% for the third quarter, which we view as an encouraging result particularly in light of our August results and the significant number of stores that were closed for a portion of the quarter.

Our e-commerce business continued to thrive during the third quarter, generating 57% net sales increase was significantly improved product margins and bottom line profitability, compared to last year.

We have function with a digital first mindset during this pandemic period and it has driven significant improvement in our e-commerce assortment management, resulted in expanded and more profitable digital spend, additional customer convenience enhancements including curbside pickup, and operational improvements in our e-commerce distribution center.

All these factors have combined to drive meaningful improvement in our e-commerce business, which we hope to sustain and build upon going forward. In terms of merchandising for the third quarter, women’s was our strongest performing department with a mid single-digit percentage increase in comp sales, compared to last year.

Although all other departments comp negative to last year, each department improved trend wise as the quarter progressed. We introduced several new third-party brands during the quarter and we have been pleased with their performance.

We also launched certain hard goods during the quarter, including skateboards, bikes and roller skates, which have performed well. Accessories were particularly challenging, due to the reduced sales of backpacks, which we believe is primarily due to increased volume of in-home and remote learning during the pandemic.

We ended the quarter with total inventory per square foot, down 7.4% to last year and believe our inventories are well positioned for the holiday season. Turning to real estate.

We have reached agreements in full or in principle addressing nearly 90% of our total store leases relating to withheld rents during the periods of store closures and adjustments of future rents in light of the ongoing pandemic. We are appreciative of the support provided to our company by the landlord community.

We currently expect to open seven new stores during fiscal 2021 that we deferred from this year by agreement with the respective mall landlords. These stores are currently expected to open during the March to May time period, although this remains subject to change.

We will continue to be very selective and opportunistic about opening any additional stores next year in light of the rapidly evolving environment. Finally, just before the end of the quarter, we opened our first RSQ skate test store here in the Irvine spectrum.

This new test store is a skate influence concept store under our proprietary RSQ brand, which incorporates hard goods; including skateboard assembly, apparel and accessories. Given what we believe is a broad and increasing appeal of skate boarding, particularly with it’s inclusion in the Olympics next year, we think this is an important test for us.

However, this is just a test store at this stage, not a fully developed chain concept and any future plans will be dependent upon consumer reaction to, and performance of this test store in greater stability in the retail environment.

Turning to the fourth quarter, total comparable net sales have been just shy of flat through December 1st versus corresponding period of last year. As expected, e-com sales have continued to be strong with a 42% increase during this time period.

Comparable net sales in physical stores have decreased by 14% in the fourth quarter, compared to the corresponding period of last year. No stores were opened on Thanksgiving Day this year and Black Friday results in stores were well off last year’s pace as we had anticipated. However, store comps have been positive each day since Black Friday.

Overall, significant reductions in store traffic have been partially offset by an improved conversion rate in higher average transaction value.

We can’t be certain what the rest of the holiday season will look like or what impact the ongoing pandemic will have on our ability to drive sales and continue to operate our stores or e-commerce particularly in light of the recent sharp increase in COVID cases across the country, and additional trend -- customer traffic restrictions in certain areas.

However, as long as we are able to continue to be fully operational, we are hopeful that this year’s holiday season can be somewhat closer to normal than what we saw during the back-to-schools period.

At this time, we expect total sales for the fourth quarter to be somewhat lower than last year overall, due to the ongoing pandemic and much higher unemployment than last year at this time. Even if we are able to continue to operate -- operating our stores throughout the quarter.

In closing, I want to thank our entire team of store associates, field and corporate employees for their tireless commitment to making Tilly’s the best it can be during this incredibly challenging time for all of us. Mike will now provide more details on our third quarter operating performance and balance sheet.

Mike?.

total net sales for the third quarter were $140.3 million, a decrease of $14.5 million or 9.4%, compared to $154.8 million last year. Net sales from physical stores were $104.6 million, a decrease of $27.5 million or 20.8%, compared to $132.1 million last year.

These results were negatively influenced by the delayed back-to-school dates this year and the stores that were closed for a portion of the quarter that Ed referenced earlier. Net sales from stores represented 74.5% of total net sales for the quarter, compared to 85.3% of total net sales last year.

E-commerce, net sales were $35.7 million, an increase of $13 million or 57.3%, compared to $22.7 million last year. E-commerce net sales represented 25.5% of total net sales for the quarter, compared to 14.7% last year.

We ended the quarter with 238 total stores, all of which were opened for business with restrictions on operating hours and customer traffic, compared to 232 total stores operating as normal last year. On a year-to-date basis, we have opened one new store and permanently closed three stores.

Gross profit, including buying, distribution and occupancy expenses was $40.7 million or 29.0% of net sales, compared to $47.2 million or 30.5% of net sales last year. Product margins improved by 70 basis points, primarily due to improved e-com product margins and reduced markdowns overall, compared to last year.

Buying, distribution and occupancy costs deleveraged by 220 basis points collectively against lower total sales. Distribution expenses deleveraged by 120 basis points, primarily due to an increase in e-com shipping costs of $1.5 million associated with a significant increase in e-commerce orders.

Occupancy costs decreased by $1 million, but deleveraged by 110 basis points against lower total net sales. Buying costs improved by $300,000 or 10 basis points, primarily due to a severance obligation recorded in last year’s third quarter.

Total SG&A expenses were $37.1 million or 26.5% of net sales, compared to $39.5 million or 25.5% of net sales last year. Total SG&A was reduced by $2.3 million, but deleveraged 100 basis points against lower total net sales, compared to last year.

Store payroll and related benefits decreased by $3.9 million in total, primarily resulting from the various periods of store closures during the quarter, careful management of staffing levels and including a $1.2 million payroll tax benefit from the CARES Act. Most other expenses were also reduced, compared to last year.

The primary exceptions to this were increased e-com marketing and fulfillment expenses of $2.3 million, due to the significant growth in e-commerce orders and a $1.7 million disputed sales tax assessment received from the State of California, relating to the 2015 to 2017 years.

Operating income was $3.5 million or 2.5% of net sales, compared to $7.7 million or 5% of net sales last year. This decline in operating results was directly attributable to the impact of the COVID-19 pandemic on our retail stores.

Other income expense decreased by $0.9 million, compared to last year, primarily due to having lower total cash and marketable securities, earning lower interest rates on our investments and paying interest on previously borrowed cash, compared to last year.

Income tax expense was $1.4 million or 39.8% of pre-tax income, compared to $2.2 million or 25.9% of pre-tax income last year. The increase in income tax rate is primarily due to the impact of the CARES Act, which allows for the carry back of year-to-date operating losses to prior fiscal years that had higher tax rates.

We cannot accurately predict what our effective income tax rate will be going forward as it is dependent upon our operating results, which are also largely unpredictable in the current environment. Net income was $2.1 million or $0.07 per diluted share, compared to $6.4 million, or $0.21 per diluted share last year.

Weighted average shares were $29.8 million for both periods.

Turning to our balance sheet, we ended the third quarter with cash and marketable securities totaling $125.3 million, including $12.4 million of withheld store lease payments and no debt outstanding, compared to $130.1 million and no withheld store lease payments or debt outstanding last year.

We ended the quarter with inventories per square foot, down 7.4%. Year-to-date capital expenditures were $6.4 million, compared to $10.6 million last year, primarily due to the reduction in new store openings this year.

One additional item of note regarding liquidity is announced in early November, we replaced our $25 million revolving credit facility with a $65 million asset backed credit facility in order to provide our company with increased protection against potential future business disruptions from the pandemic or otherwise.

We think our long time banking partner Wells Fargo Bank for working with us to provide greater liquidity projections for our company.

As of December 2, 2020, our total cash and marketable securities totaled $138.6 million, including $4.4 million of withheld store lease payments and no debt outstanding, compared to $143.7 million and no withheld store lease payments or debt outstanding at the corresponding time last year. Turning to the fourth quarter.

Given the continuing unpredictability surrounding the COVID-19 pandemic, including, but not limited to its impact on consumer behavior and our ability to continue to operate some or all of our stores or e-commerce at any point in time, we are unable to reliably predict our future sales or earnings at this time.

And therefore, we’ll not be providing any specific guidance.

However given the anticipated negative impacts of the ongoing pandemic, including restrictions on customer traffic to stores and significantly higher unemployment this year, compared to last year, we expect our fourth quarter net sales and earnings per share to be lower than last year’s fourth quarter.

We do not believe it is realistic to expect our earnings to be near last year’s levels, due to the lower sales expectations and higher shipping rates, compared to last year. Operator, we’ll now go to Q&A..

[Operator Instructions] Our first question comes from David Buckley with Bank of America. .

Hi guys, good afternoon. Thanks for taking my question.

Mike, just on your last comment on margins, could you just discuss the e-com profitability outlook for the fourth quarter? Any type of surcharge pressure you expect to incur? And then whether or not you expect product margins to improve again in the fourth quarter?.

So again, we’re not providing any specific guidance to anything given how unpredictable the environment is. But I think directionally, we would expect some of the trends that we saw in the third quarter to carry into the fourth quarter.

So we have seen meaningfully improved regular price selling, full price selling on e-com for several months now that probably isn’t going to change, we think during the fourth quarter. Certainly, added shipping charges in such with the high increase in e-com sales that we’re anticipating.

But year-over-year e-com has certainly improved its profitability relative to historical years from a combination of the operational improvements that we mentioned, but also the full price selling that’s been significantly stronger for most of the year at this point. So I don’t think that’s going to change..

Okay, great.

And can you just discuss how these store capacity issues over Black Friday or since then and so how are you managing them?.

Yes, we have. It varies by state, county, actually just a little while ago California announced some further restrictions on capacity. But we’ve managed it well, the teams have managed it well, our conversion rates are actually up, which is a good thing. And it’s a challenge sometimes, but overall we’ve gotten through it pretty successfully..

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

Good afternoon, everyone. Let me just say COVID aside congrats on underlying strong performance. It’s great to see. Maybe just as a follow-up, if you can touch on what you’ve seen around Black Friday weekend? And I know you said trends improved since then.

So just wondering maybe regionally, I know obviously it depends by region, anything to call out in terms of trends, maybe where it’s a little bit more open versus where it’s a little bit more restricted?.

Sure. Yes, on Black Friday in particular sales were well off in stores they were down over 30% on that particular day. And Thanksgiving Day, no stores were opened this year last year most stores were opened for some number of hours on Thanksgiving Day.

So between those two days combined, we lost close to $5 million in top line volume relative to last year. But then interestingly since then store comps have been positive each day following Black Friday.

So as we think about the fourth quarter, I think we’re anticipating that some of the traditional big shopping days of the quarter might not be as high of a peak on those particular days, but maybe you, kind of, stretch business out across other days as we go through the quarter..

Our traffic patterns have been pretty similar to what’s been publicly reported by different companies. So I wouldn’t say our traffic patterns are any different materially. But like Mike said, it’s encouraging to see our performance post Black Friday in the stores has been a little bit better than what it had been trending going into Black Friday..

Yes, I think in particular, because of that dynamic on Thanksgiving Day and Black Friday itself, all areas were down meaningful double digits across Black Friday weekend, but we’re recovering ground with each day it seems so far..

Okay. Well, good to hear that the trends improving.

And then I just wanted to touch on inventory, I know inventory per foot is down, maybe you can speak a little bit more about how you’re, kind of, working through management of inventory in Q4, given what seems to be sort of erratic traffic and even some recent lockdown activity?.

We planned fourth quarter with the idea that stores were likely to be meaningfully negative. Thankfully, the negative that we reported so far 14% has not been as bad as we thought it was going to be. We also planned for e-com to be up more than it has been so far.

So in a way we are, kind of, off on both assumptions, I think stores have been better than we thought it would be so far.

We thought e-com would be very strong, we thought it would be even stronger than it has been so far, thinking that, that is likely to continue as we go through the rest of the quarter like I was mentioning earlier some of these peak days we think it’s more likely do not that we’re going to lose some ground on those traditional peak days, but that hopefully based on the signs we’re seeing, we’ll do better in between those peak days and maybe at least with what we’ve seen so far.

Maybe stores can end up better than how we planned. So I think we feel pretty good about how we planned inventory overall, and we made the comment that we think our inventories are well positioned for the holiday season. We’re constantly making changes every single week and sometimes intra-week, as we continue to read the business..

Yes, just to add a little to that is, we feel really good about our inventory levels right now. It’s been -- it’s always challenging to balance the inventory between channels. But, I think, Jeff, as you know, we have the ability to fulfill out of our stores for e-commerce as necessary. And we’ve done that for a long time and we continue to do that.

So any balancing issues that we may have, we can offset it by that ability alone. So I feel pretty good about where we’re at..

Okay, that’s helpful. And then if I could just squeeze in one more.

Any comment on supply chain around hard goods?.

Well it’s -- we’re really at the early stages of it. So we’re not -- I think the supply chain is challenging for sure, but it seems to be getting little bit better. So more to come on that later as we get further into it..

Our next question comes from Matt Koranda with ROTH Capital Partners..

Hey guys, thanks. Just wanted to get a little bit more color on your Q4 revenue commentary expecting net sales to be lower year-over-year. So I guess we’re comping flat overall quarter-to-date. It looks like traffic declines, sort of, improved sequentially and the November tickets up. You said trends are improving, sort of, post-Black Friday.

Are we factoring in, sort of, some degradation in traffic for the latter portion of this month? What are the other headwinds that we should be factoring in, because it sounds like things have gotten better since the numbers you provided?.

Yes, Matt. I think, we are thinking about to some of the responses we just had with Jeff.

Some of those peak days, we’re anticipating that we’ll probably lose some ground on those peak days just as we saw on Black Friday in particular, right? Based on what we’ve seen so far, we think during those big days there is a sector of the population that isn’t going to be as comfortable going out to stores and being in large crowds and long lines and things of that nature.

It’s why we, kind of, planned stores to be even more negative than they have been so far for the quarter and that there would be some shift of that over to the e-com side. So far thankfully stores have performed better than we thought, it would be really nice if that could continue through the rest of the fourth quarter.

But as we’ve seen over this entire period of the last several months, so much changes, so quickly and it’s so unpredictable.

We’re just trying to make sure that we stay in a place that we think is reasonable and conservative and to make sure that we give our company the best chance to be successful and yet protect ourselves from downside risk at the same time..

Okay, fair enough. And then on the e-commerce side of the business, I was just curious about capacity from your standpoint.

I mean, do we have enough in terms of shipping slot allocation from your providers? Maybe you could also discuss, sort of, the use of curbside and how important that has been to the e-commerce business over the last quarter or so? And how you expect it to play out for the remainder of the holiday?.

Yes. We definitely have enough capacity. So far we have not been negatively impacted by some of the shipping carrier issues that you’re probably hearing about in terms of delays or anything like that.

We have not -- and just to, kind of, repeat a little bit of what I said to Jeff, we have the ability to fulfill out of our stores as a backup, if inventory -- if we have inventory in the stores, but not in the e-com distribution center. We’ve had that ability for a long time and we take advantage of where necessary.

So I feel pretty good about where we’re at and we should be in decent shape through the holiday season..

Thank you. Our next question comes from Mitch Kummetz with Pivotal Research. .

Yes. Thanks for taking my questions. Ed you mentioned that women’s was up mid-singles on the quarter.

Could you maybe speak a little bit more to that? And to what extent is that, because you’re tapping into some of these trends have been bolstered by COVID like comfort or maybe even fitness?.

Generally, our women’s business across the board was improved across the board really. And part of what’s driving that is the West of Melrose brand in collection that we introduced over a year ago. That’s been really strong for us and just keeps continues to get better as we build as the brand gets better recognition.

So I would say that’s probably some of its comfort in the categories that you would expect during these times. But it really is good across the board in women’s. No one is specific brand..

Got it.

And then on the other categories, you mentioned they were down, but you generally, kind of, speak to the order of magnitude, I was hoping you might be able to do that?.

Well, all categories with the exception of Women’s were down in Q3. They’re all improving across the board; all of them have improved so far quarter-to-date. So we’re seeing [Multiple Speakers].

Is there anything that was worse than others in the quarter? I feel like footwear’s are little bit more challenged over the last couple of quarters.

And I was just curious, if that was still, footwear was the worse category?.

Well, footwear for us was down, but it’s comping positive right now. And I would say probably the most challenging part of our business was our Kids business..

Boys in particular?.

Our boys and girls. Yes, boys in particular, that was a little softer than we expected..

And then the accessories area too, because of the backpacks..

And the backpacks is a major, as you know, it’s a major category for us..

Yes, and then I guess last thing, you mentioned some of the restrictions in California, and I know that LA County is sort of re-imposed some stay at home orders. I’m wondering to what extent you’re seeing any impact from that already.

And or -- is that impacting consumer sentiment or people’s willingness to want to get out in the stores or how do you see that sort of translate if at all?.

It’s hard to really quantify it, honestly. But I mean, just today, they’ve announced our reduced capacity or capacity limitations and the percentages are different across the state, depending on the county. So there is no question that is a challenging thing for us to deal with -- for everybody to deal with.

But it’s probably the right thing to do at this point. So hard to quantify it, how much of an impact it is. Other than the fact that I think you have less people browsing stores and the people that are coming in are real purchasers, which really contributes to an improved conversion rate for us..

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments..

Thank you all for joining us on the call today. Happy holidays to everyone and please stay safe. Have a good evening everyone..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a great evening..