Tilly's (TLYS 2.70%) is a specialty retailer based in California. The company sells clothing and accessories with a target audience ranging from pre-teens to young adults.
Tilly's is experiencing mixed results during the pandemic. So far in 2022, the stock is getting hammered, down 47% as of this writing. That's an opportunity for long-term investors to buy this undercover growth stock at a bargain price.
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Tilly's reports record profits
Like many other non-essential brick-and-mortar businesses, Tilly's struggled at the pandemic's onset when it was forced to close its stores to in-person shoppers. However, management has long run the company prudently. The policy paid off, and Tilly's had plenty of cash to weather the storm.
Additionally, it put Tilly's in an excellent position to capitalize as economies reopened. While competitors had difficulty securing enough inventory, Tilly's thrived. In its fiscal year ended Jan. 29, revenue surged by 46% from the prior year. The favorable competitive environment allowed Tilly's to sell products at high profit margins.
For instance, its gross profit margin of 35.7% in the year ended in January was its highest in the past decade. It all flowed to the bottom line, and Tilly's reported a record earnings per share (EPS) of $2.06 for the year. To put that outperformance into context, the company's previous high for EPS in the past decade was $0.92 in 2013. Similarly, the highest gross profit margin was 31.6%.
Tilly's has historically kept a pristine balance sheet, and the recent boom in sales and profits only helped the cause. The company has virtually no long-term debt and $139 million in cash and marketable securities. With roughly 30 million shares outstanding, that is $4.60 per share in cash. Meanwhile, Tilly's stock is selling for $9 per share.
Spooking the market
That's excellent news, so why is the stock down in 2022? Partly because the boosted sales growth and record earnings are not sustainable. Management said as much in the fourth-quarter earnings release on March 10:
During March 2021, our net sales accelerated significantly primarily as a result of considerable pent-up demand coming out of 2020's pandemic-related restrictions and significant federal stimulus payments injected into the economy, both of which were historic anomalies. As a result, the Company anticipates a further deceleration in its comparable net sales results as the first quarter of fiscal 2022 progresses compared to fiscal 2021, particularly as the Company begins to anniversary last year's peak performance in the latter half of the first quarter which was driven by the unique environment at that time.
That's understandable. Tilly's has grown revenue at a compound annual rate of 6.8% in the past decade. It's no surprise that management expects sales growth to decelerate from the 46% of the previous year.
Regardless, management's careful guidance spooked the market, and now the stock is down 47% off its high. The sell-off has Tilly's trading at price-to- earnings and price-to-free-cash-flow ratios of 4.3 and 5.6, respectively. The aforementioned are bargain prices for a growing business, a clean balance sheet, management that has handled the pandemic well. For those reasons, Tilly's is an undercover growth stock that investors can buy now.
