We're excited to welcome you here to a Fireside Chat with Tilly's. I'm Oliver Chen. I'm the Managing Director, Senior Analyst at TD Cowen, covering retail, new platforms, and luxury. We're excited to moderate this Fireside Chat with Ed Thomas, President and CEO, and a really iconic leader in the sector, and Mike Henry, CFO of Tilly's. Thanks, Ed and Mike. So we'll kick it off here. For investors newer to the story, and a lot of people here have been to the store as well, could you provide a rapid-fire intro to the business, and what are some of your core competencies?
Sure. We've been around for 40-some-odd years now. We started in Southern California. We are an apparel retailer that caters to young adults and teens, primarily. We have 251 stores in 33 states, and our merchandise mix is all about brands. We carry a lot of different iconic brands, like surf and skate brands. We carry Nike and Reebok and some of the more prevalent shoe brands. We have ample room for growth, and we're excited about that going forward.
Ed, what percentage of your stores are off-mall versus on? And also, what percentage mix is online, you know, versus physical?
Okay. Roughly about half of our stores are off-mall, and actually the concept was started off-mall many years ago in Southern California. And then we emerged into a growth, into malls. So now it's, it's probably about 50/50. Is that right?
It's about a 60/40 split.
Sixty/forty?
Mall, mall. Mm-hmm.
Um-
E-com's a little over 20%. 20%.
Yeah. We're pretty experienced at dealing with off-mall locations because we've done it for so many years.
Mm-hmm.
What's going on with the consumer? What are you seeing? We're seeing a pressured consumer, a choiceful consumer, a mixed consumer, and lots of volatility. What are you seeing? How did Black Friday go, and what are your thoughts?
We certainly saw lots of peaks and troughs through the holiday season, along the lines of what you've mentioned. We've heard from others. The very early part of November was really tough. We were down in the teens on a comp basis, and then over Black Friday weekend, where the events are, the deals are there, we had a positive comp over that five-day period through that weekend into Cyber Monday. Then things really fell off again, back into the negative teens, all the way up until right before Christmas, and then that very last Saturday was explosive for us. That one day was up 66%.
Mm.
you just think about the volatility in that,
Yeah
... and how we predict that in any way. It's, it's really been remarkable just how big the swings have been in between the big events. When the events are there, they come out. They seem to respond to our assortment, and then in between, it really slows down.
Yeah, Ed, you've seen many cycles. What's happening now? Is the past like the current?
I don't think what we're seeing now is... We've seen it before.
Yeah.
How long it lasts is always the question mark, but I think the environment overall is okay.
Yeah.
I don't think it's that bad. I think part of the challenge is for those retailers that have fresh, new, compelling, merchandise, are doing better than those that are not. And so I think it's all about merchandise newness and freshness in your inventory mix that will drive the business more than any kind of promotions or, any other traffic-driving methods that you use.
What about promotions and margins? I mean, you have a big opportunity to expand margins. What's happening in the promotional environment, and where do you see margins going?
Our product margins are at all-time lows for us. You know, we've had to fight our way through, getting rid of unproductive inventory. You know, we've negative comp for two years in a row. So we've had to pretty much constantly work through that to get our inventory position clean.
Yeah.
We feel good about that ending this fourth quarter and heading into next year. So, you know, there's ample opportunity for us to improve product margins by a couple hundred basis points.
Yeah.
We're that far off of what our usual average was before... You know, for a long time, our product margins were remarkably consistent-
Yeah
... from year to year, before the pandemic hit.
Mm-hmm. And what's the general recipe for improving top line, Ed, and what are you seeing with merchandise that's potentially interrelated with trends that you're seeing?
Driving top line is a combination of factors, but I again, I'll go back to having new, fresh, compelling merchandise as part of the merchandise mix. I think we had some challenges in the fourth quarter, where we didn't have enough newness in our merchandise mix. And we also... Women's fashion tops were really good, but we didn't have enough, and so I think we were hurt as a result of that. We use multiple different things to drive in-store traffic that are not promotion-driven. And one of the things we do really well is we have in-store events that might be a Saturday afternoon for a few hours, and it's a pizza party with a lot of interaction with the customer.
We've been really successful with that, but we had to stop doing them during the pandemic, and now we're going to start bringing them back, going forward. So those are. And we also have a pretty significant loyalty program that we've built, where we direct market to the loyalty members, who are our best customers, and number of things we do with them, like early introduction of new merchandise, sometimes a special offer. But they are clearly our best customers, and we have a lot of room for improvement in how we deal with that, too.
What parts of the assortment have performed the best, and which ones have opportunity for improvement?
I would say shoes has probably been the most consistent positive performer for us, and it's multiple brands. Vans was actually our, one of our top brands for a long time, and then they started to tail off well over a year ago. And we've replaced that business, not 100%, but we replaced it with some newer brands that, for us, like Reebok, New Balance, and Nike has always been good with us, so good for us. So, that's driving a lot of... I would say it's the most consistent performing category for us.
Okay, and as we... Mike, what do you think about your capitalization and your CapEx? What's on your mind in terms of managing those fundamentals?
It's gonna stay pretty tight this coming year. It won't exceed $15 million overall. We'll have four or five new store openings. We are in the process of upgrading our warehouse management system and distribution, allocation system, so continuing to reinvest in company infrastructure, as we go. But keeping CapEx very controlled for the time being, given, as I mentioned earlier, we have negative comp for two years in a row. So until we get the core of our business moving back in the right direction, we're gonna keep CapEx pretty contained to pretty much the must-dos.
Mm-hmm. Where is your sales productivity now, versus where it's been, and where can it go?
We are at an all-time low in terms of store productivity, about $270 per sq ft. We were north of $300 before the pandemic hit, and in earlier years, back when the company went public about 2012, we were around $350-
Mm-hmm
... off the top of my head. So, there's certainly ample room for us to get that turned around. We've done it before. We should be able to get back to those kinds of levels again, above 300.
Mm-hmm.
The profit will fall to the bottom line very quickly.
Yeah.
I mean, we have a pretty steady expense structure, actually. So, we get comps turned around, product margin opportunity, the expense base will stay fairly fixed.
Yeah.
Not entirely, of course, but we should see significant upside as soon as we get the business turned around.
Yeah, Ed, what are you most excited about in terms of the opportunity for better sales productivity? What do you think is the recipe for success there?
Well, I think sometimes when your sales decline, it's hard to identify what the problem is. And we've identified a number of opportunities which are easy fixes and should enable us to get our sales back on track pretty fast. And I think that's the most... I think we have new leadership in merchandising with a very seasoned team. Excuse me. And I think the new leadership is focused on bringing in some new brands that we don't carry and also editing brands that we... our existing brands. The other thing is, our private label brands is 30% of our business, roughly.
We have opportunity to further differentiate ourselves from others by investing more in product development, and that's one of the big things that we're going to do this year, is invest more. I would still expect we'll be a house of brands, so we'll still have several brands as part of our mix. But certainly, product development is an opportunity for us to have more exclusivity to our merchandise mix and differentiate ourselves.
What should we know about the timing impact of new merchandising leadership? And also, Mike, as we model inventory growth rates, how do you see that evolving?
I'll answer the first.
Mm-hmm.
New merchandise leadership has been on board since May, so we're expecting to see progress in spring. She got in. It was too late for her to really materially affect, impact holiday, by the time she got in, but certainly, we should see some of her early impact in spring, for sure.
In terms of inventory management, it's just a constant discipline for us, so we always aim to keep it as tight to reality as we possibly can. We're planning to be successful for fiscal 2024. If for some reason things don't pan out the way that we're planning, we'll immediately adjust, and we've proven time and time again our ability to do that. So that'll remain a very strict discipline for us to make sure we don't let inventory get out of hand at any point in time.
Ed, you spoke about product development as well as editing brands. Can you give us a flavor for what you think is the opportunity in those comments you made?
Well, I think that the opportunity. We're always looking to bring in new brands, and some of them might be really small, some of them could be bigger. And our customer expects us to have a pretty broad assortment of merchandise, both in men's and women's, with different, different brands. And so the brands that we would edit out are brands that just aren't performing. They haven't performed for the last few years, not just a short-term thing. And we have really great relationships with our brand partners, and so we continue to work with them to develop some exclusivities, with them in terms of what they do for us, and we'll continue to do that going forward.
What do you think about the future of the mall? Like, what are you seeing now? What excites you most about experiential retail and the composition of what you have with A, B, C locations as well?
Well, the mall environment has changed quite a bit. But it's still okay. And the way the shopping patterns have changed, it's not like, especially for young adults and teens, there might be decent traffic to the mall, but historically, especially the teenage customer, they would shop the mall and visit almost every store in the mall on each visit. That's changed quite a bit now, where they go to the mall with the, I call it the grocery list, and they'll shop specific retailers because they had done a lot of research online. And we're all doing the same thing as marketing aggressively online, so you can get a preview of the merchandise before you actually physically go to the mall. So I think the malls, you know, there's always a challenge.
We've been through these cycles in the past, where you have a bunch of retailers that went out of business, and who's really gonna take the space? We've seen a lot of reinvention of some of the malls with development of real estate, with condos being built on the mall property and different types of community service, services like healthcare. You see an increase in the amount of tenants that are going after space for those type of services. So... And off-mall really hasn't changed that much. It's very competitive for off-mall because probably more so now than ever for real estate, because a lot of traditional retailers that haven't gone off-mall are trying to go off-mall, at least partially.
But there are some really good, great off-mall locations throughout the whole country, which we're excited about.
Artificial intelligence is a big opportunity in our opinion at TD Cowen. We see it impacting merchandising, labor, and inventory, and safety stock, as well as magic and logic. What is your vision for how AI may or may not be helpful to the future of retail?
I think the single biggest opportunity for AI for retail is relates to merchandise planning and allocation. Using any kind of predictive technology that will do that and can read your customer data, and interpret it properly, I'm excited about the opportunity. We're still in the really early stages of it, and we use AI in a very, very small way in e-com, but we're not using it for our core business, and that's where we're trying to learn a little bit more about it, and we will use it going forward, particularly in the areas I talked about, merchandise planning and allocation.
As you think about the channels and the connected channels between digital and physical, where do you see opportunities for improved inventory management, or what's on your mind?
I think one of the hardest things to do is what we call channel planning, is deciding how much inventory goes down into e-com versus stores, and it's really complicated. We spend a lot of time on it. We're getting better at it. It's really hard. Today, it's really hard to forecast anything related to your business, whether it's doesn't matter what channel it is, the whole total company. So that makes inventory management even more challenging, and we try to take a pretty conservative approach. We've chased. We call it chase goods. We'll chase goods once in a while in certain categories where we can do it.
It's been harder to do that the last few years, since the pandemic, because a lot of the brands and the vendors, they're not carrying the inventory that they historically have to be able to do that. But it's getting better, and we're excited about that.
Before we open it up to the audience for questions, last question from me. What are factors that are least well understood about Tilly's? What should investors know about that they don't?
I think probably the single biggest factor, the thing that people don't know about us that haven't been in our stores, is a lot of people put us in the action sports category, surf, skate. We're much more than surf skate. We're a much broader assortment. Our age demographic that shops in our store is we carry, in a lot of stores, we carry kids' merchandise, in, I think, 200 stores now. And we've done that for a long time, and then we go up in age. So it's a very wide age demographic, and the brands we carry are anything from Free People, on the more fashionable side, to a traditional, surf skate brand like Volcom.
I think you really can't get the feeling. You can look at it online, but when you go into the store, you'll see how broad the assortment is, and I think you get a better understanding of what we're all about.
Are there questions from the audience? Right up front.
So to dovetail on that question, have you seen a difference in your consumer by age? Older if their behavior is different in terms of sales, results, and/or segmented by interest, whether it be surf, skate, or some other?
I'll repeat the question: segment by age and/or interests in terms of consumer differences.
The biggest change we saw, and it's not a big category for us, was the younger customer. Skate really took off during the pandemic. We really started carrying, we just started carrying, or carrying again after many years, skateboards and more skate-related product. We saw it start to slow down as the pandemic tailed off. I would say that from an age perspective, that's the only thing. You know, I've been doing the teenage, I've been in the teenage business most of my career, and the one thing that never changes with teens is change. And, ...
You know, it's a very volatile customer, and that remains. I think. Today, the way you market to teens is mostly through social media, like TikTok and some of the other social media channels. That's changed probably more than anything else. But, it's still about frequent change.
What's the hottest younger customer item?
Right now, it's Adidas.
Adidas.
Somewhat.
What items have the most shrink? That's the most-
Oh
... popular item?
Yeah, so that's my favorite subject. We know what the hot brands are by who steals it. And
Just give the three hottest, like-
So right now, like, lately, it's always about Nike. So that's an easy product to flip, and it's popular. So, I'd say The North Face is probably, it's very targeted on grab-and-runs in the stores. And, you know, it varies, but it's pretty consistent, and they, and we see it geographically. Mike and I were talking about this earlier. We, we've never seen so much, so many grab-and-runs ever as we've seen in the past year.
Mm.
And the biggest thing I worry about more than anything else is the employee safety. Because these people—it's just, you know, they run into the store, they take the merchandise, and they run out. And even with a security guard there, they'll run over the security guard. So we're very, very, very careful in how we deal with it and focused very much on safety.
We had a question in the back as well. Go ahead. Traffic. So the question is, timing and traffic to the stores and timing and impact.
Timing of bringing back the events will be towards the end of the first quarter. And the type of events we'll do to start out with is, it might be co-branded with, let's say, Adidas or Nike or one of our apparel brands. We don't, it's, it's really simple stuff, but it's fun. And we provide food for a couple of hours. We have spin the wheel. We have a chance to win a gift card or a prize or whatever. We have bean bag tosses. It's amazing how many parents like to play the bean bag toss. And we try to keep it interactive. We have, in the past, used virtual reality in some of the store events. We'll bring that back probably in the back half of this year.
It could. And it's just fun stuff and keeping it interactive.
Other questions? One up front, and the, what's your question? Okay, and what's the other question? We'll just do rapid fire. We have one minute left. Okay, Nike, Vans.
I'll answer the Vans question. I'm not sure I heard the Nike question, so...
What about newness at Nike? Nike said they don't have enough newness. That was the Nike-
Well, I just, about six weeks ago, I spent an entire day in Portland at their headquarters, going through their product. And I think we were pretty excited about what we saw. So there was definitely newness in the merchandise mix, and we saw a repeat, a follow-up to that two weeks ago, and so I'm excited about what I saw, and I think it's gonna be good. Vans is too early. There's a lot of work to do there, and we have not seen their new strategy at Vans. We've got bits and pieces of it, but we haven't seen enough to really have a conclusion on it.
Well, Ed and Mike, thanks. Ed, clearly, you're iconically involved with product merchandising, innovation, and a lot of-