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Tilly's (NYSE:TLYS)
Q3 2021 Earnings Call
Dec 02, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to Tilly's, Inc. third quarter 2021 earnings results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson of Investor Relations.

Gar Jackson -- Investor Relations

Good afternoon, and welcome to the Tilly's fiscal 2021 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 press release, please visit the investor relations section of the company's website at tillys.com. For 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 2, 2021, 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 2021 third quarter earnings release, which is 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 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 2021 continues to be a record-setting year for us with record net sales and earnings per share for each quarter thus far. We have already surpassed our total net sales for all of last year, and our year-to-date third quarter earnings per share have set a record relative to any full fiscal year.

Our third-quarter net sales grew by 47% over last year, with us being fully operational this year in a more normalized back-to-school season. And our comparable net sales grew by 27% over fiscal 2019's pre-pandemic third quarter. Our strong operating results over the past year improved our third quarter ending cash and investments position by $30 million, compared to last year, which led our board of directors to approve a special cash dividend -- a second special cash dividend of $1 per share to shareholders of record as of December 7, 2021, with payments scheduled for December 15, 2021. Our first special cash dividend of the year, also $1 per share, was paid on July 9.

The back-to-school season in the third quarter were as strong as ever, driven by a compelling overall merchandise offering in a much-improved consumer spending environment. Relative to the pre-pandemic third quarter of fiscal 2019, comparable sales of women's, men's, girls', and accessories increased by double-digit percentages, while footwear and boys' increased by high single-digit percentages. Hard goods, which we did not have as a material part of our assortment in 2019, produced $1.6 million in total net sales. During the third quarter, we now have portions of this assortment in roughly 200 of our stores.

We expanded our sustainability shop on our website during the third quarter with the introduction of over 40 styles of proprietary RSQ-branded merchandise with sustainable features to supplement our extensive selection of such products from over 40 of our third-party brands. We also launched a collection of over 200 vintage and up-cycle product choices that have been well received by our customers. In terms of stores, we opened our ninth and final new store for fiscal 2021 in early November, and we will close one store in late December. We are actively negotiating new store opportunities for fiscal 2022 and tentatively plan to open 15 to 20 new stores next year, assuming we can negotiate what we believe to be appropriate lease economics.

These stores will primarily be located within existing markets, primarily California, Texas, and the Northeast. We also have approximately 75 existing lease-up decisions to be make -- to make during fiscal 2022 that are coming up on expiration or have lease kick-out options. We intend to use this opportunity to continue to improve upon our existing occupancy cost structure with these pending lease decisions where possible. During our last earnings call, we mentioned several customer-facing investments that were underway.

In November, we upgraded our mobile app to offer greater mobile functionality, including loyalty and in-store experience features that we did not have previously. We expect to continue to invest in improving and enhancing our mobile app experiences throughout 2022. We also expect to complete an upgrade of our website platform to a more mobile, responsive version in early 2022.We will also continue to improve our omnichannel capabilities and reinvest in distribution efficiencies to expand capacity for anticipated future growth. We currently estimate that our total capital expenditures for fiscal 2022 to be in the range of $25 million to $30 million, inclusive of these initiatives, construction of new stores, and continuing IT infrastructure investments.

Turning to the fourth quarter of fiscal 2021. We are very encouraged by our strong start to the holiday season, especially considering that last year was our most profitable fourth quarter since 2012. While we continue to contend with delivery delays throughout Southern California ports, the aggregate retail value of delayed products currently represents less than 10% of our total inventory already on hand. Our merchants made every effort to position us well for the holiday season and we believe we have plenty of inventory to produce a successful holiday season.

These delivery delays may cause the supply of particular items to run low from time to time. But we have been contending with these delays all year long, not just in the holiday season, and they have not stopped us from producing record results each quarter. Despite ongoing concerns about the COVID-19 pandemic, supply chain difficulties, labor challenges, and increasing costs, generally, we remain optimistic about our business prospects for the remainder of fiscal 2021 and into fiscal 2022 at this time. I will now turn the call over to Mike, to provide additional details on our third-quarter operating performance, and to introduce our fourth-quarter outlook.

Mike?

Mike Henry -- Executive Vice President and Chief Financial Officer

Thanks, Ed. Good afternoon, everyone. The third quarter produced record quarterly net sales for us and tied our best quarterly earnings per share, which was just set a quarter ago. Details of our third-quarter operating performance compared to last year's third quarter by line item were as follows.

Total net sales of $206.1 million increased by $65.8 million, or 46.9%, compared to $140.3 million last year. Total net sales from physical stores were $165.3 million, an increase of $60.7 million, or 58.1%, compared to $104.6 million last year, with a much more normalized back-to-school season this year, that was free of pandemic-forced store closures. Net sales from physical stores represented 80.2% of our total net sales, compared to 74.5% of total net sales last year. E-commerce net sales were $40.8 million, an increase of $5.1 million, or 14.3%, compared to $35.7 million last year.

E-comm net sales represented 19.8% of total net sales, compared to 25.5% of total net sales last year. We ended the third quarter with 243 total stores, a net increase of five stores compared to the end of the third quarter last year. Total comparable net sales relative to fiscal 2019's pre-pandemic third quarter increased 27.4% with increases from physical stores of 18.3% with positive comp sales growth across all markets and from e-commerce of 80.5%. In the third quarter of fiscal 2019, physical stores represented 85.3% of our total net sales, while e-commerce represented 14.7% of our total net sales.Gross profit, including buying, distribution, and occupancy expenses, improved to $76.7 million, or 37.2% of net sales, which is a record for us in our history as a public company, compared to $40.7 million, or 29% of net sales last year.

Buying, distribution, and occupancy costs improved by 690 basis points collectively, despite increasing by $2.7 million in total due to leveraging these costs against higher net sales. Occupancy costs improved by 540 basis points, despite increasing by $0.5 million with five net new stores. Distribution costs improved by 110 basis points,despite increasing by $2.1 million.Buying costs improved by 40 basis points despite increasing by $0.1 million. Product margins were very strong, improving by 130 basis points versus last year, and by 200 basis points compared to 2019 third quarter, primarily due to lower markdowns.

Total SG&A expenses were $47.7 million, or 23.2% of net sales, compared to $37.1 million, or 26.5% of net sales last year. SG&A improved by 330 basis points as the percentage of net sales despite increasing by $10.6 million due to leveraging these costs against higher net sales. Primary causes of the SG&A dollar increase were higher store payroll and related benefit costs of $7.6 million, primarily due to operating all stores for the entirety of the quarter and serving significantly higher net sales, corporate bonus accruals of $1.8 million due to our strong operating performance this far in fiscal 2021, and increased marketing expenses of $1.2 million. Operating income improved to $29 million, or 14.1% of net sales, compared to $3.5 million, or 2.5% of net sales last year, primarily due to the significant increase in net sales.

Income tax expense was $8.2 million, or 28.1% of pre-tax income, compared to $1.4 million, or 39.8% of pre-tax income last year. The reduction in income tax rate compared to last year was primarily due to the prior impact of the CARES Act, which allowed for operating losses in fiscal 2020 to be carried back to earlier tax years with higher income tax rates. Net income improved to $20.8 million, or $0.66 per diluted share, which are third quarter records for us, compared to $2.1 million, or $0.07 per diluted share last year. Weighted average shares were $31.4 million this year, compared to $29.8 million last year.

Turning to our balance sheet. We ended the third quarter with total cash and marketable securities of $155.6 million in no debt outstanding, compared to $125.3 million in no debt last year, which included $12.4 million of withheld store lease payments. We ended the third quarter with inventories per square foot up 29% over last year to support the current momentum of our business and position ourselves for the holiday season amid the ongoing supply chain challenges. We believe our overall inventory levels are currently in a good place relative to business performance, and an expectation that delivery delays will continue.

Total year-to-date capital expenditures for fiscal 2021 were $10.9 million, compared to $6.4 million last year. The increase being primarily due to new store openings this year. Turning to the fourth quarter. We are off to a strong start compared to last year's period, which was the first full period since the pandemic began, in which we were fully operational, and which was also our most profitable fourth quarter since 2012.

Total comparable net sales through November 30 increased by 19.6% compared to last year, with comp sales increases from physical stores of 27.6% and from e-commerce of 3.9%. Based on current and historical trends, and assuming all stores and e-comm remain in operation and that supply chain challenges do not have a material negative impact on our net sales results through the fourth quarter, we would expect our fourth-quarter net sales to be in the range of approximately $210 million to $215 million, and earnings per diluted share to be in the range of $0.42 to $0.50. Although last year's fourth-quarter product margins were 210 basis points better than 2019's fourth quarter, we currently expect our product margins to improve by another 50 to 100 basis points over last year based on an assumption of a lower overall promotional environment amid the broad-based supply chain difficulties this year. We project SG&A to be approximately 26% of net sales, our estimated income tax rate to be 27%, and weighted average diluted shares to be approximately $31.6 million.

We currently expect to have 243 total stores at the end of fiscal 2021, compared to 238 at the end of fiscal 2020. This compares to $178 million in total net sales and $0.29 in earnings per diluted share for last year's fourth quarter. Operator, we'll now go to our Q&A session.

Questions & Answers:


Operator

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operators instructions] Our first question is from Jeff Van Sinderen with B. Riley.

Please proceed.

Jeff Van Sinderen -- B. Riley Financial -- Analyst

Hi, everyone. And let me say congratulations on the strong metrics, it's great to see. Maybe you can give us a little bit more color on the digital versus in-store sales that you saw over Thanksgiving week. Maybe if you could touch on Black Friday and Cyber Monday, just kind of curious -- any thoughts around that? Maybe how it differed versus the same period in 2020 and 2019? And then also kind of as a follow-up today, I know you're continuing to grow e-comm, which is terrific.

I'm just wondering if you think that that is going to stay close to 20%, or how we should think about that as a kind of concentration of the business as you open more stores and so forth?

Ed Thomas -- President and Chief Executive Officer

Hey, Jeff. How are you?

Jeff Van Sinderen -- B. Riley Financial -- Analyst

All right.

Ed Thomas -- President and Chief Executive Officer

OK. So, I guess I'll start. Over Thanksgiving weekend, our store sales were like really strong, so the traffic was good, sales were strong, stronger than e-comm business. But e-comm business remains steady, and Mike can add on to whatever I say.

But as far as e-comm, I think it's going to continue to grow, there's no question about it. We are still in the very early stages of e-comm, and a lot of the changes we put in place in the last couple of years have helped grow it. We definitely get the benefit of the stores being closed for a while, but still, we're seeing decent growth out of there and we expect that to continue. My guess is it will be north of 20% of our business going forward.

Mike Henry -- Executive Vice President and Chief Financial Officer

I would agree with that. You know, Jeff, we have to remember as we look at third quarter, we were still dealing with pandemic store closures during that period last year. So, there was a heavier shift toward e-comm last year, and the reverse has happened this year and has been that way really all year long. Our stores have just resurged so significantly.

It's been amazing to see. And the same was true through Black Friday weekend or for the month of November as a whole, stores were strong, double-digits up. E-comm was up single-digits relative to just last year. Relative to two years ago, e-comm was nice and strong, and robust still.

So, I think in a more normalized environment, I'd have to agree with Ed that, you know, as things settle down and we get back to something that's normal, and I would say nothing is still normal as we exist today, it's hard to predict anything with certainty. But I think it probably will be in the mid 20%, somewhere around 25% makes sense to me. I think the pendulum has swung heavy to stores right now because of just what's going on in the environment. So, it will probably swing back the other way a few points, I would think, as we settle in coming out of this pandemic.

Jeff Van Sinderen -- B. Riley Financial -- Analyst

OK, good. And then just as a follow-up, since we are talking about e-comm, I know you mentioned the new mobile app, and it sounds like you still have some more IT investments you're planning for 2022. So, I guess maybe if you can frame for us a little bit the benefits that you're starting to see from the mobile app and, you know, kind of where we are, what inning we're in, I guess, around that. It sounds like there's still quite a bit more to come.

Ed Thomas -- President and Chief Executive Officer

Yeah. We're definitely in early -- we just reintroduce the mobile app last week. So, it's -- we don't have enough experience with it. But we made it more user-friendly, the navigation is better, we integrated loyalty into it, and we'll continue -- we have a number of enhancements that we think we -- that we're going to make in 2022 to the mobile app.But our old mobile app was pretty antiquated.

We hadn't upgraded that in a while, so that -- the first step was to get it upgraded and more responsive. Then the other thing that we're investing in that we mentioned was we're upgrading our existing e-comm platform, which is what the best way to describe it is more mobile-friendly. So, that will take place in the first half of next year.

Jeff Van Sinderen -- B. Riley Financial -- Analyst

OK, great. So, more positive to look forward to there. Thanks for taking my questions and continued success.

Mike Henry -- Executive Vice President and Chief Financial Officer

Thanks, Jeff.

Ed Thomas -- President and Chief Executive Officer

Thanks, Jeff.

Operator

[Operator instructions] Our next question is from Marni Shapiro with Retail Tracker. Please proceed.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey, guys, congratulations. The stores have been just amazing. It's a pleasure to be shopping in them lately.

Ed Thomas -- President and Chief Executive Officer

Thanks, Marni.

Mike Henry -- Executive Vice President and Chief Financial Officer

Thanks.

Marni Shapiro -- The Retail Tracker -- Analyst

So, I'm curious if we could just parse out a little bit on some of the delivery delays. I'm curious if -- I'm looking at your stores and the assortments, are there parts of the assortment that are getting a little bit harder hit? In particular, I'm noticing you guys are turning anything what I would call sexy-pretty very fast, and I wasn't sure if what I was seeing was you were turning it really fast or the inventory was delayed, so it wasn't set quite as high as you want. So, I'm just curious if you could talk a little bit about, you know, across the store where you're seeing that kind of impact the hardest, or no impact and it's just selling out?

Ed Thomas -- President and Chief Executive Officer

Well, the women's inventory, in general, is too light right now. Part of it is because of turning fast and part of it is supply chain issues. But we have enough inventory to continue the momentum through impasse Christmas. And I would say that the point delays or more impact -- have a more impact on some of the shoes.

In particular, our shoe business would be -- it's good, but it'd be a lot better if we weren't delayed with some of the big brands.

Marni Shapiro -- The Retail Tracker -- Analyst

Yeah.

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah, I'd say that's exactly right. Footwear is the hardest hit from these delivery delays. I mean, honestly, if we could get more Nike and Converse, we'd take every bit of it we could get, we just can't get it. And they've talked about the challenges they are facing.

Marni Shapiro -- The Retail Tracker -- Analyst

Yeah.

Mike Henry -- Executive Vice President and Chief Financial Officer

We are turning faster at healthier product margins. You know, I noted in our prepared remarks that we ended the third quarter up 29% on a per square foot basis in inventory. You know, our teams did such a great job of trying to pull as much forward as they could and make sure that we were prepared to go through Black Friday weekend and the holiday season as best we could. As we sit here today, that inventory is now in the teens.So, you know, we're running at about plus 20 and the inventories is up in the teens.

So, overall, we have plenty enough apparel to have a good holiday season we think. Footwear is the most challenging area that -- I agree with Ed, if we had enough of the right things, our footwear business would be even stronger than it is. It was up plus nine. It would be even stronger.

Marni Shapiro -- The Retail Tracker -- Analyst

Well, that's impressive. And then just -- I guess following on the footwear where was like jewelry -- you have a really nice jewelry assortment, hair, things like that. At times, I was in there and it was beautifully stocked. At times, I was in there and I was like, "Oh, I wish they had more." Was that hurt, too, or was that just -- it was selling so fast?

Ed Thomas -- President and Chief Executive Officer

I think it was more fast, the pace of selling than anything else.

Marni Shapiro -- The Retail Tracker -- Analyst

I love that answer.

Ed Thomas -- President and Chief Executive Officer

I wouldn't call that out as a major supply chain issue. So, it had some impact in -- across a few of the brands, but overall, no.

Marni Shapiro -- The Retail Tracker -- Analyst

Oh, that's fantastic. Well, best of luck with the rest of the holiday season.

Ed Thomas -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Matt Koranda with ROTH Capital. Please proceed.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys, thank you, and great quarter,by the way. So, on the outlook for Q4, I guess embedded in the guidance, if I'm doing the math right here, is that it looks like potentially gross margins do erode a bit quarter over quarter in the fourth quarter. And I just wanted to clarify, is that the case or is that the base case assumption, and where are the headwinds coming from specifically? Because it doesn't look like it's coming from the merchandise margins. You said they were going to be up year over year.

So, any additional clarity there would be helpful.

Mike Henry -- Executive Vice President and Chief Financial Officer

Sure. Matt, historically, fourth-quarter product margins are the lowest of any quarter. That's always been true of our business purely because of the level of promotions that happen naturally during, you know, and normally during the holiday season. So, sequentially, Q3 to Q4, product margins are lower in Q4 than Q3.

They always are. There's nothing unusual about that, completely normal, completely expected. In Q4, relative to last year and to two years ago, as we noted, we're expecting another 50 to 100 basis points of improvement in our product margins on top of last year, which was already 210 basis points better than 2019. So, you know, we're seeing the healthiest product margins we've seen in many years, if not ever, in the fourth quarter, and it has been a less promotional environment.

Now, there are some additional costs in this particular fourth quarter that are different than history that impact distribution in particular. You've probably seen the news about all the shipping surcharges from, you know, the FedEx and UPS and that crowd, and there's certainly some extra costs this year that was not there last year. We've had to institute retention bonuses for labor protection just to get through the holiday season to make sure we have plenty enough labor to be able to serve the peak need of the holiday season. And then, of course, there are some bonus elements within the buying group that flow through the buying costs that hit gross margin.

And on the SG&A side, there are some of the same things. We've had to implement retention bonuses for store employees to protect the labor force there. We've accelerated some -- you know, any minimum wage increases that we knew were coming as of January 1, we've gone ahead and just implemented them early. And there's been some other compression type of issues with store payroll that we've addressed as well.

So, as you look sequentially, and that's why we say, you know, we're expecting SG&A to be about 26%. And all of you, the analysts, were pretty close before the call. It was -- I think you all have an average of 26.5, so not far off there. But between, you know, corporate bonuses, we're having such a stellar year, and then the things that I just mentioned about store payroll, labor challenges.

You know, there are some added expenses that were not part of the model in the past.

Matt Koranda -- ROTH Capital Partners -- Analyst

Fair enough. Very detailed. Thank you, Mike. And then just -- I guess on the dividend cadence, I'm curious now that you guys have basically done two special dividends this year.

It looks like, you know, you're going to backfill most of the cash that you pay out on the December dividend within this quarter alone. Should we be expecting a two-time-a-year cadence on a go-forward basis, or what's the thought process there? I'm just curious if I could get your latest thinking.

Ed Thomas -- President and Chief Executive Officer

Twice a year is not in the plan. It's something that we discussed -- as we've told everybody in the past, we've discussed it pretty regularly as a board, and discussed what the options are proper use of cash. So, there's nothing -- I wouldn't assume that it's going to be twice a year going forward. But I also wouldn't assume if we do anything, it's going to be in the same form.

So, I don't know yet.

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we've had such a stellar year. Obviously, each quarter has been so incredibly strong beyond anything that any historical data would point you to. You know, our board just acknowledged the cash generation has been so fantastic, you know, why not do another one.

And honestly, it caught me off guard, too, that they did another one at this particular time. So, they're just looking at the performance of the business, the cash generation, and decided that, you know, why not do another one now and reward our loyal shareholders for sticking in with us through all this. So, they'll make their determinations as they go forward and can't predict for sure what that might look like.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK, great. One more from me, maybe if I can. Maybe I'm saying to ask this early here, but any early learnings or behavioral changes for traffic or anything that you've observed around the new variant? I mean, it's probably just too early to tell, but any new observations?

Mike Henry -- Executive Vice President and Chief Financial Officer

No. Yeah, no, not on this new variant, no. We can't really tell anything yet. It's way too new, it's not as widespread as delta became, or the -- you know, just the initial peak of the pandemic, obviously. 

Ed Thomas -- President and Chief Executive Officer

And even before the new variant, traffic is still very unpredictable, and it's all -- it can be incredibly good, and it could be incredibly bad, but we're just going to manage our way through it like we have for the last several months.

Mike Henry -- Executive Vice President and Chief Financial Officer

Yeah. Overall, traffic is up substantially to last year. I'm looking at some data I have for the month of November. Traffic for the month of November was up 38% in stores.

Pretty amazing. I've never seen a number like that. Relative to two years ago, it was down 1% for us. So, you know, it still lags 2019, but it's very robust compared to last year in stores.

Matt Koranda -- ROTH Capital Partners -- Analyst

That's great. Very helpful, guys. Nice job, and I'll jump back in queue.

Ed Thomas -- President and Chief Executive Officer

Thanks, Matt.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Ed Thomas for any closing remarks.

Ed Thomas -- President and Chief Executive Officer

OK, first of all, I'd like to just do a shout-out to our incredible team of employees, home office, distribution center, and field. What they've done in the past several months has just been amazing, and I can't thank them enough for their teamwork. Lastly, thank you for joining us on the call today, we look forward to sharing our fourth-quarter results with you in March. Have a good evening.

Operator

[Operator signoff]

Duration: 32 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 Financial -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

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