Greetings, and Welcome to the Tilly's, Inc. First Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gar Jackson, Investor Relations. Thank you, Gar. You may begin.
Good afternoon, and welcome to the Tilly's Fiscal 2022 First 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 this 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, June 2nd, 2022, and actual results may differ materially from current expectations based on various 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 2022 first quarter earnings release, which is furnished to the SEC today on Form 8-K, as well as our 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. Our fiscal 2022 first quarter operating results were in line with our outlook range for the quarter. Last year was an amazing year, fueled by the unprecedented pent-up consumer demand exiting 2020 pandemic restrictions and the impact of federal stimulus payments. As we lap those record-setting numbers amid a highly inflationary environment this year, we expect our fiscal 2022 operating results will be significantly below last year for each quarter. However, relative to our pre-pandemic performance in fiscal 2019, we delivered comparable net sales growth with consistent product margins, improved gross margin as a result of lower occupancy costs, and higher operating income in the first quarter, despite significant cost increases that have occurred since then in wages, freight, fuel, and insurance.
Despite the challenges in the current environment, we continue planning for growth and further improvement in our business over time. We continue to believe we have ample opportunity to grow our business, both in terms of store count and via e-commerce, and are investing to position ourselves for that growth. Near the end of the first quarter, we completed an upgrade of our website platform to a more mobile, responsive version of our existing platform with improved customer experience features such as overall site speed, express checkout for returning customers, the ability to save items in your shopping cart, and options to receive push notifications. We are also in the process of upgrading our mobile app to allow for biometric sign-ins, loyalty card scanning, native search, and faster checkout. We are also evaluating potential distribution investments to improve efficiencies and help support our planned future store growth.
Regarding new stores, we currently have 9 leases signed for opening in fiscal 2022, with 2 stores planned to open in June, 4 in August, 2 in October, and 1 in early November. We now expect total new store openings for fiscal 2022 to be in the range of 9 to 12 total stores. As we've said in the past, we only intend to open new stores that reflect what we believe to be appropriate lease economics relative to the environment we expect. Store traffic is down relative to 2019, so lease economics for potential new stores need to reflect that reality. We closed 1 store in early May as a result of a landlord's plan to significantly increase rent.
There may be a small number of additional store closures as we work through our lease renewals, although none are currently planned. We continue to believe that we have ample opportunities to grow our store count over the next several years, despite current challenges with rising construction costs and inflation generally. Turning to the second quarter of fiscal 2022, our customers continue to suffer from high inflation and energy costs. Total comparable net sales through May 30th declined 17.0% versus the comparable period of last year as we continue to lap last year's pent-up demand and stimulus impacts.
Through May 30th, relative to the comparable period of fiscal 2019, total net sales increased by 13.9%, with a comparable net sales increase of 8.6%, with comp growth from both stores and online. We believe it is going to be a challenging year relative to last year's incredible record-setting results. However, we also believe that in absence of a significant slowdown in consumer spending or unforeseen pandemic impacts, we have an opportunity to produce operating results that are consistent with or better than our pre-pandemic performance in the back half of fiscal 2019, despite the significant cost increases that have taken place since then. I will now turn the call over to Mike to discuss our first quarter operating results and second quarter outlook in more detail. Mike?
Thanks, Ed. In addition to discussing our fiscal 2022 first quarter operating performance compared to last year's first quarter, I'm also going to intersperse a few data points relative to the pre-pandemic first quarter of fiscal 2019 for added perspective. Last year was incredible, but it was fueled by unprecedented factors that were historic anomalies, as Ed noted earlier. We believe that referring to pre-pandemic fiscal 2019 for additional context provides important perspective on our current operations and certain improvements we have made over time. Total net sales were $145.8 million, a decrease of $17.4 million or 10.7% compared to a company first quarter record of $163.2 million last year due to going up against last year's pent-up demand and stimulus impacts.
Total comparable net sales, including both physical stores and e-commerce, decreased by 13%. Total net sales from physical stores were $117.5 million, a decrease of $10.2 million or 8% compared to $127.7 million last year, with a comparable store net sales decrease of 10.8%. Net sales from physical stores represented 80.6% of our total net sales this year compared to 78.3% of total net sales last year. E-commerce net sales were $28.3 million, a decrease of $7.2 million or 20.3% compared to $35.5 million last year. E-com net sales represented 19.4% of total net sales compared to 21.7% of total net sales last year.
We ended the first quarter with 241 total stores, a net increase of 3 stores since the end of last year's first quarter. Compared to the pre-pandemic first quarter of fiscal 2019, total net sales increased by 11.9% with a comparable net sales increase of 5.8%, comprised of a slight decline from physical stores of 0.7% and an increase from e-commerce of 42.3%, reflecting the general shift in consumer behavior towards online shopping over the past 3 years. Gross profit, including buying, distribution, and occupancy expenses, was $43.8 million or 30.1% of net sales, compared to $54.8 million or 33.6% of net sales last year.
Buying, distribution, and occupancy costs deleveraged by 190 basis points collectively, despite decreasing by $1 million in total due to carrying these costs against a lower level of net sales this year compared to last year. Product margins declined by 160 basis points, primarily due to a more normalized markdown rate compared to last year when full price selling was at record levels. Compared to the pre-pandemic first quarter of fiscal 2019, gross margin was 270 basis points better than in 2019, with lower occupancy costs and 10 basis points of improvement in product margins. Total SG&A expenses were $42.7 million or 29.3% of net sales, compared to $40 million or 24.5% of net sales last year.
Of the $2.7 million increase in SG&A, $2 million was attributable to increased store payroll and related benefits, resulting primarily from wage inflation. Our average rate per store payroll hour increased by 6.5% over last year's first quarter. $1.6 million of the SG&A increase was attributable to a credit from the reversal of a disputed California sales tax assessment in last year's first quarter. Partially offsetting these increases was a reduction in corporate bonus expense of $1.6 million due to the lack of any bonus accrual this year. SG&A was $7.2 million higher than in the pre-pandemic first quarter of fiscal 2019 due to wage inflation, e-com related marketing and fulfillment costs associated with online sales growth, and increased insurance premiums.
Operating income was $1.1 million or 0.8% of net sales, compared to $14.9 million or 9.1% of net sales last year. Operating income was $146,000 in the pre-pandemic first quarter of fiscal 2019. Income tax expense was $0.3 million or 26.9% of pre-tax income, compared to $3.8 million or 25.7% of pre-tax income last year. Net income was $0.8 million or $0.03 per diluted share, compared to a company first quarter record of $11 million or $0.36 per diluted share last year. Weighted average shares were 31 million this year compared to 30.5 million last year.
Net income was $0.7 million or $0.02 per diluted share in the pre-pandemic first quarter of 2019. Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $111 million and no debt outstanding. This compared to $157.6 million at the end of the first quarter last year. Since the end of last year's first quarter, we have paid aggregate special cash dividends to stockholders of $61.6 million. During the first quarter, we also repurchased 892,000 shares of our common stock for a total of $8.2 million. We ended the first quarter with inventories per sq ft up 12.7% relative to last year, due in part to continuing supply chain challenges.
Recall that we ended last year's first quarter with reduced inventories due to the unexpected net sales growth during that period. The inventory increases are primarily in basic key items within men's and women's apparel and footwear rather than in riskier fashion or seasonal items. We have been adjusting as we read business results, including canceling late seasonal goods and reflowing key replenishment items. Our intention is to get overall inventory levels more consistent with our sales performance by the end of the third quarter without sacrificing product margins beyond what would be expected when comparing to last year's higher overall level of full price selling. Total capital expenditures for the first quarter were $2.6 million compared to $5.5 million last year, the decrease being primarily due to earlier new store openings last year.
For fiscal 2022 as a whole, we currently expect our total capital expenditures to be in the range of $23 million-$25 million. Turning to the second quarter of fiscal 2022, Ed shared our quarter to date sales performance earlier. We expect the comparable net sales relationship to last year to improve to some extent, given that May was the strongest month of the quarter in terms of percentage increase in net sales last year. However, the relationship to fiscal 2019 slowed from week to week through May. As a result, based on current and historical trends, we currently expect our total net sales to be in the range of $170 million-$175 million.
We expect our product margins to decline by approximately 200-250 basis points relative to last year, due primarily to going up against record levels of full price selling last year. We expect a combination of buying, distribution and occupancy costs to deleverage by approximately 270-320 basis points, primarily due to carrying these costs against a lower level of net sales, and SG&A to be approximately $47 million-$48 million. We expect operating income to be in the range of approximately $6 million-$8.5 million. Our estimated income tax rate to be approximately 27% and earnings per diluted share to be in the range of $0.14-$0.20, with weighted average diluted shares of approximately 30.2 million.
This compares to record net sales of $202 million and record earnings per diluted share of $0.66 for the second quarter last year, which doubled the previous company record for second quarter earnings per share. We expect to have 242 total stores open at the end of the second quarter, which is a decrease of 2 from 244 total stores at the end of last year's second quarter. Operator, we'll now go to our Q&A session.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from Jeff Van Sinderen with B. Riley Securities. Please proceed with your question.
Hi, everyone. Wonder if we could just start on some of the, I guess, sort of inflationary pressures that you think are impacting your customer, obviously higher fuel prices. What are you seeing? I know you said traffic is down versus 2019. What are you seeing in store traffic trends lately? And does the UPT and ADS indicate that customers are buying more in fewer store visits versus a few months ago? I guess, how are you looking at that data when you kinda shift out or shake out the KPIs there?
Yeah, Jeff. Relative to last year, traffic was actually up in the first quarter, but it has slipped negative in May. Our total traffic was up 6% in Q1. It's down 5.5% so far in May. That's been a little bit of a flip there. The average sale has been higher. The aggregate number of transactions has been lower. Those are the metrics we're seeing in the short run. You know, sitting here in California where you are as well, you know, gas is $6 and more all over the place. That's gotta hurt the pocketbook of our young customer, right? I mean, more of their pocketbook is going to fill the fuel tank and higher food prices and all those things.
It's gotta hurt.
Sure. Absolutely. Just wondering about pricing. I guess maybe you can just touch a little bit more on what you're seeing in terms of what the brands are doing with raising prices for you. Maybe touch on private label. I don't know, any advantages to private label or your manufacturers or your sources raising prices for you. I guess how are you thinking about passing along price increases? I know that's hard 'cause you're also comparing to almost no promotional activity last year, but maybe if we look at it versus 2019, and I guess how you're thinking about promotional activity as we kinda get into Q3.
I know you said you wanna get inventory down, so how much of that is inventory receipts and how much of that is maybe incremental promotional activity?
The price increases, Jeff, are coming from both branded and private label merchandise.
I would say there's no greater than 5% across the board. You know, we're adjusting pricing as we feel the need to, maintaining our margins.
I think the bigger challenge for everybody has been just inconsistency of the supply chain delivery.
As Mike mentioned in his comments, we've taken action, you know, by canceling some orders and adjusting accordingly. Our inventory being up 12.7%, compared to what we've seen a lot of other retailers report with much higher numbers, we think we're in pretty good shape. It will not require us to do any kind of crazy promotional activity to get the inventory levels in line with sales, as Mike talked about by the end of the quarter. I'm not expecting anything unusual in terms of promotional pricing either way. I don't think promotions are driving traffic for most retailers anyway. I think it's more the challenge of inflation, the cost of gas.
I think it's those factors that are impacting the customers' thinking in terms of whether they're gonna buy another T-shirt or not.
Yeah. Then just to your question on product margins. You know, in the first quarter, our product margins were 10 basis points better than 2019. In the second quarter last year, that was our highest product margin quarter of the year. The third quarter was only 10 basis points beneath that. We're gonna be going up against our peak product margins of last year in the second quarter and in the third quarter, so that's why we think there's gonna be a little bit more deceleration in the margin rate relative to last year than what we saw in the first quarter. We're still expecting that our product margins to be fairly consistent with 2019 levels.
At the upper end of our range, I'd say we might be able to be pretty darn close to break even to 2019. On the lower end, we'd probably see a little bit of decline relative to 2019, but not hundreds of basis points. I'm talking 30, 50 basis points maybe, on the lower end relative to 2019. As we look back to pre-pandemic times, I mean, some of the things we're encouraged about is we are seeing comp sales increases, relative to back then.
Consistent product margins, better occupancy structure. The challenge, I think, for all of us in the retail world is the rate of increase that's happened in wages, since then, along with insurance premiums for cyber insurance and property and things of that nature, and then the freight charges and fuel costs.
We're all battling that, and that's taken away the gains we're having in other areas.
Mm-hmm. I mean, I guess I would sort of summarize that by saying that if you adjust for the things that you really can't control, right? I mean, some of those, a bunch of things you just mentioned are really out of your control. You just sort of have to do y ou know, you have to pay what you have to pay people and, you know, insurance costs are what they are. I mean, it strikes me that versus 2019, if you adjust for those other things, the business is really better than it was in 2019 now.
Yes, I would.
That's right. Yeah.
I would agree with that.
You're right. That's very accurate.
Yeah. I would agree with that wholeheartedly. You know, store payroll, for example, that is our biggest dollar increase in SG&A and is going to be all year. We looked at some data points for the first quarter. Our sales per hour are actually higher than they were in 2019 on lower average hours per store than in 2019. The problem is the hourly average rate has gone up 16% since then.
Where we're managing more efficiently and effectively on hours usage, and we're getting better productivity on sales per hour out-of-store payroll, the hourly rate is just eating away at those gains.
Okay. Just one more quick one, and then I'll take the rest offline. I was just curious. I know obviously with disruption in supply chain and some things, you know, getting stuck at the ports or stuck to go on, you know, not even on trucks or in trucks or what have you. Is there merchandise coming in at times that is coming in late that you can then reject or
Yes.
Yes. Yeah. We won't take it if it's that late.
Okay.
If it's not within season, yes, we have. We've done some of that.
Yeah
For sure.
Okay.
We adjust accordingly.
You know, these supply chain delays, they're tough to be able to effectively manage your inventories the way we normally would.
Right? You've followed us for a long time. I don't think there's been a single quarter before the pandemic hit us where our inventory level was above the rate of sales in the entire time that Ed and I have been here together.
It's just made so many things so much more challenging to manage. As we think about the back-to-school season starting towards the end of this quarter, we're trying to make sure that we're in a much better inventory position for footwear, backpacks, and long bottoms to go into that season, better than we were at this time last year. We certainly are not gonna reject those orders because we need them to serve later part of second quarter and on into the third quarter business. At this point, swim, for example, we don't need more of that coming in two months late.
We are making those kinds of adjustments.
Okay. All right, good. Thanks for taking my questions, and best of luck for the rest of the quarter.
Thanks, Jeff.
Thank you. Our next question is from Matt Koranda with ROTH Capital Partners. Please proceed with your question.
Hey, guys. Good afternoon. I think you sort of addressed this in the prior set of questions, but just wanted to put a finer point on it. It sounds like you plan to clear up a fair bit of inventory in the current quarter here. Are you saying that markdown activity in your stores is supposed to revert to sort of similar levels to where you were in 2019?
Yes, yes
How would you compare the general competitive environment, I guess, in terms of markdowns as you observe it, in the broader environment?
We're not seeing any competitive pricing pressure at this point. We're expecting it in certain categories, but like swim and more seasonal goods and shorts. I don't think we're not anticipating having to do anything unusual from what we normally do. You know, the pricing generally, the margins should be decent.
Yeah, anything that we can anticipate is thought about and how we're thinking about our outlook range for the quarter, certainly. We do think that there's likely to be some discounting pressure, and we are gonna have to clear seasonal goods ahead of the back to school season. Everything that we can reasonably anticipate, we've thought about that in terms of how we've pitched our outlook range for the quarter, so we think we'll be all right in that regard.
You got it. Very helpful. It sounds like you aren't really factoring in any further deterioration in traffic or ticket for the remainder of the quarter here, just given what you shared in terms of May to date trends and then the midpoint of the guidance. Maybe if you could just speak to that, in more detail.
Sure. It's really interesting, quite honestly. We have so many different ways of looking at this. Quite honestly, we have scenarios that range, you know, have sales ranges anywhere from the mid-$160 million into the mid-$180 million, honestly. It's just neither end of that range I just mentioned makes sense relative to each other when you're looking at just versus last year versus just versus 2019. We don't think that low end that I mentioned of mid-$160s makes any sense because we reported $161.7 million of sales in the second quarter of 2019, and we are seeing a comp increase relative to 2019 with 12 additional stores. It shouldn't be that low.
We've looked at May as a historical percentage of the second quarter. The last four years, it's averaged 26% of the quarter. That would get you to the low end of our range, that $170 million figure. We do think that we'll continue to run a positive comp relative to 2019, but as we acknowledged in our prepared remarks, the rate relative to 2019, while still positive every week of May, was slowing down with each week as we went through May. The final week of May, for example, was beneath the month to date 8.6% that we mentioned. We have thought about that to factor that in.
We've kind of squeezed in from both ends of the wide range of possibilities that different methods of looking at this might provide, and centered in to what we think is the most reasonable expectation for the quarter, and that's that $170-$175 range.
Okay. Makes a lot of sense. Just, I mean, it seems obvious that inflation has impacted the consumer, but, I mean, maybe if you could put a finer point on behavioral changes that you guys have observed, maybe just in terms of more shift to private label, trade downs, any category shifts that are interesting to call out. Just if you could get a little bit more color there?
We haven't seen any material changes in any one category. The business is pretty consistent across the categories, so nothing that we've seen there. Geographically, we're also seeing the same results pretty much. There's some variation, but we're seeing the same results across the country. We're not seeing anything unusual there. It's like Mike said, you know, traffic has been a challenge, but conversion is probably the biggest area we've seen a change in is conversion, that people are buying a little less. I'd say that's probably the biggest behavioral change that we've seen.
Okay, fair enough. Then just maybe last one from me on margin expectations. I think I got you pretty clearly. Product margins probably are gonna be relatively consistent with 2019 levels. It sounds like, you know, occupancy expense is to the good relative to 2019, just given the renegotiated leases. Where we're gonna feel more pressure would likely be on distribution and buying costs. Are those the kind of buckets that you'd put the pressure in? Just any help on sort of, you know, quantifying that pressure in the next couple of quarters.
Well, in the second quarter, the aggregate of buying, distribution, and occupancy dollars are gonna be fairly consistent to what they were a year ago, a little bit lower. With a lower level of sales, that's where the deleverage is coming from. It's a simple function of basically having a similar occupancy structure on a lower sales base. We're not expecting we're gonna see the same level of decrease in the dollars year-over-year that we did in the first quarter. Naturally, the second quarter level of occupancy cost is higher 'cause occupancy is not just store leases, it's also bags, boxes, hangers, supplies, utilities, a bunch of other things that go into, you know, operating a store.
As you head into the back to school season towards the end of the second quarter, those things spike up in terms of level of cost. The raw dollars are higher in Q2 than they are in Q1. As we look at the second quarter, really looking at a fairly consistent level of dollar spend, in that bucket of costs, it's just gonna go up against a $25 million-$30 million lower sales figure.
Got it. Very clear. I'll turn it over, guys. Thank you.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.
Thank you all for joining us on the call today. We look forward to sharing our second quarter results with you in early September. Have a good evening.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.