Tilly’s First Quarterly Report

As you know, Tilly’s went public recently. They’ve just released their first quarterly 10Q report and held their first conference call as a public company. The report is for the quarter ended April 28. Their public offering was May 4, so the balance sheet doesn’t reflect the results of that offering yet, and I don’t have access to a balance sheet from a year ago, so I can’t compare the two. However, the balance sheet is just fine.

Tilly’s describes itself as “…a fast-growing destination specialty retailer of West Coast inspired apparel, footwear and accessories. We believe we bring together an unparalleled selection of the most sought-after brands rooted in action sports, music, art and fashion.” I’d be interested in chatting with them about what exactly makes a selection of brands “unparalleled.”

Sales in the quarter were $96.5 million, up 16% from $83.1 million in the same quarter the previous year. $9.9 million of that $13.4 million increase was from stores that weren’t opened in last year’s quarter.   Tilly’s ended the quarter with 145 stores in 19 states. A year ago, they had 126 stores. They opened five stores during the quarter and expect to open an additional 16 by the end of the year. They think they can expand to 500 locations over the next ten years.
 
The gross profit margin stayed the same at 31.5%. Selling, general and administrative expenses as a percent of sales fell a bit from 25.5% to 25.3%. You expect to see that decline with growth in the number of stores. Net income rose 21.7% from $4.86 million to $5.91 million.
 
We’ve got to talk about how income taxes impact those net income numbers. Reported income tax in this quarter was only $68,000. It was $56,000 in the same quarter last year. Historically, Tilly’s has been an S corporation, where taxable income flowed through to the shareholders and they paid the taxes. So the income taxes mostly showed on the shareholders’ income tax returns and not on the company’s income statement.
 
As part of the public offering, the company converted to a C corporation. If it had been a C corporation in this April 28 quarter, reported income taxes, assuming a 40% rate, would have been $2.39 million and net income would have dropped to $3.59 million. That’s more typical of what we’ll see in future quarters with Tilly’s as a C corporation and public company. 
 
Ecommerce sales were $10.9 million, up from $8.3 million in the same quarter last year and represented 11% of total revenue in this quarter. They think it can grow to represent 15% of revenues over time. I’m kind of wondering if some retailers won’t find it representing a lot more than that eventually.
 
Their comparable store sales grew by 4.3% and we learn in a footnote that the ecommerce sales were responsible for 2.8% of that. That’s 65% of the total comparable store sales growth.
 
Their brick and mortar comparable store sales, then, grew by just 1.5%. This is interesting. Do we say, “Wow, that’s not much of a brick and mortar increase.  Is there something wrong?” Or do we focus on the 4.6% and, acknowledging the increasing interdependence of ecommerce and brick and mortar, say that just fine. What does that imply about opening additional stores? What’s the multiplier between brick and mortar and ecommerce? I wrote yesterday (twice unfortunately) about Blue Tomato being acquired by Zumiez and doing 75% of their business on line. We all know there are other retailers that have a store or more, but do most of their business on line.
 
I expect most multi store retailers would agree you need fewer stores in the internet age. How many fewer? How do you think about site selection in terms of the impact on internet sales? Intriguing issue. 
        
Tilly’s describes its stores as located in “…malls, lifestyle centers, “power” centers, community centers, outlet centers and street-front locations.” I find this an interesting description, if only because I’m not certain I know what some of the terms mean. All they say about their location selection process is “…we are modeling long term a balance between mall and off-mall. So the chain today is roughly half mall, half off-mall and our long-term targets are to have the chain reflect that. We don’t manage specifically to that, it is really a function of where is the best location in the venue where we want to be, in a trade area where we know we have an opportunity.”
 
 I’d like to hear them describe that in more detail. I am wondering if stores in different kinds of locations are of different sizes and/or carry different kinds of inventory based on the type of location they’re in.
 
As you may recall, Tilly’s, as a public company, has two classes of stock and the founding shareholders are the only ones with voting stock. I also noticed from footnote eight (Related Parties) that Tilly’s leases its corporate headquarters, distribution center, some warehouse space, another office with warehouse space, and yet another building it will use as its ecommerce distribution center, from one of the co-founders.
 
But before they signed each of those leases, “…the Company received an independent market analysis regarding the property and therefore believes that the terms of each lease are reasonable and are not materially different than terms the Company would have obtained from an unaffiliated third party.”
 
So I guess it’s okay.
 
Tilly’s had a good quarter. I’ve found their 10Q and conference call lacking information in some areas, and I’ve highlighted those areas above. Partly, of course, that’s a function of the questions the analysts ask. Maybe next time they’ll ask some of mine.