Popups, Extra Week, Higher Costs; Tilly’s Quarter

Tilly’s sales for the quarter ended October 28th were down 3.9%, or $6 million, to $146.8 million from last year’s quarter.  However, the decline was due to “…the calendar shift impact of the 53rd week in fiscal 2017’s retail calendar, which caused a portion of the high sales volume back-to-school season to shift into the second quarter this year versus the third quarter last year, reducing last year’s comparable net sales base for the third quarter by approximately $14 million. This calendar shift impact was partially offset by higher comparable store sales and net sales from seven net new stores totaling approximately $8 million.”

Keep that $14 million in mind as you think about the quarter over quarter comparison.  That decline for the quarter was partly offset by seven new stores and higher comparable store sales (4.3%-  includes e-commerce) totaling $8 million.

Retail store sales, as reported, fell 6.2% from $133.8 to $125.6 million.  E-commerce sales rose 11.8% from $19.0 in last year’s quarter to $21.2 million in this year’s.  Average net sales per store fell from $606,000 to $556,000.

Tilly’s ended the quarter with 227 stores, including four RSQ branded pop-up stores in 33 states.  The regular stores average 7,500 square feet, and the “pop-ups” 2,700.  Pop-ups have come a long way from when they were literally a pop-up tent.  In fact, as long as we’re on the subject, go read this article about how pop-ups are being used.  Can I suggest you just sign up to get The Robin Report, where this article is from, for free?

Some years ago, I wrote an article wondering if the next large retailer would have 400 pop-up stores.  I was right about the importance of pop-ups, but wrong about how the trend would play out.  Like Yogi is supposed to have said, “It’s tough to make predictions.  Especially about the future.”

RSQ is Tilly’s private denim brand.  They open the pop-ups “…as a branding and marketing vehicle for our RSQ-brand and Tilly’s as a whole within key markets or properties where we’d like to have a full-size Tilly’s store.”  It’s both test marketing and brand building.  A very interesting way to evaluate expansion opportunities.

The gross profit margin fell to 29.7% from 32.8% in last year’s quarter.  1.9% of the decline was due to having fewer sales to spread some costs over.  “Product margins declined 120 basis points due to a combination of higher markdowns as a percentage of net sales, and a cumulative inventory adjustment of approximately $1.2 million which related to several prior periods.”

SG&A expense rose by $0.9 million, or 2.6%.  The biggest increase (1.1%) came from the “Increase in store payroll due to minimum wage increases and higher comparable store net sales.”

Income before tax fell by half, from $14.5 to $7.3 million.

The balance sheet remains strong, with $120 million in cash and no debt.

Talking about the future of retail, Tilly’s says what most retailers would say.

“The retail industry has experienced a general downward trend in customer 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 improvement in store traffic that we have experienced during the last eight consecutive quarters. There can be no guarantee that our recent improvement in store traffic will continue given the broader industry trends. 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.”

They also note some anticipated expense increases in 2019.

“…during fiscal 2019, we expect the impact of legislated minimum wage increases, merit increases, new systems costs, and the adoption of the new lease accounting standard to result in an aggregate increase of approximately $6 million in our annualized operating costs before consideration of any comparable store net sales assumptions. We estimate that our fiscal 2019 comparable store net sales would need to increase by approximately 3% in order to absorb these anticipated cost increases without creating deleveraging of expenses as a percentage of net sales.”

Given the conditions they describe, it sounds like getting that 3% comparative store sales increase might be a challenge.  They also have the issue of some discount coupons they issued to 612,000 customers in early September as part of a lawsuit settlement.  “These coupons allow for a one-time 50% discount on a single purchase transaction of up to $1,000. Any unused coupons expire on September 4, 2019. To date, less than 1% of these coupons have been redeemed and redemption transactions have represented less than one quarter of 1% of all sale transactions since the coupons were issued.”

Regular readers know I’ve always characterized Tilly’s as a retailer with a strong focus on real estate.  That is, they are flexible about where they open stores as long as the cost structure makes sense.  As you can see from their discussion of market conditions, they are not unaware of the transition taking place.  CEO Ed Thomas puts it this way.

“Consistent with our current strategy, we intend on being conservative and methodical in our store growth, only adding stores with what we believe to be appropriate lease economics, to drive further improvement in our operating margin over time.”

“In addition to new stores, we will continue improving our customer-facing technologies during fiscal 2019. We are working on an enhanced mobile app, which will be linked with an expanded loyalty program, offering same-day delivery from selected stores and ship-to-store program.”

Tilly’s continues to segregate ecommerce from brick and mortar sales.  They give the appropriate nod to the relationship between the two, but the 10-Q and conference call both lack a discussion of the broader strategy.  They are profitable and have a solid balance sheet, but it would be good to know more about how they are addressing the conditions they accurately describe.