Tilly’s Quarter and the Retail Environment

Tilly’s quarter ended November 2, though the 10Q didn’t come out until later. I’m late writing this, but I thought there were a few things in it you might want to think about, especially given the holiday results and warnings from industry retailers.

Just to be clear, I believe the country was over retailed even before ecommerce. With its explosion, it’s even more over retailed. Every retailer has to be thinking about where or if they should be opening (or closing) stores. Store sizes probably have to shrink. Inventory has to be managed differently as the coordination between brick and mortar and ecommerce becomes tighter.
 
Let’s start with some of Tilly’s President and CEO Dan Griesemer conference call comments. This first one sounds a lot like other CEOs.
 
“During the quarter, we experienced a continuation of the weak traffic trends that have affected many retailers, leading to lower than expected comparable store sales. Consistent with the past several quarters, consumers continue to focus their shopping into compressed peak periods and pullback during non-peak periods. This trend was consistent across all product categories, real estate formats and store vintages, as well as in our e-Commerce channel; affirming our view that our sales results were primarily driven by external factors.”
 
He seems to be implying that disappointing results are okay because they were caused by things outside of their control. I know a conference call has a high marketing content, but wouldn’t it be better if such results were caused by things they could fix?
 
“While acknowledging that teen unemployment remains high, and that other categories such as electronics and entertainment compete for teen dollars, we know that Tilly’s remains the top destination for the most relevant merchandise and brands important to our action sports inspired customers.”
 
You know if you aren’t a new reader that I don’t think that “action sports” is an adequate description of the market our retailers are in. More importantly, I’ve got a bit of a problem with the idea that Tilly’s is “the top destination.” If he’d said Amazon, well, maybe.
 
“Despite the challenging external environment, we continue to adhere to the proven business strategies that have guided Tilly’s success for over 30 years, including our differentiated business model and our sharp focus on evolving preferences and needs of our customer.”
 
Focus on customer requirements is a good thing and something all retailers are doing. Or should be doing. But I think Mr. Griesemer would agree the competitive environment has changed a bit in 30 years, and I hope Tilly’s business strategies have changed to reflect that. I don’t think any of us are using the same package of strategies we were using 30 years ago.
 
Finally, in response to an analyst’s question CEO Griesemer says, “…we recognize that we have a unique business, a unique business model.” Unique is a pretty strong word. Of course no analyst asked just what he meant by that. I don’t see Tilly’s as unique, and would have loved to hear why he’s comfortable using the term.
 
He talks about a lot of good things they are doing. They are “relentless” in pursuing the brands and styles their customers want. They are keeping the business and inventory clean, with inventory per square foot down 16% from a year ago. That’s a great result. They also talk about having “newness” in their stores multiple times a week. That certainly means with product, but it felt like he meant more, though he wasn’t specific.
 
Those are all good things, but I don’t see them rising to unique. But perhaps some of the discussion below will help us understand what Tilly’s thinks does.
 
Tilly’s balance sheet is solid, and doesn’t require any discussion.
 
Sales for the quarter fell very slightly, from $124.9 to $123.8 million. CFO Jennifer Ehrhardt reminds us that “This reflects approximately $8 million in back-to-school period sales that shifted into the second quarter from the third quarter this year, when compared to the 2012 fiscal calendar.” Ecommerce sales were $13.3 million, up from $12.9 million in last year’s quarter.  Gross margin fell from 33.5% to 30.9%. 2.4% of that decline was due to occupancy costs from new stores. Product margin improved by 0.2%.
 
Selling, general and administrative expense rose from $27.9 to $28 million. Net income was down 33.9% from $9.3 to $6.1 million.
 
They closed the quarter with 189 stores, up from 168 stores at the end of last year’s quarter. They expect to grow their store count by 15% in each of the next several years. “The stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.” That’s an interesting mix. If I had to guess, it might be that getting a good deal on the rent was an especially important factor in choosing locations.
 
Comparable store sales fell 2.4%. That includes a 1% increase contributed by ecommerce sales. The average store size at the end of the quarter was 7,788 square feet, but average sales per store were $592,000, down 16% from 705,000 in last year’s quarter. Picture each of their stores being a square that’s about 88 feet on a side. My gut tells me those are low sales for stores that size, and makes me think I’m right about their negotiating well with landlords.
 
I’m wondering if CEO Griesemer would tell me that what was unique about their business model was their ability to make money on lower store sales volumes because of their lower occupancy costs. I’d still have a hard time with “unique,” but I might be okay with calling it a competitive advantage.
 
Tilly’s is facing the same uncontrollable, external, headwinds all retailers in our industry are facing. My expectation is that those will last a while. In addition, rapid change driven by ecommerce has to be managed- maybe harnessed is a better term. The look and roll of brick and mortar is going to be different as a result.
 
Yet most retailers seem to go along opening (more cautiously, I admit) new stores that, from a macro point of view, we don’t need. The assumption, I guess, is that all the bad stuff will happen to their competitors.
 
I would remind you all that unique doesn’t necessarily mean good. Even if your evaluation of your own market advantages doesn’t rise to “unique,” be careful that your confirmation bias* doesn’t have its way with you.
 
* Confirmation bias is the tendency of people to favor information that confirms their beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. People also tend to interpret ambiguous evidence as supporting their existing position.

   

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6 Responses to “Tilly’s Quarter and the Retail Environment”

  1. A. P. C. says:

    I’ve been reading your articles for the past 2 months now and find your take on the Action Sports industry to not only be spot on but also very informative & entertaining. You are the Johnny Rotten & Simon Cowell of the Action Sports Market. You tell it like it is although some people may disagree with you but you are honest and correct with your evaluations. I’ve been in the Action Sports market for 25+ years and spent the past 15 years as a Sales Rep for a very established footwear brand in the Southern California region and have seen first hand the demise of the brick & mortar distribution channel in our industry. I have high hopes for 2014 but sometimes feel like the golden age of “Surf” brick & mortar retail is long gone. I truly hope i”m wrong. Keep the articles coming as it make for good reading while I’m stuck in traffic on the 405. Cheers…

    • jeff says:

      Hi A.P.C.
      Appreciate the kind words. Don’t despair! It’s changing like mad, and it’s our job to try and keep up with the changes. People are going to surf, skate, snowboard, ride bmx, do SUP apparently. Some are going to use scooters. And other things we haven’t imagined yet. And you know what? It’s our job to help them have fun and, hopefully, have careers in something we care about. It’s certainly harder to make a buck than it used to be, but on the other hand that has benefited some of our customers because some good products cost a bit less. Unless we are realistic about what’s going on, even if we hate it, we don’t have much of a chance to succeed.

      Thanks for the comment,

      J.

  2. GB says:

    Thanks again for a great synopsis that saved me from listening to what sounded like a painful call.

    This isn’t rocket science.

    There are now options that allow the consumer more convienient options to research and buy products more convieniently than ever before. They have chosen to take advantage of them and NOT always because of price.

    Brick n Mortar retail isn’t dead, but unless a shop gives the consumer a compelling reason to shop there (location, information, experience) then they will make other choices.
    This isn’t a bad thing. It’s change.
    I say to Brick n Mortar retailers, Take adavantage of the technology and evolve your relationship with your consumer and the brands you carry in order to stay relevant.

    Change is inevitable. You can be a mechanic or a blacksmith, you choose.

    In all sincerity
    Glenn

    • jeff says:

      Hi GB,

      Sorry we didn’t have time for a drink and to solve the problems of the industry at Surf Expo. Will I see you at SIA? Brick and mortar retailers better take advantage of technology or they are doomed; if only because their inventory management will suck. They also have to connect their physical store to their online presence (not quite sure what that means yet).

      J.

      • GB says:

        Frightens me how many brands and retailers both are unaware of the fact that the train already left the station and how fast it’s already traveling. If they don’t make immediate changes linking all their inventory and product information, they’ll be left way out the back.

        Yes, I’ll be at SIA. Actually speaking the 19th as a part of the Export presentation.
        Yes, we must drink and fix the industry. Lets set a time.

        • jeff says:

          I get there Thursday and am there until Sunday morning. Largely unbooked at this point. What works for you?
          J.