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spk00: Greetings. Welcome to the TILES 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin.
spk02: Good afternoon, and welcome to the TILES Fiscal 2021 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 3, 2021, and actual results may differ materially from current expectations based on various factors affecting Philly'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 first quarter earnings release, which was furnished to the SEC today on Form 8K, 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 will now turn the call over to Ed.
spk08: 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 fourth quarter in the last eight years. We believe these results are being driven by a compelling merchandising offering and excellent execution by our corporate and store teams, 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 first quarter 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 first quarter. But we were pleasantly surprised at how strong our business performance was relative to any quarter of the last several years. Both physical stores and e-com produced double digit positive comps in the first quarter compared to fiscal 2019. Store comps were positive in all regions relative to 2019. In terms of merchandising, all departments count positive in the first quarter compared to fiscal 2019 with women's, men's, and girls posting double-digit percentage increases and boys' footwear and accessories posting single-digit percentage increases. The atypical back-to-school timing during the first quarter resulted in an aggregate increase in backpack and denim sales of nearly $5 million over 2019 first quarter. Hard goods produced $2 million in total net sales during the first quarter, still very small as 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 first quarter, which highlights the work we have been doing with our third-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, Piva, and Adidas. that contains sustainability features that increase 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 third quarter. We are also currently working with our proprietary brand suppliers to encourage the use of recycled materials in certain of our rescue 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 two additional new stores to fiscal 2021 since our last earnings call, bringing the total new store count for the year to nine from seven. Eight of these stores have already opened. One store opened in early March, one opened in late April, and the remaining six opened in May. The ninth store is 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 second quarter of fiscal 2021, 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 31st. We have experienced a significant shift in business towards stores and away from e-com over the last several weeks, which has resulted in e-com comp turning negative since April week two compared to last year, but still up nearly 85% relative to fiscal 2019. We are encouraged by the strong performance of our business thus far in fiscal 2021, and we remain excited about the long-term future of Tilly's business and its prospects for continuing profitable growth. I will now turn the call over to Mike to provide details on our first quarter operating performance.
spk05: Mike? Thanks, Ed. Good afternoon, everyone. Details of our first quarter operating performance compared to last year's first quarter were as follows. Total net sales were a record $163.2 million for a first quarter, an increase of $85.9 million or 111% compared to $77.3 million last year. Total net sales from physical stores were $127.7 million, an increase of $80.7 million, or 172%, compared to $47 million last year, primarily due to all stores being closed for the latter half of the first quarter last year as a result of the COVID-19 pandemic. Net sales from physical stores represented 78.3% of our total net sales for the first quarter, compared to 60.8% of total net sales last year. E-commerce net sales were $35.5 million, an increase of $5.1 million, or 17%, compared to $30.3 million last year. E-com net sales represented 21.7% of total net sales compared to 39.2% of total net sales last year. Compared to last year, E-com 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 first quarter with 238 total stores compared to 239 total stores at the end of the first quarter last year. During the first quarter of fiscal 2021, we opened two new stores and permanently closed two stores. For additional reference, we're also providing comparable net sales results relative to fiscal 2019 to help clarify how our first quarter business performance compared to pre-pandemic levels. In that light, total comparable net sales for the first quarter of fiscal 2021 compared to the first quarter 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 first quarter of fiscal 2019, total net sales from physical stores represented 84.9% of our total first quarter net sales, while net sales from e-commerce represented 15.1% of our total first quarter net sales. Gross profit, including buying distribution and occupancy expenses, was $54.8 million, or 33.6% of net sales, compared to $1.6 million, or 2.1% of net sales last year. Product margins improved by 930 basis points, primarily due to the prior year impact of an estimated inventory reserve of $4.7 million, recorded during last year's first quarter when all stores were closed. Setting aside the prior year reserve impact, product margins improved by 330 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 $1.5 million 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 1,700 basis points as a percentage of net sales and were reduced by $0.5 million compared to last year. Distribution expenses improved by 450 basis points as a percentage of net sales despite increasing by $1.6 million. Buying costs improved by 70 basis points as a percentage of net sales despite increasing by $0.5 million. Total SG&A expenses were $40 million or 24.5% of net sales compared to $30 million or 38.8% of net sales last year. The 1,430 basis point improvement in SG&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 first quarter compared to only half of last year's first quarter. Of the $10 million increase in SG&A, $6.2 million was attributable to store payroll and related benefits due to operating all stores for the entirety of this year's first quarter. $1.5 million was attributable to corporate bonus accruals due to exceeding our budgeted targets thus far in fiscal 2021. $1.2 million was attributable to increased e-com marketing costs. $1.2 million 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. $0.8 million was attributable to increased credit card fees associated with significantly higher net sales, and $0.5 million was due to increased insurance premiums. These increases were partially offset by a $1.6 million reversal of a disputed California sales tax assessment originally recorded during the third quarter of fiscal 2020 that we were able to successfully resolve in our favor. Operating income improved to $14.9 million, or 9.1% of net sales, compared to an operating loss of $28.4 million, or 36.7% of net sales last year, as a result of the combined impact of the factors just noted. Other expense was $0.1 million compared to other income of $0.4 million last year, primarily due to earning lower interest rates on our investments and approximately $0.2 million in costs associated with our new ABL credit facility. Income tax expense was $3.8 million, or 25.7% of pre-tax income, compared to an income tax benefit of $10.6 million, or 37.9% of pre-tax loss last year. Net income improved to $11 million, or $0.36 per diluted share, also records for a first quarter for us as a public company, compared to a net loss of $17.4 million, or $0.59 per share last year. Weighted average shares were $30.5 million this year compared to $29.7 million last year. Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $157.6 million, including $0.8 million of remaining withheld store lease payments and no debt outstanding. This compared to $111.1 million at the end of the first quarter last year, which included $13.3 million in withheld store lease payments and $23.7 million of borrowed cash under our then existing credit facility. We ended the first quarter with inventories per square foot down 2.6% relative to last year, but up 8% relative to fiscal 2019 as we seek to support the current momentum of our business. Total capital expenditures for the first quarter were $5.5 million compared to $3.5 million last year, the increase being primarily due to new store openings this year. Turning to the second quarter 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 second quarter as a result of the pandemic, And assuming stores and e-com are able to remain in operation this year, we would expect our total net sales and earnings per share for the second quarter this year to be improved relative to the second quarters of both fiscal 2020 and 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 second quarter and 229 at the end of fiscal 2019's second quarter. 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 and 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 econ will perform relative to significant increases in econ net sales we experienced during the varying periods 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 first quarter business we did in traditional back-to-school product categories will represent a pull forward of typical back-to-school spending, or if these first 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 second quarter results to be improved compared to the second quarters of fiscal 2020 and 2019. Operator, we'll now go to our Q&A session.
spk00: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. Our first question comes from Matt Veranda with Ross Capital Partners. Please proceed with your question.
spk04: Hey, guys. Thanks, and great quarter. Just wanted to talk about margin flow through on the 38% comp that you're seeing according 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 are kind of moving through the quarter here.
spk05: Sure. So there's a couple of odd things as we think about last year. I noted in my prepared remarks the first quarter impact of the estimated reserve that we took, the $4.7 million, 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 second quarter last year, our product margins were up, I think it was 360 basis points, which was an unusual number. favorable movement for us. You know, you've followed us a while. You know, usually our product margins don't move around a whole lot versus prior year. You know, plus or minus 100 basis points is pretty typical for us. We tend to have pretty stable product margins. But last year was up 360 basis points. So given the level of full price selling that took place relative to those items we had already reserved in the first quarter, there is an unusually high level of product margins in last year's second quarter. So I do anticipate that our second quarter product margins will be down to last year and could be – 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. May or may not happen. Depends on how the rest of the quarter plays 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 first two 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 eight store openings that have already happened that Ed referenced in his remarks. So there'll 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 store rents. 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&A, there will also be a much more substantial dollar increase in SG&A. You know, 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&A than what we saw in Q1. Again, with all stores being in operation, the second quarter is typically a larger revenue quarter than the first quarter, even though this this first quarter we just finished was unusually strong. If that pattern holds and Q2 is a larger revenue than Q1, there is gonna 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.
spk00: Thank you. Our next question comes from Jeff Van Sorrenden with B. Reilly. Please proceed with your question.
spk06: 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.
spk08: Thank you.
spk06: 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?
spk08: 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 put 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.
spk06: Okay, good. And then I guess just it sounds like you're starting to see a little bit of a shift here from e-comm 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?
spk08: You know, I think, obviously, Jeff, we're going against huge increases in e-com last year because of the store closures. We got the benefit on e-com. Some of it was due to the shift in buying, but... So, you know, I expected somewhat of a little bit of a temporary slowdown, but I think both channels will continue to improve as we get through the second quarter into back to school. I'm pretty confident of that. And, you know, traffic generally, foot traffic in stores is still down, but we're seeing some really good numbers, 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. Like Mike mentioned, our full-price selling has been really good. So we're not driving any of our business... whether it's e-commerce 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 have been. But I think full price selling will continue to be very strong.
spk06: Well, you don't need to promote when your merchandise content is as 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, two stores to your plan for this year? Is that changing your thinking at all?
spk08: There's definitely – I'm more – We are more optimistic about physical store openings going forward. And, you know, 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 re-looking at that now. We have a decent pipeline. We want to take advantage of great spaces at incredibly low economics levels. And, you know, 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 six months ago, for sure.
spk06: Okay, great. Thanks for taking my questions and continued success.
spk08: Thanks, Jeff.
spk00: Thank you. Our final question comes from Mitch Kumis with Pivotal Research. Please proceed with your question.
spk07: Yes, thanks. Congrats from me 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 two-year comp by month.
spk05: Do I have that handy? I don't have that real handy on a stack basis.
spk07: Do you know if March was the strongest month or April? And obviously we have the May 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?
spk05: 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 2019 as a normal year that I'd have to look up the two-year stack.
spk07: 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, you know, three, six months ago, or is it kind of continuing along the same lines?
spk08: I think it's starting to get back to the way it was pre-pandemic. So, you know, 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.
spk07: Okay. You mentioned denim in your prepared remarks. I always think of you guys as being, you know, a good denim resource. I'm just curious, are you seeing outperformance in your denim business? And 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 just sort of lounging around the home. And I'm just kind of curious how those things are standing right now.
spk08: Denim is really strong, has been strong. It was okay during the pandemic, but got stronger as time went on. Our primary brand, Denim Rescue, is one of our top two brands in the company. It's brought a merchandise mix than just denim, but it's very strong and it's good. I expect that to continue through back to school. Okay.
spk07: All right. That's all I needed. Thanks. Good luck.
spk08: All right.
spk07: Thank you.
spk00: Thank you. Our next question is from Alex Vasty with William Blair. Please proceed with your question.
spk01: Yeah. 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 a full resumption of classes in the fall? Anything deeper you have there?
spk05: 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.
spk01: 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?
spk08: 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, you know, forecast X based on what we're seeing. But where we are seeing enough in enough stores and enough geographic areas, it's relatively positive.
spk01: Okay, great. Well, that's all I have. Thank you, guys. Okay, thank you.
spk00: Thank you. Our final question is a follow-up from Matt Garanda with Ross Capital. Please proceed with your question.
spk04: 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, you know, cash levels are super healthy here, and we've got pretty decent visibility, it seems like, to maybe a more normalized back-to-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 that a reasonable rule of thumb to use if we kind of think about if and when you decide to pay one? Would that be the way to think about it?
spk05: So the last three special dividends we've done were each a dollar per share. And so the aggregate number of shares outstanding is a little over 30 million, 30.1 million 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 to $31 million 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 one-year anniversary of our ABL credit facility, which is November 9, for the time being. You know, 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 as our normal quarterly board meeting, and it will be a topic of discussion. And 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, you know, 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.
spk04: Okay. Appreciate the color. I'll leave it there. Thank you. Thanks, Matt.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Ed Thomas for closing remarks.
spk08: 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. Thank you.
spk00: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful evening.
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