Tilly's, Inc. (TLYS) Q4 2017 Earnings Report, Transcript and Summary

Greetings. And welcome to the Tilly’s Incorporated Fourth Quarter Fiscal 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson, Investor Relations.

Thank you, Operator. Good afternoon, everyone. And welcome to Tilly’s fiscal 2017 fourth quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, CFO; will discuss the company’s results and then host a Q&A session. For a copy of Tilly’s earnings press release, please visit the Investor Relations section of the company’s website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of the call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly’s judgment and analysis only as of today, March 12, 2018 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2017 fourth quarter earnings release, which was furnished to the SEC today on Form 8-K, as well as other filings with the SEC referenced in that disclaimer. Today’s call will be limited to one hour and will include a Q&A session after our prepared remarks. I now turn the call over to Ed.

Thanks, Gar. Good afternoon, everyone and thank you for joining us today. I will summarize our fiscal 2017 fourth quarter operating results before discussing areas of focus for fiscal 2018. Mike will then review our results in more detail and introduce our fiscal 2018 first quarter outlook. For the 2017 fiscal year as a whole, Tilly’s delivered a 24% improvement in year-over-year operating income. We concluded the fiscal year by announcing a special cash dividend of $1 per share which we paid last month. In the fourth quarter Tilly’s delivered a 10% increase in year-over-year operating income. Store comps were up 2.3% driven by our fifth consecutive quarter of store traffic growth despite what reportedly continues to be negative mall traffic environment. E-comm sales dropped 12% due to certain technical issues that I will discuss a bit later resulting in total comp sales coming in flat. Despite our flat comps we delivered meaningful improvement in operating income due to consistent inventory and expense management. In terms of merchandising, our broad and diverse collection of brands performed well across all department. Our men’s business led the way with a high single-digit positive comp followed by footwear that also comp positive. While all other departments decreased in the single-digit, the branded portions of these assortments perform well. We lost ground with our private label assortment, particularly in women’s, girls and boys. With the transition into spring assortments, newness and color, and styling are driving improved results across all apparel departments compared to the fourth quarter. Total comp sales are up low single-digit thus far in the first quarter, despite continuing negative e-comm sales. Newness and exclusivity will continue to be key for differentiating our merchandising efforts in fiscal 2018. Turning specifically to e-comm which represents 14% of our total sales for the fourth quarter, sales decreased due to technical issues we encountered with our new order management and website platform systems during sustained high transaction volume period. We went live with these new systems in early November and e-comm sales comp positive for the month. However, as we entered December we began experiencing problems that resulted in incomplete orders and issues supporting omnichannel execution among other items. Today we continue to work hard with our third-party service providers to fix these issues as quickly as we can, and as a result of these efforts to-date, the e-comm sales trend is beginning to improve relative to the fourth quarter results. Although we’re still negative on a quarter to-date basis, e-comm sales are trending more favorable in recent weeks and we are beginning to see the return of positive daily comps. We expect e-comm sales to remain inconsistent for the near-term, as we complete the remaining fixes, but we believe we are on the right track to have e-comm contributing to topline growth again within a reasonable period. And again, despite these technical e-comm issues, we still delivered bottomline results for the company as a whole that were in line with our original outlook for the quarter due to the positive 2.3% store comp, with good inventory and expense management overall. Turning to real estate, we are excited to be getting back into store growth mode in fiscal 2018. As we noted during our last earnings call, we plan to open up to 15 new stores during fiscal 2018. We currently expect to open one store late in the first quarter, followed by five in the middle to late portion of the second quarter and four more during the third quarter based on the 10 negotiated -- totaled -- 10 total negotiated deals we have thus far. We also expect to open three rescue pop up stores by the end of the first quarter. Beyond new stores we have nearly 120 lease decisions to make over the course of fiscal 2018 and 2019. We continue to fight for improved economics wherever available to strengthen our bottomline and we will not hesitate to close stores if the right economics cannot be obtained. While the exact number of store closures we will have in fiscal 2018 is uncertain, we begin -- we currently anticipate closing one store later this month and possibly closing up to five more during the third quarter. Turning to marketing, as we discussed on our prior calls, we believe our emphasis on in-store events has created enthusiasm about Tilly’s and has contributed to driving improve store traffic for five consecutive quarters, despite what is reported to be continuing negative mall traffic environment. We believe more direct consumer interactions improve our customer engagement and generate additional excitement about Tilly’s and we continue -- we will continue this effort throughout 2018 with numerous events and contests. We like to thank all of our brand partners who helped us with the planning and execution of these events. In closing, fiscal 2017 represented Tilly’s second consecutive year of -- year -- improved year -- of improved year-over-year operating income results. We are off to a good start in fiscal 2018 despite our short-term e-comm issues. We aim to continue our operating momentum as we return to store growth mode this year. Now I will turn the call over to Mike to provide more details on our fiscal 2017 fourth quarter operating performance and to introduce our fiscal 2018 first quarter earnings outlook. Mike?

Thanks, Ed. Good afternoon, everyone. Our fourth quarter operating results compared to last year’s fourth quarter were as follows; net sales of $164.3 million, increased 2.6% from $160.2 million due to the extra week in this year’s fourth quarter, partially offset by ending the fiscal year with four fewer stores than a year ago. Our comp sales performance during the fourth quarter was a combination of both good and bad news. The good news was that store comps which represented 86% of our total sales were up 2.3% with positive store traffic for the fifth consecutive quarter. The bad news was that e-comm sales which represented 14% of our total sales decreased 12% due to the systems issues that Ed noted earlier. The combination of positive store comps and negative e-comm resulted in flat total comps. Gross profit of 51.4 million was an improvement of $2.3 million or 4.8% compared to last year’s $49.1 million. Our gross margin rate of 31.3% improved 70 basis points to last year’s 30.6%. This improvement was driven by occupancy savings of 90 basis points, partially offset by product margins that declined by a modest 20 basis points due to lower initial markups. SG&A expenses were $40 million or 24.3% of net sales, compared to $38.7 million or 24.1% of net sales last year. This increase was largely attributable to minimum wage increases and deleverage of increased payroll costs on the flat sales comp. Operating income of $11.4 million or 7% of net sales was an improvement of $1 million or 50 basis points compared to last year. Income tax expense was $5.2 million or 43.5% of pretax income, compared to $4.2 million or 40.2% of pretax income last year. This year’s income tax expense includes a net charge of approximately $0.2 million as a result of the Tax Cuts and Job Act -- Jobs Act signed into law during December. Despite our flat total comp, net income of $6.7 million or $0.23 per diluted share was in line with our original outlook range which should not contemplate Tax Reform. Last year’s net income was $6.3 million or $0.22 per diluted share. Weighted average diluted shares for the quarter were 29.5 million versus 28.9 million last year. Turning to our balance sheet which remains strong, we ended the quarter with cash and marketable securities totaling $136 million and no debt compared to $133.9 million and no debt at this time last year. As a reminder, last year the company paid a first ever special cash dividend to stockholders of $20.1 million in the aggregate in February 2017. The company just recently paid a second special cash dividend to stockholders of $29.1 million in aggregate as previously announced. We finished the quarter with inventory per square foot down 9% comparable week a year ago marking our ninth consecutive quarter with sales comps stronger than inventory comps. Total capital expenditures for fiscal 2017 were $13.8 million, compared to $17 million for fiscal 2016. Turning to our outlook for the first quarter of fiscal 2018. Based on current and historical trends, we expect first quarter comparable store sales to be in the range of flat to up low-single digits on a percentage basis. Bottomline results to range from a loss of approximately $0.5 million to income of approximately $1 million and earnings per share to range from a loss of $0.01 to income of $0.03. This compares to last year’s operating loss of $0.3 million and loss per share of one penny. We expect our tax rate to be approximately 27% and weighted average shares to be approximately 29.5 million. We expect inventory per square foot to remain consistent with last year’s level. We expect in the first quarter with 222 total stores comprised of 219 full-size doors and three rescue branded pop-up stores. Fiscal 2018 full year capital expenditures are expected to be approximately $20 million, primarily for the new stores we discussed earlier and continuing IT investments. Operator we will now take questions.

Thank you. [Operator Instructions] Our first question comes from Jeff Van Sinderen, B.Riley FBR. Please proceed with your question.

Hi, everybody. Ed maybe you can just give us a sense on a couple of things. I think you said the store comps were up 2.3% in Q4, did I hear that correctly?

That’s correct. Yes, Jeff.

Okay. So the store comps were actually strong, but obviously, the e-comm glitch was an issue, maybe you can just give us a little more color on the e-comm glitch. What needs to happen to fix it and then what the timeframe is to have that operating as you wanted too?

Sure. The e-comm, as Mike mentioned, the e-comm glitch we went live at the beginning of November and actually until you get into a high trans and it was extensive testing before we went live and we really didn’t detect any material problems, and then once we got into a higher transaction period in December that’s where we start to get into some of the problems that were discovered, mostly related to our integration of into our inventory omnichannel management system. So, well, those problems have not all been fixed but they have been substantially fixed, and as Mike mentioned, we’ve seen some improvement in our e-comm business, certainly better than what we’ve seen during the fourth quarter with some positive comp days. And also there is still some things that have to be fixed. We have temporarily turned off most of our omnichannel capabilities really since December and we would expect to have those turned on early -- back on early in the second quarter, Jeff.

Okay. So essentially the main issue should be resolved as we are into Q2?

Yes.

Okay. Good. And then, I guess, any more color you can give us on the women’s business, just wondering kind of how you’re feeling about that, it sounds like you are seeing a little better trends in spring time, just wondering any other thoughts you can give us there?

Sure. Slightly better and we expected -- as the -- as we get further into spring we expected to even get better. There is a couple of trends that we see that will be positive for the business. You will see more variety in bottoms -- in the bottoms business with wide leg and some other silhouettes and then also a shift in away from wovens not totally but a shift more into knit tops and that’s generally good for our business. So that’s kind of where we stand as of this discussion.

Okay. And then one more and then I will let someone else jump in. Just wondering if there any other, I guess, what you learned from the store events that you did in 2017 and then anything you can touch on in terms of plans for store events in 2018?

Sure. I mean, the store events, we have tried a lot of different types of events in the stores and all of them seem to be pretty successful nationwide. It has brought a lot of brand identity recognition to us in our newer markets and that momentum seems to continue. So we have a ton of events planned throughout the balance of this year. We will continue to tweak the type of event, but -- and we’ve had great partnership with a lot of our brand partners in helping us execute these events. So we are excited to continue them going forward.

Okay. Great. Thanks for taking my questions and I will take the rest offline.

All right. Thanks, Jeff.

Our next question comes from Sharon Zackfia, William Blair. Please proceed with your question.

Hi. This is Sharon. Can you hear me?

Yes.

Great. I guess, my first question is going to be on SG&A, obviously, as you’ve been investing more in a business, we have seen that kind of growing at kind of higher cadence year-over-year recently, I think, kind of in the mid single-digit range for last three quarters. Is that good kind of year-over-year dollar amount to kind of think about going forward on a steady state business position or is that accelerating now that you will be accelerating unit [sales] [ph] again?

So we -- during the last several quarters we had a few quarters of raw dollar decreases in SG&A and so fourth quarter in particular we had said that that was not expected to continue because of the combination of the new system expenses of going live with the new order management website systems, another round of minimum wage increases in store payroll and as you transition into Q1 for fiscal ‘18 on top of those two things, I mentioned, you still have an additional full quarter’s impact of store payroll increases, any merit increases here in the corporate office starting in new fiscal year. So there are some additive things that will come into SG&A. Overall, though, because of the other structural changes that we’ve made over the last two years, you’re still looking at a low single-digit comp like a 1% to 2% comp before we could start generating leverage on SG&A expenses and that’s what we would expect to remain true as we go through the year. It used to be, I think, a few years back the company would say, it took a three to four comp to begin leveraging SG&A that’s really no longer true, it really only takes about one to two comp to get leverage out of SG&A going forward.

Okay. And then on the comment on the quarter to-date, I think, I remember last year February was a really challenging month for you and I appreciate what is going on with e-comm, but I guess, I would have thought you’d be in a stronger position quarter to-date, I don’t know, if you already kind of adjusting for some of that cadence, what’s going to happen, I know the comparisons get a lot tougher as this quarter goes on, but [indiscernible] kind of some clarity, are you actually running [most of them] [ph] because again I think the comparisons get much more challenging as we get into April?

Yes. You’re spot on, Sharon, February was a very difficult month for us comp wise last year and Ed and I would agree with you. We actually expected to come out of February stronger than we actually did, but we are up low-single digits as we sit here. But and you’re right that going to the March, April time period those were tougher compares last year that we have going against us and so as you think about the guidance range we’ve allowed for that potential decrease that allows for that range of flat to up low-single digits for this quarter. We still everything that we see in the underlying trends of our assortment seems to point to us having a decent spring season, and of course, Easter’s moved around this year and shift some volume forward and what have you, but that’s what led to our ranges, we pitched it, knowing that we do have those tougher compares coming up and did exit February softer than we would have liked.

Okay. And last question on private label, I mean, Ed, can you give us your thoughts on kind of where private label exist at Tilly’s longer term and if you see any kind of shift towards more branded over time as we execute [indiscernible] quarter just kind of a anomaly rather than some sort of new paradigm?

Sure. The -- we average about 30% of our mix is private label and that hasn’t really changed for several years. I don’t expect that to materially change at all either up or down. And right now what we’re saying is we’re in a stronger branded cycle then not and usually when you’re in a strong branded cycle, it did some sacrifice on the private label, but there is nothing that’s fundamentally change that what cause me to want to change the way we have been operating in terms of percentage of mix and as a matter of fact we introduced a couple new brands in the women’s side minor right now in the fourth quarter of last year. So I wouldn’t expect anything materially to change related to that strategically, okay.

Okay. Great. Thank you.

Our next question comes from Janet Kloppenburg, JJK Research. Please proceed with your question.

Hi, Ed. Can you hear me?

Yes. Hi, Janet.

Okay. [Inaudible]

Hi, Janet.

Just kind of…

That’s okay.

Just kind of got a lot of volume.

Hi, Janet.

I was wondering if you could talk a little bit about the timing around improvement, when the glitch on the operational side and the PPC business channel will be resolved. And also what the outlook there is for improved digital -- for higher digital marketing enabling you to perhaps grow that business in line with what the industry is experiencing? And I also was wondering on the women’s side, if you just think about forward, we seek better plan going forward, are you encouraged that that comp could actually accelerate as you feed into the trends that you talked about most notably in bottoms or are you just happy with it that has turned positive? Thank you.

Okay. So starting with e-comm, again, we went live with the new system, at the beginning of…

Early November.

… very early November and we saw positive results the first few weeks and then we’ve started to see -- we saw the glitches as it related to omnichannel and inventory management in the beginning of December during a high volume period. So the timing of -- we’ve identified what we believe are most of the problems, some of which have been fixed and there’s still some remaining ones in the omnichannel capabilities are expected to be turned back on at the beginning, sometime early in the second quarter. And it take us a little while, but it should be -- we should be in a really good position going into back-to-school with all channels. So that’s kind of…

That’s great.

That’s kind of where we are. And we think we have significant opportunity putting aside these problems to grow the e-comm because going forward, so anyway. Related to the women’s side, the true test is really always as we get into back-to-school and so we are encouraged by what we’ve seen in market and I would expect it to get better again as we progress into the higher volume months and we’re starting to see slight improvement now.

And the men’s business continues to be solid?

Yes.

Okay. All right. Good. Thank you, guys. Good luck.

All right. Thanks Janet.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Ed Thomas for closing remarks.

Thank you again for joining us today. We look forward to discussing our first quarter results with you in late May. Have a good evening.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.