Tilly’s Quarter and Their Business Approach

Just for fun, let’s jump right to some comments in the conference call for Tilly’s quarter ended October 27, 2012. In discussing the quarter’s results, CEO Daniel Griesemer notes that, “While our third quarter comparable store sales growth of 1.9% [They were 8.5% in the same quarter last year] was below our expectations, this represents high quality growth at healthy margins.” 

Like other retailers I’ve reported on, he noted that back to school was strong, but then the market softened nationally. This seems to have carried into November for at least some companies.
He goes on to note that “…we chose not to pursue a course that would deliver a higher comp at the expense of earnings.”
I kind of like that approach. If you’ve followed me for more than a little while, you know that in the current and projected economic environment I’ve been a proponent of improving earnings through higher margins, better operations, and controlled distribution rather than big sales increases. My thinking is pretty simple; big sales increases are hard to come by right now. Focusing on operating income rather than sales makes some opportunities that exist among the interplay of production, distribution, marketing and operations in general clearer than they have been in a sales growth focused organization.
Just to give one example I’ve used before, the best marketing a brand can probably do is have a retailer sell through at full margin and then have to tell customers, “Sorry, sold out!”
This isn’t a panacea. Remember Billabong announced when the recession started that they were going to control promotions to support the brand and its image even at the expense of sales. We found out when they released their new strategic plan that they thought they had some operating issues to deal with. I agreed with Billabong’s decision. But what we now all know, and what I think Tilly’s CEO would agree with, is that the decision not to focus quite so much on sales growth requires that you look for the connections among the other parts of your business that not only reduce expenses, but improve the brand’s positioning.
In the case of a retailer, that has the potential to change the way they evaluate and decide to carry brands. Hey brands, that should resonate with you and lead you to evaluate your marketing and distribution differently.
Two other points from the conference call. First, like pretty much everybody else, Tilly’s is trying to give its customers an integrated experience across every touch point they have with the customers. CEO Griesemer says, “…we want our customer to get the same great Tilly’s brand experience across every channel, every access point; be it social media, or mobile, or in-store, or online, or through our catalog or e-mails, or whatever else – events, or all kinds of things.”
Working towards this consistency is no longer a choice.
And second, in my last two posts I’ve talked about Zumiez’s and PacSun’s quarters. I’ve compared them, saying Zumiez has a niche it owns but has to find a way to grow out of it without damaging that niche. PacSun, on the other hand, lost its niche and is trying to get a niche back to attract its customers.
Tilly’s CEO, talking about the action sports space in response to an analyst question, says, “Yes, we share an action sports-inspired lifestyle kind of platform with a whole lot of people. But as you well know, that has migrated significantly.” Later, still responding to that question, he says, “…this is a unique business with a unique customer. I think we’re going to continue to make sure we communicate that, so people resist the temptation to pigeonhole us into one particular category.
As action sports becomes comingled with fashion, youth culture or whatever you want to call it, figuring out where along the spectrum they belong is an issue Tilly’s is sharing with all brands and retailers in this space.     
Well, that was a little more fun than just starting with a bunch of numbers, but I suppose there’s no way to avoid that. If you’re so inclined, you can read the 10Q yourself here.
Sales for the quarter were up 16.4% from $107.3 million in last year’s quarter to $125 million this year. Ecommerce sales rose from $11.1 million to $12.7 million. They ended the quarter with 161 stores in 27 states. Average net sales per store declined from $730,000 to $705,000 and average sales per square foot were down from $94 to $90.
I would love to have some detailed information on how retailers thought ecommerce sales were impacting brick and mortar sales. Tilly’s does note that the 1.9% comparable store sales increase was “…due to higher net sales through our e-commerce store.” That’s not a surprise given the numbers on sales per store and square foot quoted above. 
The gross profit margin rose pretty much not at all from 33.4% to 33.5%. Selling, general and administrative expenses rose from $23.5 million to $27.9 million or from 21.9% of sales to 22.4%. Store selling expenses were up 17% to $18.8 million but as a percentage of sales rose 15.0% to 15.1%. 
Operating income rose from $12.3 million to $13.9 million, but net income was down 23.5% from $12.2 million to $9.3 million. The decline in net income was completely due to an income tax provision that rose from $140,000 to $4.53 million. That was the result of changing from a subchapter S to a C corporation as part of going public. You should look at this quarter’s tax provision as a percentage as more typical of what Tilly’s will experience going forward.
Okay that’s it. No big financial issues, and anyway I thought the first part of the discussion was way more interesting than this part.