More of the Same: Tilly’s April 29th Quarter

These quarterly reports from retailers are getting kind of repetitive.  It’s not just Tilly’s; they are all controlling inventory, slowing store openings (or closing stores), negotiating with landlords, trying to reduce operating expenses, doing omnichannel things and being generally grateful for anything that improves traffic and generates some incremental sales.

Tilly’s conference call printed out to just seven pages, with questions from three analysts.  It’s just remarkable how Wall Street is losing interest in retail.  Someday, this will translate into a huge buying opportunity in retail in general- kind of like Mexico right after Trump got elected.

Tilly’s CEO Ed Thomas tells us Tilly’s is “…trying to drive traffic to our stores,” (welcome to the club) and describes some things they are doing.

“A soft launch of our Buy Online, Pick Up in Store initiative went well and we just expanded this program to the whole chain. We plan to launch our Ship to Store program in conjuncture with a new integrated order management POS system ahead of the holiday season. We are excited about the potential these new capabilities have to improve customer engagement, drive store traffic and increase sales opportunities.”

They expect to launch “…our upgraded Web-site platform, enterprise order management, new point of sale, and customer relationship management systems…during the second half of the year.

It may occur to you that Tilly’s, with 222 stores (down from 224 a year ago), is a bit behind the curve in terms of its omnichannel initiatives, and I think you’re right.  Their description of sales results for the quarter seem to support that perception.

“Net sales of $120.9 million increased 0.6% from $120.2 million. Total comparable store sales, including e-commerce, were up 0.6%. Store comps were just shy of flat on store traffic that was up 1%. E-commerce sales increased 6% and represented 13.4% of our total sales versus 12.7% a year ago.”

Brick and mortar sales, then, were down slightly and all the growth came from e-commerce.  Is the tail wagging the dog here?  Or maybe the tail is becoming the dog.

That, fundamentally, is the problem for legacy brick and mortar retailers.  How do you respond and compete in e-commerce without cannibalizing existing brick and mortar sales?  Remember my definition of “omnichannel.”  It’s the word legacy brick and mortar retailers use to disguise the fact that they’ve got the wrong number of stores in some of the wrong places with the wrong configurations.  Takes a long time to change that even if you are clear what to do.

I don’t know the secret sauce for combining brick and mortar and e-commerce to make the whole greater than the sum of its parts.  However, an obvious piece is renegotiating leases with landlords who’s really rather have somebody, rather than nobody, in their space.

Tilly’s has the good fortune to have around 44 leases this year and then in each of the next two years either expiring or open to some form of renegotiation, and they plan to take advantage of it.  They’ve also got 40 stores where, according to Ed Thomas, “…we believe top line performance should have been stronger based on the quality of the real estate involved.”  Let’s hope many of those are among the leases coming up for renegotiation, though that isn’t the only way they are trying to improve performance at those stores.

Remember that Tilly’s stores “…are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.”  That diversification makes it sound like they are very concerned about lease costs when they locate stores and that they are striving to make them “destination stores.”  They use that term in the 10-Q.  “Destination youth culture specialty retailer” is how they put it.  I wonder how e-commerce impacts the concept of “destination” stores consumers must make a conscious decision to visit.

Their gross margin improved just a tenth of a percent to 27.2%.  Operating expenses fell by 0.8% but product margin was down by 0.7%, leaving the 0.1% improvement.

They cut SG&A expenses by $3.3 million to $33.2 million, a 9.3% reduction.  As a percentage of sales, it fell from 30.4% to 27.5%.  About two thirds of the reduction came from significant legal provisions and impairment charges they had in last year’s quarter.

Finally, in a section called “Known or Anticipated Trends” In the 10-Q, they describe market conditions as any other retailer in our space might describe them.

“We, and teen retail in general, have experienced general downward trend in traffic to physical stores for an extended period of time. Conversely, online shopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue despite the slight improvement in store traffic that we experienced in the fourth quarter of fiscal 2016 and first quarter of fiscal 2017.”

“We expect to have a limited number of new store openings in the coming year. We will continue to focus our efforts on improving our existing stores, and expanding our online/digital capabilities through omni-channel initiatives designed to provide a seamless shopping experience for our customers, whether in-store or online.”

If I had to highlight a couple of things from Tilly’s, it would be their strong balance sheet, being behind on the omnichannel, and having some upcoming flexibility in their leases.  Maybe being behind in omnichannel a bit will let them avoid other people’s mistakes.  Doing omnichannel doesn’t matter is if adds more expense than incremental operating income.