Why Tilly's Inc Shares Tanked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of clothing and accessories retailer Tilly's Inc (NYSE: TLYS  ) plummeted 26% this morning after its quarterly results and outlook disappointed Wall Street.

So what: The stock has rallied in recent months on optimism over improving traffic, but today's Q4 results -- income fell 34% on a revenue decline of 1% -- coupled with downbeat guidance is forcing Mr. Market to quickly sober up. In fact, same-store sales decreased 2.4% while gross margin slipped 260 basis points, suggesting that Tilly's competitive position is weakening rather rapidly.

Now what: Management now sees Q4 EPS of $0.15-$0.21, well below the consensus of $0.35, and expects same-store sales to decline to mid- to high-single-digits. "We maintained healthy gross margins, controlled our costs and exited the quarter with inventory as planned and well positioned for the holiday season," CEO Daniel Griesemer reassured investors. "While current trends dictate a cautious approach in the near term, we are confident in the strength of the Tilly's brand and remain focused on initiatives to advance our long-term growth." Given the particularly weak traffic trends and intense competition that Tilly's continues to face, however, I wouldn't be so quick to bet on that turnaround talk.

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