Good day ladies and gentlemen and welcome to the Tilly's Incorporated Third Quarter Fiscal 2013 Results Conference Call. Today's conference is being recoded. At this time, I'd like to turn the conference over to Anne Rakunas of ICR Incorporated. You may begin.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Tilly's third quarter fiscal 2013 earnings results. On today's call are Daniel Griesemer, President and CEO; Jennifer Ehrhardt, CFO. A copy of today's press release is available in the Investor Relations section of Tilly's website at tillys.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's website. I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today and actual results may differ materially from current expectations, based on a number of factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2013 earnings release which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We also note that this call contains non-GAAP financial information. We're providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States or GAAP, and you can find a reconciliation of these metrics to our reported GAAP results and the reconciliation table provided in today's earnings release. As for today's call we have a limit of one hour. So when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed. And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Thank you, Anne, and good afternoon everyone. Thank you for joining us today. On our call, I will be providing with an overview of the third quarter performance and the key factors that drove our results. Jennifer will then review our financial results in more detail, and provide our outlook for the fourth quarter and full year 2013. I will provide a few closing comments, and then we will open up the call for your questions. During the third quarter, we achieved quality earnings that were at the high end of our expectations, and I am pleased with how our team continues to execute in a challenging retail environment. We maintained healthy gross margins, controlled our costs and exited the quarter with inventory as planned and well positioned for the holiday season. As a reminder and discussed on our second quarter call, the retail calendar resulted in sales shifting into the second quarter from the third quarter this year, when compared to the 2012 fiscal calendar. Taking this into account, on a like-for-like basis, we delivered higher gross profit dollars than the third quarter last year, in a very challenging teen retail environment. 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. 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…

Thank you, Dan, and good afternoon everyone. For the third quarter, net sales decreased 0.9% to $123.8 million, a $1.1 million decrease compared to the third quarter of 2012. 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. Comparable store sales decreased by 2.4%, with a similar level of comps in all departments, aside from accessories that performed slightly better. Our e-commerce sales, which are included in our comparable store sales, grew 3%. Our third quarter comps reflect lower traffic, largely offset by an increase in both conversion, and the average transaction value. Gross profit was $38.2 million, or 30.9% of net sales compared to 33.5% of net sales in the third quarter of 2012. Even before factoring in the sales shift into the second quarter this year, we achieved slightly higher product margins, compared to the third quarter of last year. The increase in product margins was offset by deleverage and buying distribution and occupancy costs, as result of the negative comparable store sales, and the sale shift into the second quarter this year. We continue to diligently manage our costs, with selling, general and administrative expenses of $28 million, or 22.7% of net sales, which is just slightly above an SG&A rate of 22.4% in the third quarter of 2012. Our operating margin was 8.2%, compared to 11.1% in the third quarter of 2012, reflecting deleverage of buying, distribution and occupancy costs, offset by slightly higher product margins, as previously discussed. When adjusting for the weak back-to-school sales that fell into the second quarter this year, operating margins were higher than 8.2% we reported, but still below the third quarter 2012. Net income was $6.1 million or $0.22 per…

Thanks Jennifer. While consumer shopping patterns remain inconsistent and current trends dictate a cautious approach in the near term, we are confident in the strength of our Tilly's brand, and remain focused on our initiatives that we believe will advance our long term growth. We continue to strategically expand our presence in high caliber markets to take advantage of the significant light space opportunities we see before us, increase our brand awareness through targeted marketing and grassroots efforts, and grow and refine our e-commerce platform. I am pleased with how our entire organization continues to not only navigate and execute in a challenging retail environment, but to plan for the future in parallel. Everyone at Tilly's is focused on growing our business, and driving quality, sustainable earnings. I'd now like to open up the call for your questions. Operator?

Thank you. (Operator Instructions). We will take our first question from Sharon Zackfia with William Blair.

Hi, good afternoon. I guess a question on the fourth quarter guidance. So obviously, you are looking at kind of a mucky November, with a shift in thanksgiving. So if you would give us more insight on how the guidance kind of stacks up relative to your current trends, particularly as last year trends weakened, as the quarter went on. I guess, I am just curious, are you assuming there is an uptick from the current trend? Have you adjusted for the shift in thanksgiving? Any insight would be helpful?

Yeah, sure Sharon. So we recognize the range indicates a view of some volatility that we believe exists in the quarter and estimating here at kind of beginning at the holiday season, pre-Black Friday and well in advance of the majority of the season. The guidance reflects the trends that we have seen recently and for the last few months, so coming out of the post back-to-school time period, and we have several factors that are influencing that. Clearly, there is significant pressure on the teen sector and the teen customer, competing dollars, for limited dollars in a variety of things. Our own current trends, we have seen and believe this will be an extremely promotional season, and expect it to be pretty brutal out there. We got a calendar shift that's shortening the number of holiday days, and we have a lack of clearance going into this season, that we had last year and that was contributed to our revenue. It's kind of the combination of those factors is leading us to think that it's prudent to have a bit of a wider range than normal. We really want to see how this unfolds. The low end of the range is one thing, high end of the range is another. We are going to see how this unfolds. We are very confident about our content, our marketing strategies, the investments we have made in our merchandise, the way the stores look and feel, the preparedness of the teams. But we are going to stay focused on the things we can control. We are going to control those things. We are going to continue to work diligently, making the right decisions for the long term, and getting better at everything we do, but we recognize this very volatile season, and it's reflected in this kind of wide range that we have in here.

Okay. Thank you.

Thank you.

Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Please go ahead.

Did you mention that merchandise margins were up in the third quarter, and if so, could you quantify that?

Yes, we did mention that merchandise margins, after you account for the shift -- even before the shift, merchandise margins were slightly up, and after accounting for the shift, they were up over that, compared to last year.

And does the fourth quarter guidance contemplate a higher merchandise margin year-over-year?

It does.

As you watch some of your competitors compete with deeper and deeper promotions and discounts, how can you drive traffic into the store without succumbing to some of the same types of strategies?

Yeah. So there is only so much that we can and are willing to do, right? It's very hard to compete, when there is kind of reckless activity going on, in anticipation of some pretty significant discounting. We stay focused on making sure that the content is fresh and relevant, that the teens are creating a great experience out there, that the stores look amazing, and communicate. The value that exists in our offering, it's there, it's prominent, I am very pleased with kind of the content and where we are positioned going into that. But there is only so much we are willing to do, because we are not willing to compromise the integrity of this brand for the short term. So we have got mail strategies, things we are doing with our catalog mailing to drive traffic, things on social media, very vibrant activity online, things that we are doing in the store, all kinds of things that are happening. But there is only so much we can do. So that kind of is feeding a bit of our caution and of the view of the fourth quarter.

Thank you.

Thanks Lorraine.

We will take our next question from Steph Wissink with Piper Jaffray.

Hi. Good afternoon everyone. Thank you. Just a quick question Dan, on the new store performance, for Jennifer as well. As you look at the quarter, and then maybe stepping back just the general trend line around those new stores, is anything changing about how you think about your unit or site selection, based on what you have experienced, here in the back to school and kind of holiday-to-date period? Thanks.

So, the new store performance remains in the same relationship as the -- kind of established or heritage stores, as has always been the case. So its kind of a river or tide issue that's influencing, and again another indicator that -- and we recognize we are not perfect, and there is a lot of things we need to work on, but this is an externally influenced -- largely externally influenced thing with the teen consumer. We are being very judicious on the site selection process. We have, I don't know, between a quarter and a third of the leases signed for next year, whatever that would be. That's normal at this time of the year. We still remain very flexible, and are being very critical about where we put our stores. There is no rush here. There is no race to get to what we believe is the long term opportunity. We still are committed to the strength and opportunity that we see out there for the long term, no change in that. But we will only bring to the business, the highest caliber opportunities that we see in both malls and in off-mall venues.

Thanks Dan. If I could, could I just ask one follow-up. If you look at your back-to-school to holiday trend line, it seems like the sequence, Q3 to Q4 is a bit counter to the Group, in terms of what we have seen. Do you think there has been a delayed pull back by your customer, or maybe help shape what you are seeing, kind of third quarter to fourth quarter relative to the broader market, where we have seen, kind of significant pressure, Q3, and a slight important into Q4?

So I think what we are -- the way we are looking at it Steph, is we recognize that we have a unique business, a unique business model. We have certain peaks and valleys in our business, that may or may not sync up with other retailers exactly. We are reading the trend that we saw, coming in the peak back-to-school time period being consistent with where we had projected it and then softness that really began in Labor Day; and that softness really continued, if not slightly intensified. The guidance that we have here is the caution and concern, given the multiple factors that seemed to be kind of perfect storm here for the fourth quarter, with all of the various contributing factors around the teen sector, our own recent trends, the promotional activity we see and believe is going to be there. The limited dollars and strength in maybe the gaming industry, and some distractions, instead of purchasing apparels at, the shortened calendar, and then our own intentional push to cleaner business with cleaner inventories, and less clearance. That combination is really what's leading us to this more conservative view of the fourth quarter.

Thank you. Best of luck guys.

Thanks.

Thank you.

We will take our next question from Lindsay Drucker Mann with Goldman Sachs.

Hi. Thanks everyone. On the March margin question, are you able to quantify how your March margin -- (inaudible) improvement you saw this quarter, versus what you saw in Q2 on an apples-to-apples basis? In other words, is the improvement reasonably consistent with what you saw last quarter, or did it change some?

Thanks Lindsay. Yes, last quarter, when we talked about the impact of the shift, of that back-to-school week coming into Q2 out of Q3, we had mentioned that it met 70 basis points of product margin to us. We saw a similar decrease in Q3 related to that shift, as well as I mentioned earlier, even not considering the shift, we did have a slight improvement in our product margin. So when you look at that 70 basis points, plus slight improvement, it gets you to, what we saw, the improvement in overall product margin for the quarter.

Got it. So it sounds like, on an apples-to-apples basis, it was pretty -- the rate of improvement was pretty consistent versus 2Q?

Right, that's fair.

Okay. Then, can you -- I was hoping, you could clarify the inventory. Your inventory positioning and the adjusted inventory, versus the reported inventory, where we saw the relationship between inventory and sales get a bit worse this quarter?

We talked about this at the end of the second quarter. We recognized coming out of the third quarter last year, the composition of our inventory had more fall, winter, carryover product in it, than we needed, given the sales trend that we experienced in the latter part of the third quarter, and in the fourth quarter. We had identified that, coming out of that season. We weren't pleased with the amount of clearance markdowns we needed to take, in order to ensure that it's so critical to our business, ensuring that our inventory remains fresh and current. So we identified, that we did not need that overhang of inventory, and planned for it, and manage the inventory down to that and we talk about mid-teens, down on a per square foot basis. It really is cleaner and more current, and less clearance inventory was the make up. It was intentional, and we are going to exit the fourth quarter down in the low double digits. And so we are committed, we remain committed. It's critical to this business that we remain committed to keeping our inventory fresh and current, that's what our kid wants. They want to come in and see newness. So we won't carryover past season's problems into future seasons. So that's kind of where we have, and what we are thinking about, and the relationship of the inventory, really is less than related to the sales plan, and more in related to the composition.

Got it. Then just last one for me Dan; if we sort of go back to earlier in the year, where you talked about the softer backdrop and a slower -- the river, with a lower level, in terms of your customer spending. You talked about competitive environment, and while you were reticent to really dial-up aggressively on the promotions. You said you had some other plans to try and drive the business, even in the face of the softer, kind of backdrop. I was hoping, maybe you can talk to us about, what was successful, what you feel is working, and any incremental plans you have in store for 4Q, 1Q, I mean, (inaudible) that the macro dynamic doesn't get better, should we just be looking for ongoing sluggish comps, or do you have other areas you are looking to play off in? Thanks.

Yeah. Okay, okay. Sure. We clearly believe that it is, particularly in this fourth quarter, going to be a very competitive and promotional environment. We recognize that. We knew and know that our business is not built on a high-low strategy. We have a strong branded presence and the integrity of our brand, and of our brand partners, is critical to the long term health of the business. So we don't build our plans and strategies around discounting desirable and current and fresh and relevant products. So it starts with making sure, that we are relentless in the pursuit of having the brands and the styles and products from those brands that our customers want. But then, more to your question is saying, how are we communicating the value that exists in our offering; and it's there. And if you go into our store right now, you will see us being more obvious with that value, and its in our windows, its on our tables. You can see it, and while we have some strategies in place for this coming weekend and throughout the holiday season, I am not going to give a whole lot of detail on that, we will be able to share that once its over, or you can see it as it unfolds. But we are going to remain committed to keeping the business clean, keeping the inventory clean, communicating value in the offering, and being very innovative on the product side and on the marketing, messaging side.

Thanks.

Thank you.

We will take our next question from Jeff Van Sinderen with B. Riley. Jeff Van Sinderen - B. Riley & Company: Good afternoon. Dan, maybe you can just talk a little bit more about -- I mean, I understand kind of where you are in promotions generally, but just wondering if your plan is -- were you more or less promotional in Q3, just wanted to clarify that, and are you planning to be more or less promotional or take fewer discounts? It sounds like if you back -- let's say we back out the extra clearance inventory that you had last year, are you planning to be more or less promotional, take more or less discounts this year in Q4 versus last year?

Yeah, it's probably about the same. It is hard to back out the clearance, because that has such a heavy influence on kind of the promotional cadence and what you are messaging and what you are doing. Suffice it to say, both the third quarter and the fourth quarter, we will be taking less overall markdowns, so think about that. But there may be some shift in something that would have gone to clearance, that now might be promoted in a slightly different way. But other than that, no. This business remains very-very clean. Markdowns as a total or not, a big part of it, and the big lever that moves is, what you have to do to clear your residual inventory, that's really what influences the whole markdown pool. So keeping our inventory clean and current and lean is critical to the long term health of the business. Jeff Van Sinderen - B. Riley & Company: Okay. And then just a follow-up on comps, if your inventory is much cleaner, you have got much clearance inventory in the next -- for Q4 this year, versus last year. I am just wondering how -- I know its hard to break this out, but how do you think about your comp to last year, if you were to say okay, apples to apples, we have the same amount of clearance last year as we do this year? Is there a way to look at it like that, and say gee, if we didn't have as much clearance inventory, or let's say we had flat clearance inventory, we would be guiding to a comp that is low to mid single digit, instead of mid to high single digit, or is there a way to sort of break that out?

Yeah. Without giving a whole lot of detail, you are on the right track there. We recognize that we did begin the season last year, with more inventory that needed to be cleared coming out of the third quarter, that was competing for fourth quarter products. So we intentionally pulled that out. We recognized that with that chain sales, and very little profit. So we are thinking, this is the right way to run this business for the long term. We would -- the lack of clearance is a contributing factor to our acknowledged wide range here for the fourth quarter, it is a contributing factor, so you are on the right track. Jeff Van Sinderen - B. Riley & Company: Okay. Thanks very much, and good luck for holidays.

Thank you.

Thank you.

We will go next to Dave King with ROTH Capital Partners.

Good afternoon. This is actually Isela Soto on for Dave King. Can you just talk about the outlook on the SG&A front, and how we should think about the opportunity for future savings, and then should we expect deleverage both in gross margin and SG&A in the fourth quarter, given your guidance for a negative comp?

Sure. I will address that with you. If you look at SG&A for Q3, you will see from a pure dollar perspective, we came in just slightly above last year. So we really are diligently controlling costs and always looking for ways to optimize efficiencies, processes, things along those lines. So when you look at SG&A as a percent of sales, that was deleverage that you saw going from the 22.4 to 22.7 this year. It was deleveraged on the negative comp. And we look into Q4, you had already set it up perfectly. The SG&A and the rate that you see there is all driven by the deleverage on the guided negative comps that we put out there.

Okay. Thank you.

You're welcome.

Thank you.

We will take our next question from Pamela Quintiliano with SunTrust.

Great. Thanks so much. So just to be clear with the guidance, not to beat a dead horse, but it sounds like the environment in traffic, that's the issue not as much, and obviously not having as much carryover product. But the new fashion content, the customer is responding to the product that you have in the stores currently?

Yes. We see good response from the lower level, right? So the tide is lowered, river lowered I guess, a better way to say it, and what we see the customer doing in the store, we are pleased with.

Then, I understand that it's critical for you guys to keep the inventory fresh and current, and not compete with the excessive promotions that are out there, just to remain -- having the integrity. But how do you balance that, just with the remaining relevance, given what's going on out there, and have you been working with vendors to try to create other types of compelling offers or anything differentiated for holiday that we could think about, that you think your customer would get excited about, that's not necessarily 50% of the entire store, or something like that?

I like where you are going with that. Yes, the answer is spot-on, because we cannot compete on price. You don't achieve greatness and relevance by just battling it out on the cheapest ticket. Using the long term relationship and partnerships that we have with our brands, mapping out of course with them, that works for them and works for us to make sure that there is a unique product, well priced value across the entire offering, and that's in all product categories and branded in our own proprietary product. It's critical, if you go into our store, you will see some of those things. Now, you will see them as part of the holiday offering, and you will see them ongoing.

Then, is there any change to the timing of the flows, just once again, you keep on talking about the inventory being fresh and current. Is that what we think about year-over-year?

So flow for us is different than it is for a vertically integrated retailer, and that we don't flow entire collections. So, newness is flowing into our stores on a daily basis. Multiple times a week, newness is across all product categories. So achieving these more rationalized inventory levels, we are done across the board, all levels, not just by pushing a collection out or pulling one forward. Does that make sense?

It does. And I guess what I was thinking more is, are there more statements that you are making? Sorry if I misphrased it with the flows, but more statements that you are making, when you are flowing in product, to create the excitement in between thanksgiving and Christmas to try to capture that traffic when its not Black Friday and those excessive promotions going on out there?

Yeah, I would actually ask you to go into a store, and you tell me; because, I am a little bit biased, because I think our stores look amazing right now. I am so bullish on the strength of the offering, the focus and fashion relevant product in the junior side, the key items, the wealth price, both branded and the proprietary product. On the guys side, the newness that we have in accessories and footwear. So I am not the good one to ask, because I think we are doing a lot of great things, and I hope that we are being overly cautious here, but there is a lot of headwind, the things that I have talked about. There is a lot of headwind that gives us reason to be cautious.

Fair enough. So best of luck with all of it.

Thank you.

Thank you.

We will take our next question from Betty Chen with Mizuho Securities.

Thank you. Good afternoon everyone. Just to kind of follow-up on some earlier questions Jen? I was wondering, how we should think about, specifically in terms of SG&A in the fourth quarter? I know you mentioned that we should be looking for deleverage, given the negative comps. Should we look for the deleverage to be similar in magnitude to the third quarter, or is it going to be a little bit more (inaudible) because of the sales shift going on from the calendar?

Yeah, if you look at the deleverage in SG&A, it is going to be a little bit more severe than what you are seeing, especially when you think about the comps that we guided for Q4, versus where we just came in at Q3, at the down 2.4. So as I mentioned, we only saw about 30 basis points of deleverage in SG&A for Q3. So you should be factoring in a bit more severe for Q4, based upon the deleverage on negative comps.

Okay. That's helpful. Then in terms of the Q4 inventory position being (inaudible) they did. Is the reduction just coming across the board from all categories, or are there specific categories where, you are sort of reducing the investment, given some of the learnings you have seen in last year or maybe this year?

No. That is pretty much across the board, because the inventory overhang that we believe we began the quarter with -- the fourth quarter with last year, was created by a -- at the beginning of some traffic softness. So it was across the board. That's really one of the things that I hope comes through, as people learn more about this business is the stability, the diversity, the balance that exists in this business across apparel, footwear and accessories, guys, juniors and kids, branded in private label, fashion, and more relevant basic. So its across the board, and its being prudently managed, I am very proud of it, the job, the merchants in the inventory teams have done to position us very well, or what we believe is going to be a challenging quarter.

Okay, great. It sounds to us that -- it sounds like maybe the e-commerce channel saw a similar challenge with traffic. I know you have talked about various marketing initiatives, whether it's social media, or maybe catalog mailing. What do we think is maybe happening with the e-commerce customer, and are there some, may be online only offers that you can continue to drive, that you did in the third quarter to try to stimulate that interest?

Yeah. So we do believe that this is a teen kind of macro, external influence; because we have seen, as we have talked about, what we experienced in the third quarter was, across all channels and all product categories. It was a relative thing going on. It's important to note, that the magnitude of that one week that shifted out of the third quarter into the second quarter was one of the largest e-commerce weeks of the year, and that moved, remember, we reported in second quarter, a 30% increase in e-commerce. We are reporting in the third quarter, a 3% increase. When you combine the two, its 15% increase. So it's still a very healthy, very vibrant business and any other softness that you might see there, I would attribute to the clearance as well, because we talked many times about how efficient e-commerce is in clearing residual inventory, and not owning it. Has put a little bit of pressure on there. But that said, we are achieving those results and feel very bullish about e-commerce as a channel, and the things that we have in place, both from segmentation of our communication to social media to unique product, to broader and more dominant assortment, more compelling categories and more breadth from those categories to make sure we keep that channel growing and vibrant.

That's great. A follow-up Dan; in terms of the shift impacting third quarter e-com business, is the shift in the fourth quarter going to have a similar impact, or not as dramatic?

No. Kind of all washes out in the fourth quarter. That last week of the quarter, relative to the first week of the quarter, not a whole lot different. So minor. Nothing like the shift in the second quarter to third.

That's great. It will be nice, when we survive through all these shifts.

Yeah you're telling us, yeah, right, right.

Can you just remind us again, where we stand in terms of the e-commerce DC capital program, and I think originally, we were possibly looking at a -- maybe spring completion date; and so if you could remind us on that, and when we may perhaps see some benefits from the efficiencies of that DC?

Yes. Spring is still a good window to look at. We still believe that's the case. The real variable continues to be approvals that we need, in order to operate the facility, but it is moving along very nicely. Jennifer in her script commented about the capital associated. It's coming in, at or slightly below where we thought it would be. We are very pleased with how this is going to support the business, and we would look for kind of any benefit in the unit throughput to be probably more meaningfully expressed than the back half of the year. Wouldn't want you to model too much early on.

Okay. Wonderful. Best of luck for the holiday. Thanks.

Okay. Thank you very much.

Thank you.

(Operator Instructions). And it appears we have no further questions in the queue. At this time, I would like to turn the conference back to management for any additional or closing remarks.

Hey, thanks operator. Thanks again for joining us. We look forward to speaking with many of you at the ICR Exchange in January. Have a good evening.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.