This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good afternoon and welcome to the TILES first quarter 2023 results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.
spk04: Good afternoon, and welcome to the Tilly's Fiscal 2023 First Quarter Earnings Call. Ed Thomas, President and CEO, and Michael Henry, TFO, 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 1, 2023, 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 as included in our fiscal 2023 first quarter earnings release, which is 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 will include a Q&A session after our prepared remarks. I will now turn the call over to Ed.
spk03: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our first quarter results were within our estimated outlook ranges. April results were less negative in terms of comparable net sales than in February and March. We believe the combination of an uncertain and inflationary economic environment for our teen, young adult, young family customer demographic in prolonged unseasonable weather in California during February and March, along with certain assortment issues resulting in a weak quarter overall. Not surprisingly, considering the cold wet weather in the West in particular, our spring summer product categories were more challenged than our winter product categories during the first quarter. Footwear performed best with a single digit negative sales comp percentage compared to last year, while all other merchandising departments produced double digit negative sales comp results. California, with 40% of our total stores, was our weakest performing geographic area in both stores and online. Total store transactions decreased by a high teens percentage during the quarter although better in April than earlier in the quarter. The less negative April trend as carried into the second quarter thus far, our total comparable sales, net sales through May 30th decreased 11.5%. Our spring-summer product categories have performed better than they did during the first quarter, led by women's and girls, which have come positive compared to last year. On an overall basis, footwear and girls have calmed positive thus far in the second quarter, while all other departments remain negative. We generally feel good about our spring-summer merchandise assortment, and our inventory aging was more current entering the second quarter compared to last year. However, the negative impacts of inflation and other macroeconomic factors on our young customer demographic remain a concern in the near term. In positive news, we hired our new chief merchandising officer, Laura Janney, who joined us on May 8th. Having previously been in senior merchandise positions at both Hudson's Bay and Nordstrom, we're excited to see what her tremendous experience will bring to our business, particularly as her influence on our merchandise assortment becomes apparent over time. We also just hired a new vice president of merchandise planning and allocation with extensive experience who started last week. We believe these two new leaders give us a meaningful opportunity to take a fresh look at how we do business and help us get back on track to delivering sales growth over time. Despite short-term challenges, we continue to invest in our business for the long term. We just relaunched our mobile app in early May with several customer-friendly features. We will continue adding features to this new app over the next couple of quarters. We also continue to make progress in developing a new warehouse management system to improve efficiencies of labor and inventory management across our two distribution facilities here in Irvine. We currently expect that this important upgrade will be completed in early fiscal 2024 and that it will better position us for future growth. In terms of store real estate, we now expect to have seven new store openings during fiscal 2023. One store opened in late March, four are expected to open during the third quarter, and two are expected to open in the fourth quarter. Three stores originally planned for this year have been pushed into 2024 due to delays in timing of spaces being made available to us. For existing stores, we are approximately 60% complete with our fiscal 2023 lease decisions. Given the current environment, we continue to approach all lease renewals with reasonable conservatism to manage lease costs as much as possible. At this time, we expect to close three stores during fiscal 2023, two of which have already closed. We remain open to additional store growth opportunities where economics makes sense. I now turn the call over to Mike to provide additional details on our fiscal 2023 first quarter operating performance and to introduce our second quarter outlook.
spk02: Mike. Thanks, Ed. Good afternoon, everyone. Our fiscal 2023 first quarter results compared to last year's first quarter were as follows. Total net sales were $123.6 million, a decrease of 15.2%. Net sales from physical stores represented 79.1% of total net sales compared to 80.6% last year. while e-commerce net sales represented 20.9% of total net sales compared to 19.4% last year. Total comparable net sales, including e-commerce, decreased by 17.5%, with a 19.7% decrease from physical stores and an 8.3% decrease from e-commerce. We ended the first quarter with 248 total stores, a net increase of seven stores compared to last year. Gross margin, including buying distribution and occupancy expenses, was 21.0% of net sales compared to 30.1% of net sales last year. Buying distribution and occupancy costs deleveraged by 620 basis points and increased by $2.4 million collectively, predominantly from occupancy costs as a result of operating seven net additional stores. Product margins declined by 290 basis points primarily due to a higher level of markdowns utilized to manage inventory levels. Total SG&A expenses were $43.2 million or 34.9% of net sales compared to $42.7 million or 29.3% of net sales last year. Primary increases in SG&A were attributable to corporate payroll as a result of wage inflation software as a service expenses, and recruiting expenses associated with the hiring of our new CMO. These increases were partially offset by a $0.9 million reduction in store payroll and related benefits, resulting from an admirable job by our store teams of managing store payroll hours despite operating seven net additional stores and absorbing an average 8% hourly wage rate increase compared to last year. Operating loss was $17.3 million or 14% of net sales compared to operating income of $1.1 million or 0.8% of net sales last year as a result of the combined factors just noted. Other income was $1.1 million compared to breakeven last year, primarily due to earning significantly higher rates of return on our marketable securities compared to last year. Income tax benefit was $4.2 million or 26.1% of pre-tax loss compared to income tax expense of $0.3 million or 26.9% of pre-tax income last year. Net loss was $12 million or 40 cents per share compared to net income of $0.8 million or 3 cents per diluted share last year. Weighted average shares were 29.8 million this year compared to 31.0 million last year. Turning to our balance sheet, we ended the first quarter with total cash and marketable securities of $93 million and no debt outstanding compared to $111 million in no debt last year. We ended the first quarter with total inventories at cost up 1.6% per square foot, but down 5.8% in total units per square foot compared to last year. Total capital expenditures for the first quarter were $4.3 million compared to $2.6 million last year. With seven new store openings currently expected for fiscal 2023, we now expect our total capital expenditures for the year to be approximately $15 million. Turning to our outlook for the second quarter of fiscal 2023, total comparable net sales through May 30 decreased by 11.5% compared to last year. Based on current and historical trends, we currently estimate that our total net sales for the second quarter of fiscal 2023 will be in the range of approximately $148 million to $158 million, translating to a comparable store net sales decline in the range of approximately 10% to 15% for the second quarter fiscal 2023 compared to last year. We expect our SG&A to be in the range of $49 million to $50 million. At these sales levels, we would expect to report a loss per share in the range of 13 cents to 27 cents, with an estimated income tax rate of 26.1%, and total shares outstanding of 29.9 million. We currently expect to have 248 total stores at the end of the second quarter compared to 242 at the end of last year's second quarter. Operator, we'll now go to our Q&A session.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Matt Caranda with Roth Capital. Please go ahead.
spk06: Hey, guys. Good afternoon. quick one to start. As you mentioned, some assortment issues that may have caused some challenges inside the quarter, aside from just the weather and kind of the general macro weakness. Can you just elaborate on that?
spk03: Sure. Nothing, no major category or no major category did we see any major assortment issues. There's always some, but I think most of the challenge was due to seasonal categories not performing as well as they normally would, like shorts and swim, primarily because of weather.
spk06: Okay, got it. And then just on the second quarter revenue guide, maybe you can just unpack that a bit in terms of the low end, high end for us. It looks like the low end probably assumes that sort of the May comp just kind of holds steady through the rest of the quarter. Maybe you could just elaborate on sort of how to think about what's embedded on the low end versus the high end of the second quarter revenue guide.
spk02: Sure, Matt. So on the low end really is based on the average of the last several years excluding the 2020 pandemic year. Looking at the last five to six years average history of Q1 to Q2 build. Q2 is always larger than Q1. That average of that five to six year period would get you to the low end. The high end is looking at May as a percentage of Q2. It's usually right around 25%, slightly over 25%. Again, looking at the last five, six years, cumulative average of May as a percentage of Q2, that would get you to the high end of the range, and we're sitting in between those two numbers as we speak. So I felt like that was a very reasonable range based on documented history of how our business has performed. across environments over the years. So that's how you get to either end. Gotcha.
spk06: And then maybe you could talk about the sort of what you're seeing in the latest comp from May, just in terms of traffic versus ticket. And if you could just kind of unpack some of the trends that you're seeing there, that'd be helpful.
spk02: Sure. So traffic has been consistent. Overall, traffic was down 12% in Q1 and it was down 12% in May. It's really all transactions, which to me speaks to an overall environmental type of issue. Transactions were down 17.5% in Q1, and they've been down almost 15% in May, so consistent there. Our average sale really hasn't moved that much. It's been plus or minus less than 3%. In Q1, it was down less than 3%, and in May, it was actually back up 2.5%. So the people that are buying seem to be buying a consistent amount in terms of average transaction value. Conversion has moved just a few percentage points, was down 6% in Q1, and is down 2.7% in May. It really is traffic and transactions that are the double-digit movement. Everything else is what I'd call fairly consistent.
spk06: Okay, fair enough. And then just maybe on the product margin, front or merch margin, could you just talk about trends there that did take a bit of a step down? Wanted to see how we should think about that number going forward, just given the overall promotional environment that we're dealing with.
spk02: Yeah, as always, you know, when we look at what the sales trends tell us where the business is headed, we contemplate what we think we might need to make sure we keep inventory in a healthy position and not let ourselves get over-inventoried with too much seasonal risk as we move forward. So, you know, the first quarter was obviously a struggle very clearly during February and March. Each of February and March, we're down 20% plus. And then April was down 11.4. May is also consistent with that. So we have an eight-week trend rate here that has been a little bit below 11% negative comp. And if that is going to continue, we have contemplated taking certain actions that we'll need to take to keep our inventory fresh, allow for newness to keep getting delivered, As you know, as we get towards the end of the second quarter, the back to school season will be starting. Some of the earliest markets start in mid to late July. So we'll need to be ramping up for that. And we need to make sure that we have ample room to allow for that newness to come in and not cut off newness as we think about moving forward into the back half of the year. So we'll do what we need to do to keep inventory fresh. And we have that contemplated into our thinking for the second quarter.
spk06: Okay, maybe just one more from me and then I'll jump back in queue. But the occupancy costs for the rest of the year, maybe just any thoughts on how you guys are kind of approaching the remainder of the LEAF negotiations that you have. You mentioned you were like 60% through, I think. How are we thinking about sort of pressure from occupancy costs over the coming quarters?
spk02: Yeah, the dollars are going to be up year over year because total store count is up year over year. So we had seven net additional stores that each store costs some dollars. You know, the way occupancy is treated from an accounting perspective, it's straight lined over the life of the lease, generally speaking, absent specific stores that are on pure percent rent deals. So the dollars don't move around that much. from quarter to quarter. And then it's a matter of how are your comps performing relative to a relatively stable base of occupancy. And then year over year, adding stores, that adds dollars. So the dollars will continue to be up a little bit. We've been reasonably satisfied with what we've been able to achieve in terms of occupancy negotiations. As always, you've heard this from us again and again over many years now that you know, we take a pretty darn hard look at what we expect on a go-forward basis for any given store. We use pretty reasonable sales assumptions to derive where we need to be. And if we're able to reach agreement with our landlord partners, we move forward. And if we can't, we're not afraid to close stores if we have to.
spk03: But overall, I think, just to add on to what Mike said, I think we're pretty satisfied with the direction that we've been going with our renewals. And For news stores, even though we're not doing a huge amount of news stores, the economics have been pretty good. Okay, great. I'll jump in. Thank you, guys. Thanks. Thank you.
spk01: The next question is from Jeff Van Cenderen with B Reilly. Please go ahead.
spk05: Hi, everyone. I don't want to harp on the weather here, but boy, it's been pretty horrible in California. I'm just wondering, did you see a better trend in other geographies where maybe weather was not as unseasonable as it's been where you have a big chunk of your stores?
spk02: California was the worst. California was down over 20% in total. All areas were down double digits, though, so it's not like some areas were positive and there was a mix. Everything was down double digits and there was a range. You know, some of the best ones might have been down only 13, 14% versus California, which was down over 20. So, you know, that broad-based decline coupled with the weather, to me, says things are generally slowing down. They're getting tougher out there. And we've heard from a number of companies that, you know, they're seeing the same kind of thing. So California was the worst, which does speak to some of the weather issues early in the quarter. And when you look at seasonal performance, As we mentioned in our prepared remarks, the spring-summer categories were more negative than the winter-fall categories. In May, things have gotten a little better than the Q1 trend, but they're still negative, other than a couple of areas that we called out. So it's still tough.
spk05: And then I just wanted to touch on Laura. She seems like a terrific hire. When will we actually see a meaningful impact from her? And then maybe also if you could touch on what you think needs to improve with planning and allocation under your new leader there.
spk03: Yeah, I think we'll start to see some real, I mean, obviously since she just started, she's not going to be able to affect back to school in any major ways. But wherever she can or feels like she can tweak the merchandise assortment, she's working on that as we speak. I think that you'll start to see a bigger impact as we move into fall and through holiday for sure. So I'm really excited. Already she's picked up on some opportunities for us, which we'll share more as she's in the position. We'll share more on future calls for sure. Merchandise planning allocation. um we just basically brought in somebody that we the person that was in that position previously had been with the company for 20 years uh really solid employee and stuff but um the person that we brought in is more experienced um multiple types of companies and mostly apparel and uh i see some uh really positive uh improvements from some of the methodologies we've had in place for many years, there needs to be some change to it, what we've been doing in the past. So I see a combination of he and Laura, I think will be a major positive for the company.
spk05: Okay, great. And then just wanted to touch a little bit on On SG&A, I know you guys are always looking for ways to reduce expenses. I'm just wondering, anything there maybe that you're uncovering where you can flex a little bit? Or is it just really a situation where we need to kind of be patient for sales to turn upward? And then just any thoughts on what you think? I mean, obviously, we've got a really tough macro out there, and you're not alone in what you're experiencing. But what do you think needs to happen for sales to turn around? Is it Is it largely macro? Is it we need more, I don't know, more newness or more merchandise content drivers, or how do you think about that?
spk03: Well, I think there's always, I think it's more macro than anything else. I actually, overall, I'm pretty happy with our assortment, but I think the challenges definitely make go in As I'm sure you've seen from other reported results, we're not alone.
spk02: Right. Yeah, and on your SG&A question, you know, we've run a pretty tight ship here. Ed and I see virtually every expense in this company. So we don't have frivolous multimillion-dollar programs that, you know, you can just arbitrarily yank out of the business and not have an impact. As we noted in our remarks about Q1, our store team did a phenomenal job in the first quarter to generate raw dollar savings in store payroll. When you think about year over year, we have an 8% average hourly wage increase from minimum wage impacts and wage inflation and having seven additional stores. That was an outstanding result. But that pressure continues. The average hourly rate is still 8% higher than last year. And so we're doing everything we can to be as tight as possible on hours management. We work very closely with our store ops group and our store teams to be as tight on it as we can. Store payroll is roughly 40% of our total SG&A in any given quarter. So that's the nugget that can move the dial. There's not a lot of other wiggle room, to be honest. So bits and pieces here and there. But just like in the first quarter, A few things moved a couple hundred thousand here, a couple hundred thousand there, but it's not realistic to think that we can just yank several million dollars out of SG&A by snapping our fingers. It's just not realistic.
spk05: Okay, fair enough. I just thought I would ask if there's anything else new you might be uncovering. I appreciate you taking my questions. We'll take the rest offline.
spk01: Thanks, Jeff. The next question is from Mitch Cummets with Seaport Research. Please go ahead.
spk00: Yeah, thanks for taking my questions. You know, given some of the softness around the seasonal business, you mentioned shorts and swim, Ed, how are you feeling about, you know, the inventory that you have, and do you think there's, you know, any opportunity for pent-up demand as the weather is turning or has turned, or is, you know, the macro just too difficult?
spk03: I feel pretty good about the content itself. I think that the things that we've started styles that we've sold for many years consistently, there's no major changes to those. I think there will be some pent-up demand for sure, but I also expect it to be extremely promotional in certain categories like shorts and swim and maybe sandals. It will be extremely price competitive, but we're expecting that. We plan for it.
spk00: Okay. And then... you know, back to school, you start to see some back to school at the tail end of Q2. How are you planning for that? I mean, I know that you're lapping, you know, I think a double digit negative from last year. And I don't know to what extent you've kind of been able to adjust your plans, just given what you've seen in the macro lately to where you don't end up getting stuck with you know, too much excess inventory, you know, through the back-to-school season. So how are you playing the business? Have you adjusted your buys? Have you been able to adjust your buys if, again, that's kind of what you feel like you need to do?
spk03: We've adjusted. You know, we've re-forecast our business almost every hour here. So we constantly are adjusting our are buying plans and are on order accordingly from what we think is going to happen down the road. So we've pretty much back to school plans. We haven't drastically changed what we thought was going to happen when we did the yearly plans, but we've made some adjustments and I think we'll be well positioned in categories that are very strong for us, like backpacks, which is usually a seasonal adjustment for back to school. And we're going to be in great shape inventory-wise. And shoes, which has been pretty consistently better than apparel, we'll be in great shape for that. We haven't had to adjust any of those numbers based on what's happening right now.
spk02: Yeah, and Mitch, this is just my own opinion, but As I think about the back to school season, you know, we are known tillies is known as as the backpack destination, having one of the absolute best collections of backpacks, there is I think of back to school is much more of a need based type of period. The kids are going back to school. They've probably grown since last year. There's a need for, you know, some wardrobe updating as they go into the next year school. I'm hopeful that despite the challenges that we might continue to face from the environment, it seems like we will be facing these challenges for the foreseeable future, however long that lasts. But the back to school season is more of a need-based period that I'm at least cautiously optimistic that maybe that means we could see a better trend than what we're seeing right now. But I honestly, I can't predict the future. Nothing is predictable still for three years running now. It is exceptionally difficult to try to predict anything with certainty. But that's how I think about heading into the back to school season and having some potential opportunity to see a better run rate in the business hopefully coming soon.
spk00: Okay. All right. Thanks and good luck. Thank you.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Ed Thomas for any closing remarks.
spk03: 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.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer