Greetings. Welcome to the Tilly's, Inc. Third Quarter 2022 Earnings Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin..

Good afternoon, and welcome to the Tilly's Fiscal 2022 Third Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the Company's results and then host the Q&A session. For a copy of Tilly's earnings 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 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 1, 2022, and actual results may differ materially from current expectations based on various 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2022 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 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. Our third quarter sales performance was stronger than we anticipated throughout the quarter, resulting in both topline and bottom line results exceeding our outlook and analyst consensus estimates for the third quarter.

As expected, we saw a deceleration in sales trends from month-to-month as we anniversaried last year's early holiday shopping that was driven by supply chain concerns and other pandemic-related factors in the later stages of the quarter.

Not surprisingly, as we lap those prior year conditions amid this year's highly inflationary environment, all geographic markets comped double-digit negative and most merchandising departments comped double-digit negative with the expectations -- exceptions of footwear, which was just slightly negative and accessories, which was led by strengthened backpacks, but still decreased by a single-digit percentage overall.

Also, not surprisingly, customer store traffic and conversion both declined by high single-digit percentages compared to last year's record results.

Despite current economic challenges associated with inflation, we continue to believe that Tilly's has meaningful future growth opportunities in many of our existing markets, particularly California, Texas, the Northeast and greater Chicago area.

With very few exceptions, our new store openings over the past several years have met or exceeded our expectations, and we believe it is important for our long-term earnings potential to continue to grow our store base, along with our e-comm business. In the third quarter, we opened five new stores.

In the fourth quarter, we have opened two new stores so far with two more we'll be opening in a few more days, bringing our total new store openings to 11 for the year. We anticipate closing two stores in mid-January, bringing our fiscal year and store count to 249.

For fiscal 2023, we have a preliminary expectation to opening up to 15 stores, assuming we can negotiate what we believe to be appropriate lease economics relative to the retail environment. At this time, two of those potential new stores have been fully -- have fully executed leases, and we are engaged in active negotiations on the remainder.

In addition to new stores, we continue to invest in company infrastructure during fiscal 2023 to support our future growth plans. We plan to upgrade our warehouse management systems to create greater efficiencies in managing inventory between our stores, e-commerce and our two distribution centers as well as to improve distribution labor efficiency.

We are also planning to upgrade our merchandise planning and allocation systems with the goals of improving inventory efficiency and reducing the volume of inventory transfers. In total, including 15 new stores, we preliminarily expect our total capital expenditures for fiscal 2023, not to exceed $25 million.

Turning to the fourth quarter of fiscal 2022, we are off to a softer start than expected. Total comparable net sales through November 29, including both physical stores and e-comm decreased by 18.5% versus the record comparable period of last year.

For Thanksgiving weekend, Thursday and through Cyber Monday, we saw an improved relative trend with total comparable net sales decreasing 13.4% compared to last year and a high single-digit negative comp on Black Friday, specifically.

Assuming our fourth quarter sales exceed third quarter sales, as has been the case throughout our history, except for last year, we believe we have an opportunity to produce an improved comp sales trend for the fourth quarter relative to recent quarters, although still below last year due to the much more difficult economic conditions in play this year.

We will continue to manage our business prudently relative to the current environment, but remain focused on our longer-term goals of continued growth and improved operational performance. I now turn the call over to Mike to discuss our third quarter operating results and fourth quarter outlook in more detail.

Mike?.

Total net sales were $177.8 million compared to a company record of $206.1 million last year. Last year's results were fueled by unprecedented pandemic-related factors, along with supply chain concerns about the holiday season, which we believe pulled sales forward into the third quarter last year.

Total comparable net sales, including both physical stores and e-commerce decreased by 14.9%. Total net sales from physical stores were $141.5 million compared to $165.3 million last year, with a comparable store net sales decrease of 15.8%. Net sales from physical stores represented 79.6% of our total net sales this year compared to 80.2% last year.

E-commerce net sales were $36.3 million compared to $40.8 million last year. E-comm net sales represented 20.4% of total net sales this year compared to 19.8% last year. We ended the third quarter with 247 total stores, a net increase of four stores since the end of last year's third quarter.

For additional perspective, our total comparable net sales for the third quarter increased by 8.7% relative to the pre-pandemic third quarter of fiscal 2019. Gross profit, including buying, distribution and occupancy expenses, was $54.6 million or 30.7% of net sales compared to a company record of $76.7 million or 37.2% of net sales last year.

Buying, distribution and occupancy costs deleveraged by 360 basis points collectively due to carrying these costs against a significantly lower level of net sales this year compared to last year.

Product margins declined by 300 basis points this year, primarily due to an increase in more normalized markdown rate compared to last year when full price selling was at record levels.

For additional perspective, product margins were down less than 100 basis points compared to the pre-pandemic third quarter of fiscal 2019, primarily due to lower initial markups and a higher markdown rate. Total SG&A expenses were $48.3 million or 27.1% of net sales compared to $47.7 million or 23.2% of net sales last year.

The primary increases in SG&A compared to last year were $0.6 million from store payroll due to having four net additional stores, along with higher hourly wage rates and $0.5 million from corporate payroll due to wage inflation.

Partially offsetting these increases were a $1.8 million reduction in bonus expense due to the lack of any bonus accrual this year and a $0.6 million reduction in marketing costs. Operating income was $6.3 million or 3.6% of net sales compared to a company record of $29 million or 14.1% of net sales last year.

Other income was $0.7 million compared to zero last year, primarily due to earning higher rates of return on our marketable securities investments and the absence of any costs associated with our former ABL credit facility, which were included in last year's results.

Income tax expense was $1.8 million or 26.3% of pretax income compared to $8.2 million or 28.1% of pretax income last year. Net income was $5.1 million or $0.17 per diluted share compared to a company record of $20.8 million in net income and $0.66 per diluted share last year.

Weighted average shares were 30 million this year compared to 31.4 million last year. Turning to our balance sheet; we ended the third quarter with total cash and marketable securities of $105.8 million and no debt outstanding. This compared to $155.6 million and no debt outstanding last year.

Since the end of last year's third quarter, we paid special cash dividends to stockholders of $30.9 million in December 2021 and repurchased 1,258,330 shares of our common stock for a total of $10.9 million during this year.

We ended the third quarter with inventories per square foot down 6.9% compared to last year, following being up 4.1% to last year at the end of the second quarter. Total year-to-date capital expenditures were $11.9 million this year compared to $10.9 million last year.

We expect our total capital expenditures for fiscal 2022 to be approximately $19 million at the end of the year.

Turning to our outlook for the fourth quarter of fiscal 2022; we remind you that last year's fourth quarter was a historic anomaly for us with fourth quarter sales below third quarter sales for the first time ever due primarily to supply chain concerns and other pandemic-related factors, which we believe pulled some holiday season sales into the third quarter last year.

While some level of similar customer behavior may have been repeated this year amid the current highly inflationary environment at this time, we assume that our fourth quarter sales performance will revert to a more traditional cadence such that it would be the largest sales quarter of the year.

Based on our quarter-to-date net sales results through November 29, 2022, that I had shared earlier and our pre-pandemic historical sales build patterns we currently anticipate our total net sales for the fourth quarter of fiscal 2022 to be in the range of approximately $183 million to $188 million, SG&A to be approximately $54 million to $55 million, pretax income to be in the range of approximately $0.8 million to $2.6 million, our estimated income tax rate to be approximately 27% and earnings per diluted share to be in the range of $0.02 to $0.06 based on estimated weighted average diluted shares of approximately $29.9 million.

This compares to a company fourth quarter record of $204.5 million in net sales and $0.38 in earnings per diluted share for the fourth quarter last year and total net sales of $172.5 million and earnings per share of $0.21 in the pre-pandemic fourth quarter of fiscal 2019. Operator, we'll now go to our Q&A session..

[Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley..

Hello. This is Rick Magnusen for Jeff Van Sinderen.

Can you provide more insight into how you are planning incoming inventory for spring? And do you expect inventory to be up or down on a square foot basis at the end of fourth quarter?.

Hi Richard. We expect inventory to be down on a per square foot basis finishing the fourth quarter. As we think about next year as a whole, one thing to keep in mind is, obviously, 2021 was crazy to the good side of things.

All year long, we've been going up against that, and you see the comparisons in the negative double-digit comp that we've seen all year. The last month that we will have that is February. February 2022, we had a plus 15% comp. After that, every month -- after that, we'll be going up against this year's negative double digits.

So there's some optimism there that assuming we can stay on trend with our merchandise assortment the way we consistently have we think there's an opportunity for us to be able to turn around back into positive comps once we get into 2023 and past the month of February, in particular, which is a small month.

But we're expecting to improve our business in 2023 and do better business in the spring than we did this year..

All right. No, that sounds good.

And can you provide some detail on the different trends that you saw in Cyber Monday and Black Friday sales in e-comm?.

It was pretty erratic. I think we were going up against a lot of our competitors were much more aggressive promotionally than us, and we elected, as we consistently do, we elected to not play the aggressive promotion campaign and may have somewhat negatively impacted our demand. But overall, it was close to what we expected..

Okay.

And then can you remind me what is the comparison easier for e-comm?.

Well, as I just mentioned on the -- it was a total business, we're going to be going up against double-digit total business. Spring, yeah, it will start right after the month of February. We had similar directional performance between stores and e-comm.

I'm looking at the chart here, e-comm was up single digits in February and then down double digits the next four months in a row. Still negative in July, August and then back to double digits September, October, November. So similar in nature to how stores compare..

Okay.

And then my last question is, what are you seeing in brick-and-mortar this week, if you can speak to that?.

I wouldn't call it particularly strong. So it's not..

No, I'd say it's -- in the past, you usually go through Black Friday weekend and then there's a little bit of a lull after everyone kind of goes through Black Friday promotions and all the buzz of that and Cyber Monday and those kinds of things, you tend to go through a lull and we're experiencing that.

We do think that the overall patterns for holiday shopping will be later this year than they were last year.

We also think that's part of why our fourth quarter start was weaker than anticipated because remember, we talked about the fact that we thought some early holiday shopping pulled into October, well it also pulled into early November because of all the supply chain concerns last year.

So I do think we are anniversarying and lapping some of that early holiday shopping patterns of last year because of the supply chain concerns. Come to this year, everyone's got more inventory than they need and has pretty much all year long, really promotional environment. We do think that we'll see the holiday season come into being.

It will just be a later flow than it was last year, and we have contemplated that and how we've thought about our outlook..

Just to add to that, too, is we're going into the next few weeks the quality of our inventory, both in terms of quantity and the mix is really in great shape. So we're positioned -- we feel like we're well positioned to do the business if it's there..

Our next question comes from the line of Mitch Kummetz with Seaport Research..

Starting with the Q4 to-date comp, I think, Mike, in the press release, and it's down 18.5%.

Do you know what that is on a sales basis? And then also, do you happen to know what both comp and sales are for that period versus three years ago?.

I don't -- all I have is what we just reported is the comp number. I don't -- we haven't closed fiscal November. We're in the process of closing fiscal November. So I don't have all-in sales numbers to report at this early date..

Okay. And then you referenced the pull forward last year because of supply chain and some COVID. Can you remind us how -- so I think last year, you guys did, I think, a 12.5% comp, if I have that correct.

Can you remind us kind of how that flowed through the fourth quarter maybe on a monthly basis, just so we have a good -- a better sense of the compare?.

Yes. So last year, '21 versus '20, November was the strongest month in terms of comp at a plus 21%, then December was about half that at 10.5%, and then January was a plus 4%. So it gets easier as the quarter goes in terms of those comparisons.

This is another reason why despite how slowly November started, you look at all the historical relationships of how we just finished Q3, how we finished Q3 relative to 2019, it just -- it all points that if history means anything at all -- we have to be somewhere in the $180 million range for the fourth quarter.

We just reported $178 million for the third quarter. Fourth quarter is larger than third in any way, shape or form, the way it traditionally was other than last year, you're in the $180 million. So it seems to make sense again, if history proves to be accurate at all. If something else happens, there's no way I can predict it.

I have to believe, despite our slow start in November that the holiday season will come and that some sense of a normal cadence of Q3 to Q4 will take place.

Coupled with, the fact, we did just do nearly a plus 9% comp to 2019 in the third quarter, some level of positive comp in the fourth quarter relative to 2019 also gets you in that $180 million area when you contemplate, we have nine additional stores than we did then.

So it seems to line up despite the soft start, those other metrics seem to point you to a place that says the business will come, it's just later than what it was last year..

Yes.

And do you have a sense as to how much of the quarter is in the books through November 29? I imagine the vast majority is still in front of you?.

It is. The largest we serve right around Christmas, as you would expect, Thanksgiving week is one of the largest weeks. But that last full weekend before Christmas, that last full week before Christmas, those are the hugest weeks of the quarter, those two.

And then usually, the first week right after Christmas is pretty big before -- then for the rest of January, the weeks get really small. So the great majority of the quarter will be in once December is done..

Okay. And then lastly, Ed, there's been a lot of talk on other retail earnings calls about how challenging the apparel environment is, in particular.

Can you just elaborate on what you guys are seeing?.

Yes. The apparel environment has been challenging. Honestly, I think part of it's because there's no dominant trend, particularly in our -- cater to our age group. And for us, what we've seen is one of our best-performing categories is long bottoms, and it's been good.

I'm not saying denim other long bottoms, but the other typical categories that are really strong have slowed down. And I think part of its economic and part of it is lack of really dominant trend..

Our next question comes from the line of Matt Koranda with Roth Capital..

This is Ray [ph] on for Matt. Most of my questions were already asked, but maybe if you guys can talk a little bit about how Black Friday, Cyber Monday, I guess, how much of that sorry, okay.

Maybe like Q4, how much of the revenue actually come from Black Friday and Cyber Monday and kind of like understanding that last year was a little bit out of the norm..

I don't have any data points on Black Friday as a piece of the quarter. I mean, it's in the top five sales volume weeks of the quarter, top four, but the real bulk of the business comes around Christmas typically. And again, because of the difference of last year to this year it's going to come later.

There is an extra day of shopping before Christmas to say later this year. So there's still a lot of business to be done yet. We did see during the Black Friday weekend, as we referenced, the month as a whole was down 18%. We were down worse than that in the first three weeks of November.

And then Black Friday weekend was down about 13%, and Black Friday itself was only down 9%. So during that particular peak weekend, we saw a meaningful improvement in the trend of our business.

And given that we are expecting a later flow of the holiday shopping versus what it was last year, we'd expect to see similar sorts of behaviors during those key peak weeks in the mid- to latter part of December in particular..

[Operator Instructions] It looks like we have reached the end of the question-and-answer session. I will now turn the call back over to Michael Henry for closing remarks..

Hi. Unfortunately, it's Ed. Thank you for joining us on the call today. We look forward to sharing our fourth quarter results review in mid-March 2023. Have a good evening..

Thanks, everybody..

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..