Earnings Call: Q1 2022

Jun 3, 2021

Greetings. Welcome to the Tilly's Incorporated First Quarter 2021 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. Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin. Good afternoon, and welcome to the Tilly's fiscal 2021 Q1 earnings call. Ed Thomas, President and CEO and Michael Henry, CFO, will discuss the company's results and then host a Q and 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 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 3, 2021, 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 2021 Q1 earnings release, which is furnished to the SEC today on Form 8 ks as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to 1 hour and will include a Q and A session after our prepared remarks. I will now turn the call over to Ed. Thanks, Gar. Good afternoon, everyone. Thank you for joining us today. Fiscal 2021 is off to a record setting start With our best first quarter net sales and earnings per share since becoming a public company in 2012. This follows ending fiscal 2020 with record quarterly net sales and our most profitable Q4 in the last 8 years. We believe these results are being driven by a compelling merchandise offering And excellent execution by our corporate and store team, as well as several favorable environmental factors, including increased consumer activity generally, the impact of federal stimulus checks on consumer spending, A return to in person learning in many schools, the reopening of public venues. I'm going to discuss our fiscal 2021 performance relative to fiscal 2019's pre pandemic Q1 as a better indicator of how our business performed. We expected our results to be significantly better than last year due to the pandemic related store closures we experienced in the later half of last year's Q1, but we were pleasantly surprised and how strong our business performance was relative to any quarter of the last several years. Both physical stores and ecom produced double digit positive comps in the Q1 compared to fiscal 2019. Store comps were positive in all regions relative to 2019. In terms of merchandising, all departments comped positive In the Q1 compared to fiscal 2019, with women's, men's and girls posting double digit percentage Increases in boys footwear and accessories posting single digit percentage increases. The atypical back to school timing during the Q1 resulted in an aggregate increase in backpack and denim sales of nearly $5,000,000 over 2019 Q1. Hard goods produced $2,000,000 in total net sales During the Q1, still very small as a percentage of our total business, but continuing to grow. Hard goods were in 70 stores at the end of the first quarter and our plan is for them to be in half of our stores by the end of the second quarter. We launched our sustainability program during the Q1, which highlights the work we have been doing with our 3rd party brand to curate a collection of more sustainable products that have a reduced impact on the environment. So far, we have introduced over 700 products on our website from brands like The North Face, Billabong, Levi's, JanSport, Obey, Hydro Flask, EVA and Adidas that contain sustainability features That increased the use of recycled materials or support other positive outcomes. We plan to grow this assortment to more than 1,000 products by the end of the Q3. We are also currently working with our proprietary brand suppliers to encourage The use of recycled materials in certain of our RSQ branded products. As an update on real estate, We continue to believe there are significant opportunities for us to grow our store footprint over time. We have added 2 additional New stores to fiscal 2021 since our last earnings call, bringing the total new store count for the year The 9 from 7. 8 of these stores have already opened. 1 store opened in early March, 1 opened in late April and the remaining six opened in May. The 9 stores scheduled to open in early November. We are encouraged by the early results of these new stores and intend to continue to open a mix of both mall and off mall stores over time, remaining very selective as we do And only with what we believe to be appropriate rent economics relative to the retail environment that continues to produce Negative customer traffic to 2019. Turning to the Q2 of fiscal 20 21, again relative to fiscal 2019 due to the varying periods of pandemic store closures we experienced last year, Total comparable net sales increased 30% through May 31. We have experienced a significant shift in business towards stores and away from e comm over the last several weeks, which has resulted in ecom comp turning negative since April week 2 compared to last year, but still up nearly 85% relative to fiscal 2019. We are encouraged by the strong performance of our business thus for fiscal 2021, and we remain excited about the long term future of Hilli's business and its prospects for continuing profitable growth. I will now turn the call over to Mike to provide details on our Q1 operating performance. Mike? Thanks, Ed. Good afternoon, everyone. Details of our Q1 operating performance compared to last year's first Quarter were as follows. Total net sales were a record $163,200,000 for the 1st quarter, an increase of $85,900,000 or 111% compared to $77,300,000 last year. Total net sales from physical stores were $127,700,000 an increase of $80,700,000 were 172% compared to $47,000,000 last year, primarily due to all stores being closed for the latter half of the quarter last year as a result of the COVID-nineteen pandemic. Net sales from physical stores represented 78.3% of our total net sales for the first quarter compared to 60.8 percent of total net sales last year. E commerce net sales were $35,500,000 an increase of $5,100,000 or 17 percent compared to $30,300,000 last year. Ecomnet sales represented 21.7 percent of total net sales compared to 39.2% of total net sales last year. Compared to last year, econ comps were up 39% in February, up 40% in March, then down 13% in April as a result of the significant shift in business towards stores that Ed just noted. We ended the Q1 with 238 Total stores compared to 239 total stores at the end of the Q1 last year. During the Q1 of fiscal 2021, we opened 2 new stores And permanently closed 2 stores. For additional reference, we're also providing comparable net sales results relative to fiscal 2019 to help clarify how our Q1 business performance compared to pre pandemic levels. In that light, total comparable net sales for the Q1 of fiscal 2021 compared to the Q1 of fiscal 2019 increased 21.9% with comparable net sales from physical stores up 11.7% and e commerce net sales up 80.4%. In the Q1 of fiscal 2019, total net sales from physical stores represented 84.9% Our total Q1 net sales, while net sales from e commerce represented 15.1% of our total Q1 net sales. Gross profit, including buying, distribution and occupancy expenses, was $54,800,000 or 33.6 percent of net sales compared to $1,600,000 or 2.1 percent of net sales last year. Product margins improved by 9 30 basis points, Primarily due to the prior year impact of an estimated inventory reserve of $4,700,000 recorded during last year's Q1 when all stores were closed. Setting aside the prior year reserve impact, product margins improved by 3 30 basis points on a comparable basis, primarily as a result of a lower total markdown rate. Buying, distribution and occupancy costs improved by 2,220 basis points collectively, despite increasing by $1,500,000 in total due to leveraging these costs against a much higher level of net sales this year compared to last year's Store shutdown period. Occupancy costs improved by 1700 basis points as a percentage of net sales and were reduced by 0 point $5,000,000 compared to last year. Distribution expenses improved by 4.50 basis points as a percentage of net sales despite increasing by 1 point Buying costs improved by 70 basis points as a percentage of net sales despite increasing by $500,000 Total SG and A expenses were $40,000,000 or 24.5 percent of net sales compared to $30,000,000 or 38.8 percent of net sales last year. The 1430 basis point improvement in SG and A as a percentage of net sales was primarily due to leveraging the higher level of expenses against a much higher level of net sales as a result of all stores being in operation for the entirety of the Q1 compared to only half of last year's Q1. Of the $10,000,000 increase in SG and A, dollars 6,200,000 was attributable to store payroll and related benefits due to operating all stores for the entirety of this year's Q1. $1,500,000 was attributable to corporate bonus accruals due to exceeding our budgeted targets thus far in fiscal 2021. $1,200,000 was attributable to increased e com marketing costs. Dollars 1,200,000 was attributable to increased corporate payroll and related benefits due to being fully staffed this year compared to significant furloughs during last year's store shutdown period. $800,000 was attributable to increased credit card fees associated with significantly higher net sales and $500,000 was due to increased insurance premiums. These increases were partially offset by a $1,600,000 reversal of a disputed California sales tax assessment originally recorded during the Q3 of fiscal 2020 that we were able to successfully resolve in our favor. Operating income improved to $14,900,000 or 9.1 percent of net sales compared to an operating loss of $28,400,000 or 36.7 percent of net sales last year as a result of the combined impact of the factors just noted. Other expense was $100,000 compared to other income of $400,000 last year, primarily due to earning lower interest rates on our investments And approximately $200,000 in costs associated with our new ABL credit facility. Income tax expense was $3,800,000 25.7 percent of pre tax income compared to an income tax benefit of $10,600,000 or 37.9 percent of pre tax loss last year. Net income improved to $11,000,000 or $0.36 per diluted share, also records for our Q1 for us as a public company, compared to a net loss of $17,400,000 or $0.59 per share last year. Weighted average shares were 30,500,000 this year compared to 29 $7,000,000 last year. Turning to our balance sheet. We ended the Q1 with total cash and marketable securities of $157,600,000 including $800,000 of remaining withheld store lease payments and no debt outstanding. This compared to $111,100,000 at the end of the quarter last year, which included $13,300,000 in withheld store lease payments and $23,700,000 of borrowed cash under our then existing credit facility. We ended the Q1 with inventories per square foot down 2.6% relative to last year, but up 8% relative to fiscal 2019 as we seek Total capital expenditures for the Q1 were $5,500,000 compared to $3,500,000 last year, the increase being primarily due to new store openings this year. Turning to the Q2 of fiscal 2021, as Ed noted earlier, Total comp sales through May 31 increased 30.2% versus the comparable period of fiscal 2019. This result is comprised of a comparable net sales increase from physical stores of 21.1% and an increase in e commerce net sales of 84.6%. Based on current trends and given the varying periods of store closures we experienced during last year's Q2 as a result of the pandemic And assuming stores and ecom are able to remain in operation this year, we would expect our total net sales and earnings per share for the Q2 this year to be improved relative to the 2nd quarters of both fiscal 2020 2019. We expect to have 244 total stores open at the end of the second quarter, which compares to 238 at the end of last year's Q2 and 229 at the end of fiscal 2019 Q2. We believe that drawing specific conclusions from comparative financial performance against last year's results can be misleading given the various impacts of the pandemic, And it is challenging to predict future performance trends with any certainty due to many continuing unknowable factors in the current environment. These factors include, but are not limited to, how the pandemic may continue to impact consumer habits, how the continuation or cessation of federal or State and local stimulus payments may continue to impact consumer spending. How store performance will compare relative to fiscal 2020 2019 over a longer period of time, particularly against last year's strong results upon the initial reopening of stores, which occurred on a staggered basis over several months beginning in mid May last year. How ecom will perform relative to significant increases in ecom net sales we experienced during the varying period of store closures during fiscal 2020, Whether or not we'll have a more typical back to school season this year, which usually begins in late July, and whether any of the Q1 business we did in traditional back to Product categories will represent a pull forward of typical back to school spending or if these 1st quarter sales will be incremental to what we hope will be a more normal back to school season this year. In light of these and other uncertainties, we will not be providing any specific earnings guidance at this time beyond our statement that we expect 2nd quarter results to be improved compared to the 2nd quarters of fiscal 2020 2019. Operator, we'll now go to our Q and A station. Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Matt Veranda with ROTH Capital Partners. Please proceed with your question. Hey guys, thanks and great quarter. Just wanted to talk about margin flow through on the 38% comp that you're seeing quarter to date. Just maybe if you could discuss it Around merchandise margins, I would assume they stay relatively strong relative to Q1. And then maybe just if you could talk about how buying distribution and occupancy costs Kind of moving through the quarter here. Sure. So there's a Couple of odd things as we think about last year. I noted in my prepared remarks, the Q1 impact of the estimated Reserve that we took, the $4,700,000 when all of our stores were closed, and we didn't know yet how long most of them would stay closed, And thought we were going to have to be a heck of a lot more promotional than we ended up being in reality. So during the Q2 last year, Our product margins were up, I think it was 3 60 basis points, which was an unusual favorable movement for us. While usually our Product margins don't move around a whole lot from versus prior year, plus or minus 100 basis points is pretty typical for us. We tend to have pretty stable product margins. The last year was up 3 60 basis points. So, given the level of full price selling that took place Relative to those items we had already reserved in the Q1, there is an unusually high level of product margins in last year's Q2. So I do anticipate that our 2nd quarter product margins will be down, till last year, and could be It remains to be seen what happens the rest of the quarter, but it could be as much as that original 360 unusual swing to the positive. It may or may not happen, depends on how the rest of the quarter goes out. On occupancy, distribution, those kinds of things, We should still see with the level of sales we're seeing, we should still see some leverage on both distribution and occupancy. The dollars will be up to some degree though. Distribution certainly with all stores being open this year versus All stores being closed for the 1st 2 weeks of May and a lot on into June before they reopened last year. We've got a full quarter of distribution operations this year, so those dollars are going to be higher. We have the 8 store openings that have already happened That Ed referenced in his remarks, it will be raw dollar increases in occupancy because of the added stores. And again, because of the operation of all stores all quarter long, occupancy isn't just It's also things like utilities and telephone and security and other things like that that will cause a dollar increase in those items. And then just thinking about SG and A, there will also be a much more substantial dollar increase in SG and A, exact numbers To be seen depending on how sales behave the rest of the quarter, which I can't predict, but it still should be a Larger dollar increase in SG and A than what we saw in Q1. Again, with all stores being in operation, it's a the second quarter is Typically a larger revenue quarter than the Q1, even though this Q1 we just finished was unusually strong. If that pattern holds and Q2 is a larger revenue than Q1, there is going to be an even larger increase in store payroll than we saw. In Q1, there'll be more bonus accruals coming because we are definitely exceeding our budget targets for the year. So those are some of the puts and takes. And Again, the specifics are just impossible to predict with not knowing all the answers to the list of questions that I called out. Thank you. Our next question comes from Jeff Van Serenden with B. Riley. Please proceed with your question. Hi, everyone. And let me just say first, terrific work managing through the worst, we hope Was the worst of the pandemic and congratulations on the great metrics for Q1. Thanks, Jeff. Thank you. I guess my first question just kind of following up On supply chain, is there more color you can give us relevant to what you're seeing in supply chain? I guess, where are the challenges, if any? And what areas are improving? And How are you managing inventory for what is usually the kind of the traditional back to school period Within the confines of kind of whatever supply chain dynamics you're dealing with at this point. Well, the port delays on the West Coast still remain an issue. In the scheme of things, overall Materiality is low compared to what total receipts are expected to be. We don't have much Color in terms of when, the port situation improves, but certainly we're monitoring it. And We did plan on bringing in some inventory for back to school a little earlier than norm To compensate for the potential delays. But I feel pretty good about where our inventory is right now and where it's going to land. Okay, good. And then I guess just it sounds like you're starting to see a little bit of a shift here From ecom back to brick and mortar. So I guess how are you thinking about that for the remainder of Q2? And then I guess as we kind of think more about Q3 also as we wrap up the back to school period, traditional back to school period, how are you thinking about that? I think obviously, Jeff, we are going against huge increases in ecom last year Because of the store closures, we got the benefit on e comm. Some of it was due to the shift in buying. But So I expected somewhat of a little bit of a temporary slowdown, but I think both channels We'll continue to improve as we get through the Q2 into back to school. I'm pretty confident of that. And traffic generally foot traffic in stores is still down, But we're seeing some really good number decent numbers there. They continue to improve. And I think one of the things that surprised me the most is The new store openings, we didn't know what to expect because it's just not normal out there. And the new stores that we've opened have exceeded plan So far since they opened. So I'm really excited about that. So I think it's going to be a combination of a lot of factors and I Like Mike mentioned, our full price selling has been really good. So we're not driving any of our business, Whether it's e com or stores through anything unusual promotionally. And we've seen Quite a bit of the competition online in particular be a lot more promotional than we are, we have been, but I think full price selling will continue to be very strong. Well, you don't need to promote when your merchandise content is Good as yours is, at least maybe not as much as some others. So just as a follow-up to that, because you're seeing the new store openings exceed plan, is that Shifting your thoughts about, I guess, your plans for a store opening as you think out maybe a year from now. I know you said you added, I think, what was it, 2 stores to your plan for this year? Is that changing your thinking at all? There's definitely I'm more we are more optimistic about Physical store openings going forward. And we've always had a pipeline, but we really didn't touch much of the pipeline of potential Stores during the pandemic and certainly, we are relooking at that now. We have a decent pipeline. We want to take advantage of great spaces at incredibly low economics. And we're going to maintain our discipline all along. We're still not going to open any stores unless the economics are right. But certainly, I think we're probably in a different mindset now in terms of opening stores Than we were 6 months ago for sure. Okay, great. Thanks for taking my questions and continued success. Thanks, Jeff. Thank you. Our final question comes from Mitch Kummetz with Pivotal Research. Please proceed with your question. Yes, thanks. Congrats from you as well and thanks for taking my questions. I guess I just have a couple. Mike, I was hoping you could give us for the quarter The 2 year comp by month. Do I have that handy? I don't have that real handy on a Stack basis. Do you know if March was the strongest month or April? And Obviously, we have the main number. I'm kind of curious how things sort of move from March, April to May. Do you happen to know kind of off the top of your head without having the numbers in front of you? I don't. I'd have to look at that. There's so many different versions of things we've been looking at relative to 2020, relative to 20 19 is a normal year that yes, I'd have to look up the 2 year cycle. That's fine. Ed, could you maybe address how purchasing behavior is Changing if at all as we're kind of starting to come out of COVID just in terms of what your consumers are buying, is that Is it changing at all from 3, 6 months ago or is it kind of continuing along the same lines? I think it's starting to get back to the way it was pre So, I think that certainly there was pent up demand. I think for the young adult and teenage customer, they're hungry for newness and we've given them quite a bit of newness in both men's and women's. So I think that's helping. So I don't see it materially changing, Mitch. Okay. You mentioned denim in your prepared remarks. I always think of you guys as being A good denim resource. I'm just curious, did you are you seeing outperformance in your denim business? And you kind of can you kind of remind us how Denim performed for you through the pandemic. I feel like there was kind of maybe a little bit of a shift away from denim to things like fleece that are maybe more comfortable as it sort of lounging around the home. And I'm just kind of curious How those things are standing right now? Denim is really strong, has been strong. It was okay during the pandemic, but got stronger As time went on and our primary brand Denim Rescue is One of our top two brands in the company. It's broader merchandise mix than just denim, but it's very strong and it's good. So and I expect that to continue through back to school. Okay. All right. That's all I needed. Thanks. Good luck. Right. Thank you. Thank you. Our next question is from Alex Vascey with William Blair. Please proceed with your question. Yes. Hey, guys. Thanks. This is Alex on for sharing right now. Thanks for taking the questions. And I just had a couple of quick ones. First, could you maybe talk about any of your early reads you have into the back to school season given many regions have announced like a full resumption of classes in the fall? Anything deeper you have there? I think so far with the back to school dates we've been able to confirm, It does look like we may have a fairly normal back to school season. That's what we're guessing And planning on at this stage. Most stores we haven't been able to get confirmed Back to school dates yet, but the ones that we have received to this stage look like they're pretty darn normal in terms of their timing. So I think just given where things are across the country, I think it's probably more likely than not that we'll see something Much closer to a typical back to school season. That's my best guess right now. Okay, great, great. And then just kind of, I guess, following up on that one, given you said that maybe there's not much more you could say here, but given you said that The ones that you have been able to see confirmation, is there anything you have on more of a regional basis? I know you said that All the stores are comping positively in all regions over 2019, but anything specific to call out there? No, not really. I mean even within the same geographic region, the back to school dates are all over the place. So there's nothing that we can look at and say, okay, forecast X Based on what we're seeing, but where we are seeing enough and enough stores and enough geographic areas, it's relatively positive. Okay, great. That's all I have. Thank you, guys. Okay. Thank you. Thank you. Our final question is a follow-up from Matt Koranda with ROTH Capital. Please proceed with your question. Hey, guys. Thanks for letting me back in the queue here. For some reason, my call dropped. So just wanted to get a little bit more color on your thought process on the special dividend. So it seems clear that cash levels are super healthy here and we've got pretty decent visibility, it seems like to maybe a more normalized back School season. Are there any further impediments in your mind to the special dividend beyond just sort of the typical Stuff around the revolver and the constraints you have there. And then I noticed, I guess, the last couple Of special dividends you paid, it looked like about a quarter of the cash balance was paid out in terms of the special dividend. Is there is that a reasonable rule of thumb To use if we kind of think about if and when you decide to pay 1, would that be the way to think about it? So the last three special dividends we've done were each $1 per share. And so the aggregate number of shares outstanding is a little over 30,000,000, Standing is a little over $30,000,000 $30,100,000 as we sit here today. So if we were to do one and it happened to be a similar Rate, it would be somewhere about $30,000,000 to $31,000,000 if the Board chose to keep it at the same level that it has been the last few times. We are officially precluded from issuing any dividends until the 1 year anniversary of our ABL credit facility, which is November 9, for the time being. Our Board talks about these things literally every Quarterly Board meeting as we look at things. So they'll be discussing this again. Actually next week is our normal quarterly Board meeting and it will be a topic of discussion. Certainly, we feel very good about how the business is performing so far in 2021 and Certainly see the strength in our balance sheet. So there's nothing I can say beyond that at the moment other than I'm sure the topic will be revisited, and we'd be able to share more once anything was decided. Okay. Appreciate the color. I'll leave it there. Thank you. Thanks, Matt. Ladies and gentlemen, we have reached the end of the question and answer session. I I will now turn the call over to Ed Thomas for closing remarks. Thank you all for joining us on the call today. We look forward to sharing Our Q2 results with you in early September. Have a good evening. Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.