Why did Tilly’s Inc (NYSE:TLYS) jump 7.9% in the All Investable Screener?
Earlier this week, Tilly’s announced its first quarter 2016 results.
“Our first quarter results were at the better end of our outlook range before taking a legal provision into account, and we managed inventory well with a 7% decrease on a per square foot basis,” stated Ed Thomas, President and Chief Executive Officer. “Looking ahead, we expect to launch some important initiatives during the second quarter that we believe will improve the business for the long term, despite the current challenges affecting retail in general.”
Here are the main points compared to the previous corresponding period in 2015:
- Total net sales were $120.2 million, flat to last year
- Comparable store sales, which include e-commerce sales, decreased 4.1%
- Gross profit was $32.6 million, a 9.6% decrease from $36.1 million last year. Gross margin, or gross profit as a percentage of net sales, was 27.1% compared to 30.0% last year. This 290 basis point decrease in gross margin was attributable to three factors: 1) occupancy costs deleveraged 170 basis points due to the negative sales comp and adding 11 net new stores year over year; 2) product margins remained strong but declined 90 basis points as a result of increased markdowns; and 3) distribution costs deleveraged 30 basis points on the negative sales comp, primarily due to increased shipping costs associated with the growth of e-commerce
- Selling, general and administrative expenses (“SG&A”) were $36.6 million, up $2.7 million from $33.9 million last year. Of this increase, $2.4 million was attributable to the combination of a legal provision and non-cash store asset impairment charges. Excluding these items, SG&A increased less than $0.3 million, primarily due to increased store payroll dollars associated with 11 net new stores and minimum wage increases, which offset expense reductions in other areas
- Operating loss was $4.0 million, or 3.3% of net sales, compared to operating income of $2.1 million, or 1.8% of net sales, last year. The 510 basis point decrease in operating results was primarily attributable to lower gross profit and increased SG&A as noted above
- Income tax benefit was $1.1 million, or 29.5% of pre-tax loss, compared to income tax expense of $0.9 million, or 40.0% of pre-tax income, last year. This tax rate change was attributable to a $0.4 million discrete income tax impact related to restricted stock vesting during the first quarter of fiscal 2016
- Net loss was $2.7 million, or $0.10 per share, compared to net income of $1.3 million, or $0.05 per share, last year. On a non-GAAP basis, excluding a tax-effected $1.0 million legal provision, net loss was $1.7 million, or $0.06 per share
Balance Sheet and Liquidity
As of April 30, 2016, the Company had $88 million of cash and marketable securities, and no debt outstanding under its revolving credit facility compared to $79 million of cash and marketable securities and no debt, respectively, as of May 2, 2015.
The Company expects second quarter comparable store sales to be in the range of flat to -4%, operating results to be in the range from break-even to a net loss of $3 million, and earnings per share results to be in the range from break-even to a loss of $(0.06). This assumes an anticipated effective tax rate of approximately 40% and weighted average diluted shares of 28.5 million.
Now, here’s what I really like about Tilly’s. Having read through the Earnings Call Transcript for Q1 2016 Results at Seeking Alpha, three points stuck out for me:
Enhanced Loyalty Program & Mobile App
“We are also on schedule to launch an improved and rebranded customer loyalty program during the second quarter. This new program offers more frequent and compelling benefits to our most loyal customers and will be integrated with our mobile app. We are excited about the potential these new initiatives have for improving customer engagement satisfaction in our overall sales results.”
Combatting the ‘Amazon Effect’
“In terms of the Amazon effect, a lot of our brands do not sell directly online, and it doesn’t mean it wouldn’t happen someday. We are hoping it doesn’t, but certainly, even with Amazon, and a lot of our brands have their own web sites too. I think e-comm business is very healthy, and we see it continue to grow, despite the Amazon effect, and other competitive factors that we are dealing with, with online only retailers.”
Unique & Diversified Offering
“The other thing I think I’d point out is that we have such a broad and diverse assortment with — we have sales from over 600 different brands last year, for example; some of those are tests, not all are store buys, and some of them are very limited distribution, so they are not ready to be in Amazon just yet. Those are some of the things that we have coming in and out of our assortment all the time, that helps make our assortment unique and diversified from what you might perceive from others.”
I know that a lot of investors want to stay clear of bricks and mortar retail businesses but, Tilly’s does seem to have a firm grasp on what it takes to be a bricks and mortar retailer with a strong e-commerce component. Highlighted by its sales channels that include Buy Online, Pickup at Store, Ship To Store, Ship From Store, these are all important initiatives, but particularly, if you allow the consumer to know that that product is in their nearby store too.
For me, Tilly’s represents great value. It currently has a market cap of $178 million but, its pristine balance sheet and improved inventory management means it has an excess of cash over debt of $99 million. With operating earnings of $18 million, it has an Acquirer’s Multiple of 4.33. The company trades on a P/E of 21 and has a FCF/EV yield of 18%.
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