What happened

Shares of teen retailer Tilly's (NYSE:TLYS) dropped deeply on Thursday -- and they remain down 21.4% in the closing 10 minutes of trading -- after reporting a small earnings beat of $0.24 per share (pro forma), versus consensus expectations for $0.23, but a bit of a sales miss. 

Teens shopping for clothes

Stock shoppers may not be finding what they like at Tilly's today. Image source: Getty Images.

So what

Tilly's management tried to put a brave face on the news, with CEO Ed Thomas exulting:

Tillys continued its positive momentum with its tenth consecutive quarter of flat to positive comparable store net sales and its strongest back-to-back quarterly comparable store net sales performance since the first half of fiscal 2012.

And yes, "comparable store net sales" rose a respectable 4.3% in Q3. However, total sales nonetheless declined nearly 4% to just $146.8 million, falling short of Wall Street's expected $150 million. Worse, with operating costs rising, Tilly's operating profit margin earned on those sales that it did make slid 360 basis points to 5.6%.

Thus, even with a smaller tax bite this quarter than in the year-ago quarter, net profits ended up plunging 30% to just $0.21 per diluted share (GAAP).

Now what

Looking ahead, Tilly's guided investors to expect Q4 sales of between $163 million and $168 million -- roughly in line with the $165.1 million that Wall Street is expecting to see. The problem is, it's earnings that are expected to fall short next time around, with Tilly's forecast earnings per diluted share of $0.22 to $0.26 missing Wall Street's mark. (The Street is looking for $0.28, you see.)

The long story short is that guidance was too weak for Wall Street's tastes, and that's why the stock is down despite a Q3 "earnings beat."

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.