Tilly’s Quarter: The Connection Between Operations and Marketing

We need to start by recalling that Tilly’s converted from an S to a C corporation on May 2nd, 2012 and went public May 3rd.  That had an impact on its comparative financial statements.  Let’s review the GAAP results than look at that impact. 

Sales grew 20.5% to $105 million from $87.3 million in the pcp (prior calendar period- same quarter last year). They ended the quarter with 155 stores, up from 131 at the end of the pcp. Comparable store sales were up 5.1% compared to 15.2% in the pcp. Ecommerce sales were $9.8 million, or 9.3% of total sales.
 
The gross profit margin was essentially the same, rising one tenth of a percent to 29.6%. However, the merchandise margin fell by 0.3% but was offset by a 0.4% improvement in leveraging their costs over more stores and sales. Selling, general and administrative expense (sg&a) rose from $22.2 million to $34.5 million. As a percentage of sales, they rose from 25.4% to 32.8%.
 
As a result, they went from pretax income of $3.5 million in the pcp to a loss of $3.3 million. Net income fell from $3.5 million to a loss of $1.2 million.
 
Okay, now the IPO impact. There was “a one-time charge of $7.6 million, or 7.3% of net sales, to recognize life-to-date compensation expense for stock options that was triggered by the consummation of our IPO during the quarter.” That was charged to sg&a and without it, those expenses as a percent of sales rose only 0.1%.
 
The income tax result included a one-time $1 million net tax benefit that resulted from converting from an S to a C corporation as part of going public.
 
Tilly’s says that if you adjust their income statement for the stuff related to going public, their proforma net income for the quarter would have been $2.6 million instead of the GAAP loss of $1.2 million. That’s still down from the $3.5 million profit they reported in the pcp. However, they also provide a proforma income statement for the pcp, and say that profit would have been $1.7 million compared to the $3.5 million they reported.
 
The balance sheet is fine. Changes reflects the IPO, the growth of sales, and the opening of new stores.
 
Okay, those are the numbers. On to the fun stuff. As you know, “Tilly’s operates a chain of specialty retail stores featuring casual clothing, footwear and accessories for teens and young adults.”
 
 According to President and CEO Daniel Griesemer, They “…plan to capitalize on the significant opportunities we see to expand the Tilly’s action sports-inspired lifestyle brand, through the following four growth drivers. By expanding our store base, by driving comparable store sales increases, by growing our e-commerce business, and by increasing our operating margins.”
 
Fair enough I guess. That’s pretty much what every retailer wants to do. Ah, here’s a little more useful information. He goes on to say, “By flowing in merchandise to our stores five days a week, we continue to offer our customers new, on-trend and relative merchandise across a broad assortment of brands and categories. This also allows us to quickly identify and satisfy emerging fashion trends. We drove traffic to our stores by staying connected to our young dynamic multitasking customer as we engaged them through our catalogs, e-mails, in-store events and contests, social media and grassroots community programs, and traditional media.”
 
Here’s another quote from him: “One of the things that we have been good at for a long time is inventory discipline, keeping our inventory current and fresh and full of the most relevant product that our customer wants. Our dynamic business model is built around flowing newness into our stores almost on a daily basis, and addressing the opportunities that we have by reordering and getting back into and expanding key trending fashion trends and categories.”
 
Here’s one more, then I’ll stop. “Constantly flowing in newness and testing new brands, and so I am pleased that you saw it and we’re continuing to go forward with it.”
 
If you’ve been reading many of my articles over the last year or so, you’ll recognize some familiar themes here. Good inventory management that permits a focus on gross margin dollars rather than sales growth. The criticality of operating well. Connecting with your customers the way they want to connect with you. The importance of new brands. Identifying and being on trend. The blurring of the lines between brands and retailers and the additional pressures retailers will put on brands.
 
I doubt doing any of this was ever a bad idea; it just wasn’t so necessary. Note the imperative of a close connection between operations and marketing. Tilly’s talked about its promotions being executed as planned. That is, they weren’t done in response to what competitors were doing or because they had to dump some inventory that hadn’t sold. You won’t be able to take that approach if you’re logistics and inventory management aren’t right.
  
As usual, good strategic and operating ideas will, eventually, be adopted by most management teams- at least at companies that expect to prosper. When that happens, they cease to be a source of advantage. That seems to be what’s going on in our industry. It’s not that Tilly’s is doing anything wrong. Their history is one of success. But, as I’ve been pointing out, many companies are doing the same things. What was innovative begins to become standard practice.
 
I think we’re early in what I’d construe as a massive change in the consumer market and the retail/brand relationship. But if everybody is catching on, it’s time to give some consideration to what will happen next.