Tilly's (TLYS) Q4 2020 Earnings Call Transcript

Tilly's (TLYS 2.70%)
Q4 2020 Earnings Call
Mar 11, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Tilly's Inc fourth-quarter 2020 earnings results conference call. [Operator Instructions]. I would now like to turn the conference over to your host, Gar Jackson.

Gar Jackson -- Investor Relations

Good afternoon, and welcome to Tilly's fiscal 2020 fourth-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 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, March 11, 2021, 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 fourth-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 conclude a Q&A session after our prepared remarks.

I'll now turn the call over to Ed.

Ed Thomas -- President and Chief Executive Officer

Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Fiscal 2020 was an incredibly challenging year. I'm very proud of our teams' fourth-quarter accomplishments in finishing the year including a positive overall comp, significantly improved top line, and bottom-line performance from our e-com business and improved earnings per share compared to last year's fourth quarter along with a strong debt-free balance sheet.

This was our strongest fourth-quarter earnings per share performance since fiscal 2012 fourth quarter. We believe these results are quite remarkable considering the significant restrictions on store operating hours and customer traffic during the quarter, high overall unemployment in the broader economy, and other operational challenges posed by the pandemic. In terms of merchandising results for the fourth quarter compared to last year, women's and footwear were our strongest departments with double-digit percentage increases in comparable net sales. Men's was just shy a flat and girls decreased in the low-single digits.

Accessories and boys, decreased by double digits. We believe that an improved overall assortment in the introduction of several new brands drove the strong performance of women's and footwear. Weakness in third-party brands and denim were the primary causes of net sales decline in boys. Weaker hydration and backpack businesses were the primary causes of net sales decline and accessories.

Hard goods including skateboards, bikes, roller skates, and certain snow products were launched in 20 stores during the fourth quarter after being soft-launched online during the third quarter. Hard goods represented less than 2% of total net sales during the fourth quarter but we have been encouraged by the customer response to these new offerings so far. In terms of merchandizing priorities for fiscal 2021, we intend to expand offerings of our proprietary rescue brand, which was our No.1 overall brand in terms of net sales in fiscal 2020. This expansion will include new product categories as well as broader sizing and fit offerings within denim.

We also intend to continue to introduce new third-party brands, which we believe will drive additional customer interest in our overall merchandise assortment. We also intend to expand hard goods into 80 of our stores with greater breadth in our product offerings during the spring expecting that the draw of individual outdoor activities will continue to be meaningful throughout 2021. Turning to real estate. We currently have seven new stores planned to open during fiscal 2021 that were originally signed to open during fiscal 2020.

These new stores are dispersed among our existing markets in a mix of both mall and off-mall stores. The first store just opened in Las Vegas on March 1, two are planned to open by the end of April, and the remaining four are scheduled to open in early May. We intend to continue to open a mix of both mall and off-mall stores over time, but we will be very selective and only pursue those opportunities wherein we believe the economics are appropriate to the environment. Inclusive of conservative internal sales estimates and good co-tenancy expectations.

With respect to our existing store portfolio, we have addressed approximately 95% of our store leases relative to the rents. We withheld during the pandemic shutdown period last year. In many cases, we have negotiated ongoing adjusted rent while we remain in this pandemic environment. We currently have one known store closure that will take place at the end of March.

Turning to the first quarter of fiscal 2021. Total comparable net sales have decreased 4.6% through March 8 versus a comparable period last year. Comparable net sales were positive in both physical stores and e-com during last year's period before the pandemic began adversely impacting our operations. As a reminder, all of our stores were abruptly closed midway through last year's first quarter and remained closed into the second quarter due to the impact of the COVID-19 pandemic across the country.

This year, stores have been operating with significant government mandates restrictions on customer traffic, and reduced operating hours compared to last year's pre-pandemic period. Assuming our stores and e-com can remain in operation this year, we would expect our total net sales and earnings per share to be substantially better than last year for the first and second quarters of fiscal 2021. However, at this time specifics are impossible to predict with any certainty until we see how our business performs as we begin to anniversary last year's store shutdown period. To further complicate any efforts to predict our business, we've also been experiencing meaningful product delivery delays from Southern California ports impacting almost 20% of our planned retail inventory receipts.

During the first several weeks of the quarter, delivery delays have ranged up to a full month at this time across a variety of product categories. We do not currently have good visibility as to when the situation will be fully resolved. As a result of these delays, we may at times temporarily carry higher inventories than last year. We are carefully monitoring events and adjusting to the best of our ability as we get more information.

In closing, we believe we have successfully managed our way through one of the toughest years in recent retail history. We remain excited about the future of Tilly's business and dedicated to continuing to push through the challenges posed by the pandemic. Although so much remains uncertain for now, we are hopeful that we can continue to position the business for success in the evolving environment as we proceed through fiscal 2021. We intend to remain conservative in our approach to managing our business over the near term in order to protect our longer-term prospects in light of the continued volatility and uncertainty in the retail environment.

I will now turn the call over to Mike, to provide details on the fourth-quarter operating performance and balance sheet. Mike?

Mike Henry -- Executive Vice President and Chief Financial Officer

Thanks, Ed, good afternoon, everyone. Details of our fourth-quarter operating performance compared to last year's fourth quarter were as follows; total net sales were $177.9 million, an increase of $5.4 million or 3.2%, compared to $172.5 million last year. Total comparable net sales, including both physical stores and e-commerce, increased 2.5%. Comparable net sales from physical stores decreased 12.3% and represented 68.9% of total net sales, compared to 80.7% of total net sales last year.

E-commerce net sales increased 66.5% and represented 31.1% of total net sales, compared to 19.3% of total net sales last year. We ended fiscal 2020 with 238 total stores compared to 240 total stores at the end of fiscal 2019. In fiscal 2020, we opened two new stores and permanently closed four stores. Gross profit including buying distribution and occupancy expenses was $58.3 million or 32.7% of net sales, compared to $52.1 million or 30.2% net sales last year.

Product margins improved by 210-basis-points primarily due to reduced total markdowns. Buying distribution and occupancy cost improved by 40-basis-points collectively. Occupancy and cost improved by $2.3 million and 170-basis-points as a percentage of net sales compared to last year. Distribution expenses increased by $2.8 million and deleveraged by 140-basis-points primarily due to an increase in the e-com shipping cost of $3.1 million associated with a significant increase in e-commerce orders.

Buying cost improved by 10-basis-points. Total SG&A expenses were $44.1 million or 24.8% of net sales, compared to $43.6 million or 25.3% of net sales last year. The 50-basis-point improvement in SG&A was primarily driven by a $2.5 million reduction in store payroll and related benefits expenses and a $1 million reduction in print, advertising expenses, partially offset by increased e-com marketing and fulfillment cost of $4 million in the aggregate due to the significant increase in e-com activity. Operating income improved to $14.1 million or 7.9% of net sales, compared to $8.5 million or 4.9% of net sales last year, as a result of the combined impact to the factors just noted.

Other expense was $0.1 million, compared to other income of $0.6 million last year, primarily due to earning lower interest rates on our investments and approximately $0.2 million in cost associated with our new ABL credit facility. Income tax expense was $5.1 million or 36.6% of pre-tax income, compared to $2.8 million or 30.9% of pre-tax income last year. Net income improved to $8.9 million or $0.29 per diluted share, compared to $6.3 million or $0.21 per diluted share last year. Weighted average shares were $30.1 million this year compared to $29.9 million last year.

Turning to our balance sheet, we ended the fiscal year with cash and marketable securities totaling $141.1 million, including $2.2 million of withheld store lease payments and no debt outstanding compared to $139.9 million with no withheld store lease payments or debt outstanding last year. We ended the quarter with inventories per square foot down 0.7%. Total capital expenditures for fiscal 2020 were $8.2 million, compared to $14.3 million in fiscal 2019, primarily due to the reduction in new store openings this year as a result of the pandemic. As of March 9, 2021, our total cash and marketable securities were $138.7 million, including $2.1 million of withheld store lease payments and no debt outstanding compared to $115.5 million as of the comparable fiscal date last year.

As a reminder, in late February 2020, we paid a cash dividend to stockholders of $1 per share or $29.7 million in the aggregate. Per the terms of our ABL credit facility, we're temporarily prohibited from paying dividends or repurchasing our own stock until November 2021. Turning to the first quarter of fiscal 2021. As I had noted earlier, total comp sales have decreased 4.6% through March 8, including a decrease of 13.3% in comparable store net sales and an increase in e-commerce net sales of 40.6%.

Comps were negative in February, but have been positive so far in March. Given all stores were closed as a result of the pandemic halfway through the first quarter last year, we would expect our total net sales and earnings per share for the first quarter this year to be substantially better in the $77 million in total net sales and loss per share of $0.59 we reported for last year's first quarter as long as stores and e-com can remain in operation. As we began to anniversary last year's store shutdown period next week the unknowable factors include how to store performance will compare relative to pre-pandemic performance levels, and how e-com will perform as it goes up against last year's significant increases we experienced during the store shut down period. These factors are impossible to predict with any certainty and therefore, we will not be providing any specific earnings guidance at this time.

Operator, we'll now go to Q&A.

Questions & Answers:

Operator

Thank you. At this time, we'll be conducting the Q&A session. [Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley & Co.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Hi, everyone. First, let me say congratulations on the strong Q4 metrics, amazing to see positive comps there especially given the backdrop. As we're thinking about the port delays in inventory. I know your inventory is down a little bit on a comp basis.

But I think you said about 20% of your receipts are impacted by the delays in a variety of categories. I guess I'm wondering, how much of that has impacted Q1, and how much of that do you expect to impact Q2, and are the delays changing your ordering plans going forward?

Ed Thomas -- President and Chief Executive Officer

It's pretty hard right now Jeff to quantify whether it's a Q1 impact or a Q2 impact. But I'm sure it's going to touch both quarters.

Mike Henry -- Executive Vice President and Chief Financial Officer

Yes, it's shifting. It's shifting as we go.

Ed Thomas -- President and Chief Executive Officer

And it really is a moving target. So it's really hard to get any kind of visibility. The brands are having just as difficult of time of getting visibility to when it will get better or when goods will come in. So right now, our inventories are in pretty good shape.

So we're pretty good about that. But obviously, the longer the delays go on it will have some impact on us.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Ok. And then I just wanted to know, I know this is also really hard to predict, but just thinking about the e-com business given the comparisons. And I think you're about 30% e-com penetration in Q4 or low 30s. How do we think about or how are you -- I know you can't predict about? How are you thinking about where your e-com business penetration might go, 30% the level or do you think it comes down from there as the stores rent back? At this point, what's your best guess? What's your latest take on that?

Ed Thomas -- President and Chief Executive Officer

I think, we -- as you know, we have a pretty underdeveloped e-com business going in pre-pandemic and we've created a lot of positive momentum in building that business, and I don't think it's totally just because the stores were closed. I think a lot of it was, we saw growth in areas that out of areas of the state that we don't have any store presence or we have very little. So we feel that e-com will continue to grow in a good way and a decent pace, even with the stores fully operating. So this still remains a pretty significant opportunity for that business to become big, bigger.

Mike Henry -- Executive Vice President and Chief Financial Officer

I think we're thinking it's going to stay somewhere call it maybe the mid-20% best guess. It's not -- It's unlikely to stay at the low 30s with all stores being open, right? Because that penetration is going to shift between the two channels. But, we certainly think it's going to be higher than where we ended fiscal 2019 when it was only 16% of total sales. We don't think it's going to revert all the way back down to where it was.

I think we made a lot of progress. We've invested in technologies and capabilities that we didn't have two years ago. So, we do think it's going to remain a bigger piece of the business and it's good to see that through this past year while that increase occurred on the top line we also improved product margins and bottom-line profitability of our e-com business. So it will be a healthier contributor to the overall business than it has been traditionally in pre-pandemic times.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

If I could squeeze in one more. You put up a really strong operating margin of around 8% for Q4. I think and I'm just wondering how you're thinking about that within the context of things. I know that last year obviously, there were some unusual things around expenses.

But I guess what I'm getting at is, do you think 8% percent is sort of -- I won't say the new normal for you. But do you feel like you've moved up I guess in terms of what kind of the normal status quo operating margin might be for you?

Mike Henry -- Executive Vice President and Chief Financial Officer

Over time, we expect to continue to improve the operating margin performance of this business. Each quarter is a little bit different under normal circumstances or if you look back at the history of Q1, it's the smallest revenue quarter that puts a lot more pressure on cost and leverage points on cost during the first quarter in particular. So 8% doesn't automatically become the run rate each and every quarter going forward as of the change in volume and the mix between stores and e-com. But generally speaking, we still feel like under normal conditions if everything can stay operating all the COVID caveats, we would expect to continue to push this business through the mid-single digits and into the high-single digits in operating margin in the future.

We think that's a realistic goal and certainly, part of our thinking in how we're trying to manage the business.

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Ok, great to hear. Thanks for taking my questions and best of luck.

Ed Thomas -- President and Chief Executive Officer

Thanks, Jeff.

Operator

And our next question is from Matt Koranda with ROTH Capital Partners.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys. Good afternoon. Thanks for the preliminary commentary as well on I guess February. I wanted to get things for how we should think about transaction values and any color you can provide on sort of how comparison maybe on a two-year stack going forward in 1Q versus kind of more normal plans in 1Q 2019, maybe directionally you could help us with traffic and transaction values relative to that marker?

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah, I don't have any two-year stacks for any of that information. Thus far, in the first quarter compared to last year, which would have been the last pre-pandemic weeks at this stage. Traffics been down 28%. The conversion rate has increased by high single-digit percentage and average transaction value has been up low teens.

So traffic is certainly down on top of a meaningful decline last year in the prior year at the same time. But it seems that we're doing a good job of converting those who come in and they're buying more than they have in the past when they're coming in.

Matt Koranda -- ROTH Capital Partners -- Analyst

Got it. That's helpful, Mike. And then just on the strong gross margins from this last quarter. It seems like you called out marked-down activity relatively low.

How sustainable do you think that is heading into kind of more of reopening or maybe you're competing a bit more for traffic over the next several months? Can you talk a little bit about the markdown environment and how you see that playing out?

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah, this is one of those things, it's a question mark in the current environment, right? Depending on how close store performance is relative to pre-pandemic levels. What the mix-e-com is and then further complicated by this port delay situation that we're dealing with. That is also unpredictable of what exactly is that going to mean for when the products come in, how seasonally appropriate are they, when they do come in. the good thing between Q1 and Q2 is, that's the spring, summer assortments.

There's not a massive assortment shift between Q1 and Q2. So as long as we can get those products in somewhere in a reasonable amount of time, we'd expect our product margins to remain pretty consistent as they always typically are. They don't tend to move around by more than 100-basis-points plus or minus historically. Our Q4 performance was a bit outlier to the good.

So all those unknowns in play. I wouldn't expect it will continue to see plus 200-basis-points in product margins going forward. I think if anything there might be a little bit of pressure on that because of those factors that we just mentioned.

Ed Thomas -- President and Chief Executive Officer

Yeah and just to add to that. We're much better at managing merchandise margins and have been for the past year than what was in the past and we've never been bad at it. Just that we got better and the inventory management disciplines within the organization are really good as is merchandized margin, and we have not changed nor that we anticipate changing our promotional strategy where we're just not a promotional company. And if you see a promotion out there most of the time it's a planned promotion at a decent margin.

Matt Koranda -- ROTH Capital Partners -- Analyst

Got it. Ok. The last one, this really quickly. You mentioned a bit of distribution deleverage and it looks like probably mostly just e-com mix.

But anything one time in the quarter to call out just in terms of like maybe excess cost in terms of outbound shipments for challenges around partial careers that kind of caused you a little bit of headache there or is that just mix of e-com in that distribution deleverage?

Mike Henry -- Executive Vice President and Chief Financial Officer

It's primarily the mix of e-com. I mean if you look back at the last several quarters of our performance the very same things have been the same impacts whether you're looking at the buying distribution occupancy buckets or you're looking at the SG&A bucket. It's been the same key things that are primary drivers of movement in the dollar. So while costs were higher for the carriers, it's more the e-com penetration significant increase in e-com activity is what the primary driver of the increase in the cost is.

Matt Koranda -- ROTH Capital Partners -- Analyst

Ok, understood. I'll jump back in queue guys. Thank you.

Ed Thomas -- President and Chief Executive Officer

Thank you.

Operator

And our last question comes from Mitch Kummetz with Pivotal Research.

Mitch Kummetz -- Pivotal Research -- Analyst

Yeah, thanks for taking my question. Mike, I think you said on the quarter occupancy dollars were down. I feel like that's been the trend. Can you give us some sense of how you expect that line item flow in 2021 from a dollar standpoint?

Mike Henry -- Executive Vice President and Chief Financial Officer

It will continue to be reduced because of all of the negotiations that we have completed. The specific impact from quarter-to-quarter is really going to move somewhat depending on where comps land out. So I can't get terribly more specific than that not knowing exactly how stores versus e-com are going to shake out. But we should see year over the year some continuing favorability.

Because if you think back 12 months, a lot of these negotiations that we did during this past pandemic year hadn't been accomplished yet. So, we should continue to see some favorability through that line for each of the next couple of quarters, not into the second half, I'd say.

Mitch Kummetz -- Pivotal Research -- Analyst

Ok. And hard goods. I think you said penetration was 2% in the quarter. Can you maybe speak to how you expect that to ramp through the year and is that largely incremental? I imagine there's some floor space being pulled from other areas.

But do you feel like that's more incremental than not? And again kind of where those percentages might go?

Ed Thomas -- President and Chief Executive Officer

It's largely incremental, But -- and I don't expect it to ramp up to bigger, too much bigger numbers. Other than the fact that we're going to expand it into a lot more stores. So in the spring. So that -- so far, the initial test we've done in stores has been good, and we'll continue to build it from there.

But I wouldn't expect a major overall change in our merchandise mix assortment in the store by just adding hard goods. There'll be some tweaks to it, but nothing major coming out.

Mitch Kummetz -- Pivotal Research -- Analyst

Ok. And then I guess lastly, there have been some delayed tax refunds. But now we've got stimulus coming. Did the tax refund delays do you think that hit February and how are you thinking about the business with the stimulus that is happening later this month into next month.

And are you ready to capitalize on the stimulus given where the inventory is?

Ed Thomas -- President and Chief Executive Officer

I think it's hard to tell whether the stimulus impacted February. The fact is, as we stated as traffic has been down. And the shopping is not back to normal yet and our conversion is really healthy. As Mike said an industrywide, I mean the traffic has been off.

Still significantly off, and I think it's going to be a while before you see traffic started to normalize. So I think that's a bigger challenge and certainly, the tax refunds and the stimulus should help in terms of driving sales.

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah, in the middle of February where we saw that really severe winter weather snap hit. We did see our business decelerate everywhere. So, we were actually positive comp overall in the first week of February, and then we were down double digits each of the next two weeks when all that severe weather hit. I think we had 43 total stores closed for up to a week at one point, not all of them were closed to a full week.

But varying degrees. And then the fourth week of February got back into single-digit negative and then week one of March was positive. So, we saw a blip there in week two and week three of February partially because of the weather. It's really hard for us to tell how tax refunds or stimulus impacts factor in.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. Totally understand. All right thanks guys good luck.

Ed Thomas -- President and Chief Executive Officer

All right, Mitch. Thank you.

Operator

Ladies and gentlemen, we've reached the end of the Q&A session. And I would like to turn the call back over to CEO, Ed Thomas for closing remarks.

Ed Thomas -- President and Chief Executive Officer

Thank you all for joining us on the call today. We look forward to sharing our first-quarter results with you in early June. Have a good evening everyone.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Gar Jackson -- Investor Relations

Ed Thomas -- President and Chief Executive Officer

Mike Henry -- Executive Vice President and Chief Financial Officer

Jeff Van Sinderen -- B. Riley & Co. -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

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