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spk04: Greetings. Welcome to the TILES Inc. Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are on 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'll now turn the conference over to your host, Gar Jackson. You may begin.
spk01: Good afternoon, and welcome to the TILES Fiscal 2022 Third Quarter Earnings Call. Ed Thomas, President and CEO, and Michael Henry, CFO, will discuss the company's results and then host the Q&A session. For a copy of Tilly's earnings 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, December 1, 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 third quarter earnings release, which was furnished to the SEC today on Form 8-K, as well as our other filings that 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.
spk00: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our third quarter sales performance was stronger than we anticipated throughout the quarter, resulting in both top-line and bottom-line results exceeding our outlook and analyst consensus estimates for the third quarter. As expected, we saw a deceleration in sales trends from month to month as we anniversary last year's early holiday shopping that was driven by supply chain concerns and other pandemic related factors in the latest stages of the quarter. Not surprisingly, as we left those prior year conditions amid this year's highly inflationary environment, all geographic markets comped double-digit negative, and most merchandising departments count double-digit negative with the exceptions of footwear, which was just slightly negative, and accessories, which was led by strengthened backpacks but still decreased by a single-digit percentage overall. Also, not surprisingly, customer store traffic and conversion both declined by high single-digit percentages compared to last year's record results. Despite current economic challenges associated with inflation, we continue to believe that TELUS has meaningful future growth opportunities in many of our existing markets, particularly California, Texas, the Northeast, and greater Chicago area. With very few exceptions, Our new store openings over the past several years have met or exceeded our expectations, and we believe it is important for our long-term earnings potential to continue to grow our store base along with our e-com business. In the third quarter, we opened five new stores. In the fourth quarter, we have opened two new stores so far. With two more, we'll be opening in a few more days. bringing our total new store openings to 11 for the year. We anticipate closing two stores in mid-January, bringing our fiscal year and store count to 249. For fiscal 2023, we have a preliminary expectation to opening up to 15 stores, assuming we can negotiate what we believe to be appropriate lease economics relative to the retail environment. At this time, two of those potential new stores have fully executed leases, and we are engaged in active negotiations on the remainder. In addition to new stores, we continue to invest in company infrastructure during fiscal 2023 to support our future growth plans. We plan to upgrade our warehouse management systems to create greater efficiencies in managing inventory between our stores, e-commerce, and our two distribution centers, as well as to improve distribution labor efficiency. We are also planning to upgrade our merchandise planning and allocation systems with the goals of improving inventory efficiency and reducing the volume of inventory transfers. In total, including 15 new stores, we preliminarily expect our total capital expenditures for fiscal 2023 not to exceed $25 million. Turning to the fourth quarter of fiscal 2022, we are off to a softer start than expected. Total comparable net sales through November 29th, including both physical stores and e-com, decreased by 18.5% versus the record comparable period of last year. For Thanksgiving weekend, Thursday through Cyber Monday, we saw an improved relative trend with total comparable net sales decreasing 13.4% compared to last year and a high single-digit negative comp on Black Friday specifically. Assuming our fourth quarter sales exceed third quarter sales, as has been the case throughout our history except for last year, we believe we have an opportunity to produce an improved comp sales trend for the fourth quarter relative to recent quarters, although still below last year due to the much more difficult economic conditions in play this year. We will continue to manage our business prudently relative to the current environment but remain focused on our longer-term goals of continued growth and improved operational performance. I now turn the call over to Mike to discuss our third quarter operating results and fourth quarter outlook in more detail. Mike?
spk07: Thanks, Ed. Our third quarter operating results compared to last year were as follows. Total net sales were $177.8 million compared to a company record of $206.1 million last year. Last year's results were fueled by unprecedented pandemic-related factors along with supply chain concerns about the holiday season, which we believe pulled sales forward into the third quarter last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 14.9%. Total net sales from physical stores were $141.5 million compared to $165.3 million last year with a comparable store net sales decrease of 15.8%. Net sales from physical stores represented 79.6% of our total net sales this year compared to 80.2% last year. E-commerce net sales were $36.3 million compared to $40.8 million last year. Econ net sales represented 20.4% of total net sales this year compared to 19.8% last year. We ended the third quarter with 247 total stores, a net increase of four stores since the end of last year's third quarter. For additional perspective, our total comparable net sales for the third quarter increased by 8.7% relative to the pre-pandemic third quarter of fiscal 2019. Gross profit, including buying, distribution, and occupancy expenses, was $54.6 million, or 30.7% of net sales, compared to a company record of $76.7 million, or 37.2% of net sales, last year. Buying, distribution, and occupancy costs deleveraged by 360 basis points collectively due to carrying these costs against a significantly lower level of net sales this year compared to last year. Product margins declined by 300 basis points this year, primarily due to an increased and more normalized markdown rate compared to last year when full price selling was at record levels. For additional perspective, product margins were down less than 100 basis points compared to the pre-pandemic third quarter of fiscal 2019, primarily due to lower initial markups and a higher markdown rate. Total SG&A expenses were $48.3 million, or 27.1% of net sales, compared to $47.7 million, or 23.2% of net sales last year. The primary increases in SG&A compared to last year were $0.6 million from store payroll due to having four net additional stores, along with higher hourly wage rates, and $0.5 million from corporate payroll due to wage inflation. Partially offsetting these increases were a $1.8 million reduction in bonus expense due to the lack of any bonus accrual this year. and a $0.6 million reduction in marketing costs. Operating income was $6.3 million or 3.6% of net sales compared to a company record of $29 million or 14.1% of net sales last year. Other income was $0.7 million compared to zero last year, primarily due to earning higher rates of return on our marketable securities investments and the absence of any costs associated with our former ABL credit facility, which were included in last year's results. Income tax expense was $1.8 million or 26.3% of pre-tax income compared to $8.2 million or 28.1% of pre-tax income last year. Net income was $5.1 million or 17 cents per diluted share compared to a company record of $20.8 million in net income and 66 cents per diluted share last year. Weighted average shares were 30 million this year compared to 31.4 million last year. Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $105.8 million and no debt outstanding. This compared to $155.6 million and no debt outstanding last year. Since the end of last year's third quarter, we paid special cash dividends to stockholders of $30.9 million in December 2021 and repurchased 1,258,330 shares of our common stock for a total of $10.9 million during this year. We ended the third quarter with inventories per square foot down 6.9% compared to last year, following being up 4.1% to last year at the end of the second quarter. Total year to date capital expenditures were $11.9 million this year compared to $10.9 million last year. We expect our total capital expenditures for fiscal 2022 to be approximately $19 million at the end of the year. Turning to our outlook for the fourth quarter of fiscal 2022, We remind you that last year's fourth quarter was a historic anomaly for us with fourth quarter sales below third quarter sales for the first time ever due primarily to supply chain concerns and other pandemic related factors, which we believe pulled some holiday season sales into the third quarter last year. While some level of similar customer behavior may have been repeated this year amid the current highly inflationary environment, at this time, we assume that our fourth quarter sales performance will revert to a more traditional cadence. such that it would be the largest sales quarter of the year. Based on our quarter-to-date net sales results through November 29, 2022 that Ed shared earlier, and our pre-pandemic historical sales build patterns, we currently anticipate our total net sales for the fourth quarter of fiscal 2022 to be in the range of approximately $183 million to $188 million, SG&A to be approximately $54 million to $55 million, pre-tax income to be in the range of approximately $0.8 million to $2.6 million, our estimated income tax rate to be approximately 27%, and earnings per diluted share to be in the range of 2 cents to 6 cents based on estimated weighted average dilute shares of approximately 29.9 million. This compares to a company fourth quarter record of $204.5 million in net sales and 38 cents in earnings per diluted share for the fourth quarter last year, and total net sales of $172.5 million and earnings per share of 21 cents in the pre-pandemic fourth quarter of fiscal 2019. Operator, we'll now go to our Q&A session.
spk04: At this time, we will 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 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. And one moment, please, while we pull for questions. Our first question comes from the line of Jeff Van Sinderen with B Reilly. Please proceed with your question.
spk02: Hello, this is Richard Magnuson in for Jeff Van Sinderen. Thank you for taking our call. Can you provide more insight into how you are planning incoming inventory for spring And do you expect inventory to be up or down on a square foot basis at the end of fourth quarter?
spk07: Hi, Richard. We expect inventory to be down on a per square foot basis finishing the fourth quarter. As we think about next year as a whole, you know, one thing to keep in mind is obviously 2021 was crazy to the good side of things. All year long we've been going up against that. You see the comparisons in the negative double digit comp that we've seen all year. The last month that we will have that is February. February 2022, we had a plus 15 comp. After that, every month after that, we'll be going up against this year's negative double digits. So, you know, there's some optimism there that assuming we can stay on trend with our merchandise assortment the way we consistently have. We think there's an opportunity for us to be able to turn around back into positive comps once we get into 2023 and past the month of February in particular, which is a small month. But we're expecting to improve our business in 2023 and do better business in the spring than we did this year.
spk02: All right. No, that sounds good. And can you provide some detail on the different trends that you saw in Cyber Monday and Black Friday sales and e-comps?
spk00: It was pretty erratic. I think we were going up against a lot of our competitors were much more aggressive promotionally Than us and we elected not as we consistently do we we elected to not play the aggressive promotion campaign and may have Somewhat negatively impacted our demand, but overall it was close to what we expected and
spk02: Okay, and then can you remind me, when do the compares get easier for e-com?
spk07: Well, as I just mentioned, that was a total business. We're going to be going up against double-digit total business. Spring? Yeah, it'll start right after the month of February. We had similar directional performance between stores and e-com. I'm looking at a chart here. Ecom was up single digits in February and then down double digits the next four months in a row, still negative in July, August, and then back to double digits September, October, November. So similar in nature to how stores compare.
spk02: Okay. And then my last question is, what are you seeing in brick and mortar this week, if you can speak to that?
spk05: I wouldn't call it particularly strong. So it's not.
spk07: No, I'd say it's a, you know, in the past we usually go through Black Friday weekend and then there's a little bit of a lull after everyone, you know, kind of goes through Black Friday promotions and all the buzz of that and Cyber Monday and those kinds of things. You tend to go through a lull and we're experiencing that. We do think that the overall patterns for holiday shopping will be later this year than they were last year. We also think that's part of why our fourth quarter start was weaker than anticipated. Because remember, we talked about the fact that we thought some early holiday shopping pulled into October. Well, it also pulled into early November because of all the supply chain concerns last year. So I do think we are anniversarying and lapping some of that early holiday shopping patterns of last year because of the supply chain concerns come to this year. everyone's got more inventory than they need and has pretty much all year long really promotional environment we do think that we'll we'll see the holiday season come into being it'll just be a later flow than it was last year and we have contemplated that and how we've we've thought about our outlook just to add to that too is we're going into the next few weeks the quality of our inventory uh both in terms of
spk00: quantity in the mix is really in great shape. So we're positioned, we feel like we're well positioned to do the business if it's there.
spk02: Okay, that's good to know. Well, thank you, and I'll get back into the queue.
spk04: Thanks, Richard. Our next question comes from the line of Mitch Clements with Seaport Research. Let's see if we'll see what your question is.
spk06: Yeah, thanks for taking my questions. Starting with the Q4 today comp, I think, Mike, in the press release, and it's down 18.5. Do you know what that is on a sales basis? And then also, do you happen to know what both comp and sales are for that period versus three years ago?
spk07: I don't. All I have is what we just reported is the comp number. We have a closed fiscal November. We're in the process of closing fiscal November, so I don't have all in sales numbers to report at this early date.
spk06: Okay. And then you referenced the pull forward last year because of supply chain and some COVID. Can you remind us how, so I think last year you guys did I think a 12.5 comp, if I have that correct. Can you remind us kind of how that flowed through the fourth quarter, maybe on a monthly basis, just so we have a better sense of the compare?
spk07: Yeah, so last year, 21 versus 20, November was the strongest month in terms of comp at a plus 21. Then December was about half that at 10.5. And then January was a plus four. So it gets easier as the quarter goes in terms of those comparisons. This is another reason why, despite how slowly November started, you look at all the historical relationships of how we just finished Q3, how we finished Q3 relative to 2019. It all points that if history means anything at all, You know, we have to be somewhere in the 180 million range for For the fourth quarter. We just reported 178 for the third quarter fourth quarter is larger than third in any way, shape, or form the way it traditionally was other than last year, you know, you're, you're in the 180 so It seems to make sense, again, if history proves to be accurate at all. If something else happens, there's no way I can predict it. I have to believe, despite our slow start in November, that the holiday season will come and that some sense of a normal cadence of Q3 to Q4 will take place. Coupled with the fact we did just do nearly a plus nine comp to 2019 in the third quarter, some level of positive comp in the fourth quarter relative to 2019 also gets you in that 180 area. When you contemplate, we have nine additional stores than we did then. So it seems to line up. Despite the soft start, those other metrics seem to point you to a place that says, you know, the business will come. It's just later than what it was last year. Yeah.
spk06: And do you have a sense as to how much of the quarter is in the books through November 29th? I imagine the vast majority is still in front of you.
spk07: It is. The largest weeks are right around Christmas, as you would expect. Thanksgiving week is one of the largest weeks. But that last full weekend before Christmas, that last full week before Christmas, those are the hugest weeks of the quarter, those two. And then usually the first week right after Christmas is pretty big before. Then for the rest of January, the weeks get really small. So the great majority of the quarter will be in once December is done.
spk06: Okay. And then lastly, Ed, you know, there's been a lot of talk on other retail earnings calls about how challenging the apparel environment is in particular. Can you just elaborate on what you guys are saying?
spk00: Yeah. You know, the apparel environment has been challenging. Honestly, I think part of it's because there's no dominant trend, particularly in our uh, for catered to our age group. Um, and for us, what we've seen is, um, one of our best performing categories is long bottoms and it's been good. I'm not saying denim, other long bottoms. Uh, and, but, um, the other typical categories that are really strong have, have, have slowed down. And I think part of it's, um, uh,
spk04: economic and part of it is lack of really dominant trend okay that's helpful thanks and uh good luck for holiday thank you thanks our next question comes from the line of matt garanda with rock capital please proceed with your question hey guys this is ray on for matt
spk03: Most of my questions were already asked, but maybe if you guys can talk a little bit about how Black Friday, Cyber Monday, I guess how much of that – sorry. Okay. Maybe in like Q4, how much of the revenue actually comes from Black Friday and Cyber Monday and kind of like understanding that last year was a little bit out of the norm?
spk07: I don't have any data points on Black Friday as a piece of the quarter. I mean, it's in the top five sales volume weeks of the quarter, top four. But the real bulk of the business comes around Christmas typically. And again, because of the difference of last year to this year, it's going to come later. There is an extra day of shopping before Christmas to stay later this year. So there's still a lot of business to be done yet. We did see during the Black Friday weekend, as we referenced, you know, the month as a whole was down 18. We were down worse than that in the first three weeks of November. And then Black Friday weekend was down about 13 and Black Friday itself was only down nine. So during that particular peak weekend, we saw a meaningful improvement in the trend of our business. And given that we are expecting a later flow of the holiday shopping versus what it was last year you know we'd expect to see you know similar sorts of behaviors during during those key peak weeks in the in the mid to latter part of december in particular okay thank you that was helpful um yeah i think most my questions were answered so i'll go ahead and hop back in the queue thanks thank you thank you ray
spk04: And again, as a quick reminder, if anyone has any questions, you may press star one on your telephone keypad to join the question and answer queue. It looks like we have reached the end of the question and answer session. I'll now turn the call back over to Michael Henry for closing remarks.
spk00: Hi. Unfortunately, it's Ed. Bye. Thank you for joining us on the call today. We look forward to sharing our fourth quarter results with you in mid-March 2023. Have a good evening. Thanks, everybody.
spk04: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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