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My Favorite Stock to Buy in 2020

By Parkev Tatevosian - Mar 1, 2020 at 1:00PM

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Shares sold off after Tilly's reported weak holiday results, but this presents a buying opportunity.

Shares of this California-based apparel retailer are going through a tough stretch. Tilly's (TLYS 0.43%) was optimistic about the holiday season when it reported its third-quarter earnings on Dec. 4. That encouraged investors, who lifted the stock over 25% in a matter of days. But then came a preview of weak holiday results in January, and the stock fell off a cliff. It has been unable to recover and is trading at levels not seen since 2016.

Here's why investors should consider buying the drop.

Shirts on hangers on display.

Image source: Getty Images.

A not-so-jolly holiday

Expectations were high entering the fourth quarter after Tilly's reported 14 consecutive quarters of flat to positive comparable-store sales growth. Moreover, in the third-quarter press release, the company provided guidance for comparable-sales growth of 2% to 5 in the fiscal fourth quarter.

But in January, management offered a preview of holiday results that lowered expectations immediately. The updated guidance for the fourth quarter is now a decrease of 2% to 3% for comps. The bottom line also suffered as management downgraded its per-share earnings guidance from $0.29 to $0.32 to just $0.18 to $0.20. Still, this does not mean the company will stop growing.

A rare retail company that's expanding

While many retail companies are closing stores, Tilly's is capitalizing on the opportunity and expanding. In fiscal 2019, it opened 14 new locations, and it expects to open 15 more in 2020. These additions will amount to a 14% increase in store count in just two years.

In 2019, store openings took place mostly after the busy back-to-school season but before Black Friday. This time around, management expects the new build-outs to be front-loaded, completing the bulk before back-to-school shopping begins.

It appears the work is on schedule, as it ended the third quarter with 232 total stores and now has 240 in operation. The increased footprint will put upward pressure on net revenue numbers in the second half of the year.

Furthermore, 90% of stores underwent remodeling or updating in the last three years, which should offer two benefits to investors. First, current and fresh-looking stores are likely to increase foot traffic to Tilly's. Then, for the next few years, capital spending will be allocated largely to new openings.

A woman checking out at counter in a clothing store.

Image source: Getty Images.

Over 40% of its share price is in cash

As of the end of its fiscal third quarter, Tilly's had $130 million in cash and marketable securities and no debt. Since then, it paid a $1 per share special dividend on Feb. 26, which is roughly $30 million in aggregate. That leaves about $100 million on its balance sheet, which is over $3 per share in cash -- a significant amount when you consider the stock is selling for around $6.50 as of this writing.

With a balance sheet so robust, the business can ride out times of declining sales without much adverse effect on its long-run prospects. Given that it's still the middle of the retail apocalypse, a company that has such flexibility can take market share as competitors retreat. Finally, long-term investors can feel more secure with a company that's managed with a conservative approach.

Tilly's has an excellent opportunity to reduce lease expense

Tilly's leases all of its locations. That's another benefit for investors, because market dynamics for retail space are firmly in favor of tenants, and it's likely to remain that way for several years.

Management will have an opportunity over the next few years to obtain various concessions from landlords. It has 46 decisions to make on leases in fiscal year 2020 with an aggregate value of $64 million and another $59 million coming in 2021. To put these amounts into perspective, net income for fiscal 2018 was $24.9 million. Reaching better terms on a significant portion might lead to cost savings and higher profits. Furthermore, it allows Tilly's to close a store if it determines the economics are not worthwhile.

What this means for investors

The sell-off in this consumer-discretionary stock was the result of lower-than-expected growth figures from the holiday season, leading management to adjust the current quarters' estimates downward. However, Tilly's is on stable footing, with several catalysts to turn the stock around.

Investors should be looking to buy the still-growing retail company at these levels and evaluate the position at the end of the year.

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Stocks Mentioned

Tilly's, Inc. Stock Quote
Tilly's, Inc.
TLYS
$7.05 (0.43%) $0.03

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