Shares of the specialty retailer Tilly's (TLYS -5.83%) are falling fast after the retailer reported holiday sales on Jan. 13 that were below expectations. Since the announcement, its stock price is down 25%. With no real explanation for the underperformance, CEO Ed Thomas said, "The business experienced an unexpected deceleration in net sales and store traffic during the second and third weeks of December." Despite the holiday headwinds, the retailer is moving ahead with its plans to expand.
The horrid results are an about-face for the company, which was riding high on the positive momentum from its third-quarter earnings report, where it surpassed analysts' expectations on both the top and bottom lines and offered optimistic guidance on the quarter to follow.
Disappointing holiday sales
Tilly's updated investors on holiday sales numbers ahead of its investor day presentations, and the results were atrocious. Comparable-store net sales decreased 2%, which led management to lower its guidance for fourth-quarter revenue to fall between 2% and 3% year over year. That's a stark reversal from previous guidance of comps growth between 2% and 5% for the fourth quarter.
Not only is the top line expected to fall short, so is the bottom line. If its fourth-quarter results are as bad as forecast when the company reports in March, that would be a decrease in earnings from the prior year. Earnings were expected to fall in the range of $0.29 to $0.32 per share, but management revised those estimates downward to a range of $0.18 to $0.20 per share. From the brief commentary management provided on the results, it appears the company is expecting to return to growth. Nevertheless, investors will be tuning in to the next quarterly report with a skeptical ear after Tilly's hard miss during the holiday season.
Store expansion plan still intact
Many facing the challenging retail landscape are looking to close stores and shrink. However, additional details in its investor presentation reveal that Tilly's is continuing its disciplined approach to store growth. Its balance sheet remains in excellent condition with $130 million in cash and equivalents and no debt. Given that 90% of its stores have undergone remodeling in the last three years, there is a limited need for incremental capital investment other than new store openings.
Tilly's is the rare retail company that's opening new stores. After opening 14 locations in 2019, the company is planning on opening 15 more in 2020. The openings this year would represent a 6% increase in its store count from its current 240 locations in the U.S., which would lift its total to 255.
Additionally, Tilly's has 46 lease decisions to make in 2020. Given that so many stores are closing, leaving mall owners with vacant spaces all across the country, this is an opportune time to have the option to renegotiate lease agreements. Tilly's should be able to earn itself better lease terms. However, if it's unable to come to acceptable terms with its landlords, it may end up closing some of those existing locations and end the year with a smaller footprint even with the new openings.
As a result of its healthy balance sheet, its small size compared to its competitors, and the favorable terms landlords should be willing to offer, extending the opportunistic expansion plan is reasonable.
What this means for investors
Now that shares have pulled back so much in the opening weeks of 2020, they're trading at just 11 times forward earnings. The major sell-off may present an opportunity to own this consumer discretionary stock with a pristine balance sheet and room to expand. But to avoid the risk of catching a falling knife, give the market some time to digest the bad news before you start accumulating shares.