Tilly's, Inc.

Greetings and welcome to the Tilly's, Inc. Third Quarter 2020 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. Thank you, Gar. You may begin.

Good afternoon and welcome to the Tilly's fiscal 2020 third 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 this 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, December 3, 2020, and actual results may differ materially from current expectations based on various factors affecting Tilly's business, including impacts of and the company's actions in response to the ongoing COVID-19 pandemic. 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 2020 third quarter earnings release, which was furnished to the SEC today on Form 8K, as well as our other filings that the SEC referenced in that disclaimer. Today's call will be limited to one hour, and I will include a Q&A session after our prepared remarks. I will now turn the call over to Ed.

Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. We continue to adapt to this rapidly evolving COVID-19 environment and its impact on retail. We have gone from having our stores open for only 50% of total available operating days in the first quarter to 65% in the second quarter to 94% in the third quarter, all with restrictions on operating hours and customer traffic upon store reopenings that began during the second quarter. We entered the third quarter with 33 of our California indoor mall stores closed for the entire month of August, began reopening these stores throughout September, and reopened the final eight stores on October 7th. As we announced in early September, back-to-school dates were meaningfully delayed compared to prior years, which got us off to a very weak start to the quarter in August. However, as schools announced their later reopening dates, our business began to rebound to a degree later in the quarter. Compared to the respective fiscal months of last year, August net sales decreased 35%. but then September net sales increased 22% and October net sales increased 10%. Altogether, this resulted in a total net sales decrease of 9% for the third quarter, which we view as an encouraging result, particularly in light of our August results in the significant number of stores that were closed for a portion of the quarter. Our e-commerce business continued to thrive during the third quarter, generating 57% net sales increase with significantly improved product margins and bottom line profitability compared to last year. We have functioned with a digital first mindset during this pandemic period, and it has driven significant improvement in our e-commerce assortment management, resulted and expanded and more profitable digital spend, additional customer convenience enhancements, including curbside pickup and operational improvements in our e-commerce distribution center. All these factors have combined to drive meaningful improvement in our e-commerce business, which we hope to sustain and build upon going forward. In terms of merchandising for the third quarter, Women's was our strongest performing Department with a mid-single digit percentage increase in comp sales compared to last year. Although all other departments comped negative to last year, each department improved trend-wise as the quarter progressed. We introduced several new third-party brands during the quarter, and we have been pleased with their performance. We also launched certain hard goods during the quarter, including skateboards, bikes, and roller skates, which have performed well. Accessories were particularly challenging due to the reduced sales of backpacks, which we believe is primarily due to increased volume of in-home and remote learning during the pandemic. We ended the quarter with total inventory per square foot down 7.4% to last year and believe Our inventories are well positioned for the holiday season. Turning to real estate, we have reached agreements in full or in principle addressing nearly 90% of our total store leases relating to withheld rents during the periods of store closures and adjustments of future rents in light of the ongoing pandemic. We are appreciative of the support provided to our company by the landlord community. We currently expect to open seven new stores during fiscal 2021 that were deferred from this year by agreement with the respective mall landlords. These stores are currently expected to open during the March to May time period, although this remains subject to change. We will continue to be very selective and opportunistic about opening any additional stores next year in light of the rapidly evolving environment. Finally, just before the end of the quarter, we opened our first rescue skate test store here in the Irvine Spectrum. This new test store is a skate-influenced concept store under our proprietary rescue brand which incorporates hard goods, including skateboard assembly, apparel, and accessories. Given what we believe is a broad and increasing appeal of skateboarding, particularly with its inclusion in the Olympics next year, we think this is an important test for us. However, this is just a tester at this stage, not a fully developed chain concept, and any future plans will be dependent upon consumer reaction to and performance of this test store in greater stability in the retail environment. Turning to the fourth quarter, total comparable net sales have been just shy of flat through December 1st versus corresponding period of last year. As expected, e-com sales have continued to be strong with a 42% increase during this time period. Comparable net sales have decreased by 14% in the fourth quarter compared to the corresponding period of last year. No stores were open on Thanksgiving Day this year, and Black Friday results in stores were well off last year's pace, as we had anticipated. However, store comps have been positive each day since Black Friday. Overall, significant reductions in store traffic have been partially offset by by an improved conversion rate and a higher average transaction value. We can't be certain what the rest of the holiday season will look like or what impact the ongoing pandemic will have on our ability to drive sales and continue to operate our stores or e-commerce, particularly in light of the recent sharp increase in COVID cases across the country and additional customer traffic restrictions in certain areas. However, as long as we are able to continue to be fully operational, we are hopeful that this year's holiday season can be somewhat closer to normal than what we saw during the back-to-school period. At this time, we expect total sales for the fourth quarter to be somewhat lower than last year overall due to the ongoing pandemic and much higher unemployment than last year at this time. even if we are able to continue operating our stores throughout the quarter. In closing, I want to thank our entire team of store associates, field and corporate employees for their tireless commitment to making Tilly's the best it can be during this incredibly challenging time for all of us. Mike will now provide more details on our third quarter operating performance and balance sheet. Mike?