Tilly's, Inc.

Good day and welcome to the TILI's third quarter 2024 results conference call. All participants will be in a 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 touchtone phone. And 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 Mr. Gaurd Jackson, Investor Relations. Please go ahead, sir.

Good afternoon and welcome to the Tilley's Fiscal 2024 Third Quarter Earnings Call. Michael Henry, Executive Vice President, Chief Financial Officer, will discuss the company's business and operating results. And then he and Hezi Shaked, Co-Founder, Executive Chairman, President, and Chief Executive Officer will host a Q&A session with analysts. For a copy of Tilley's earnings press released, 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'll 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 5th, 2024, 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 2024 third quarter earnings release, which is 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 I will include a Q&A session after our prepared remarks. I now turn the call over to Mike.

Thanks, Garth. Good afternoon, everyone, and thank you for joining us today. While we still have work to do to generate consistent sales growth and a return to profitability, there were some positive highlights to share about our third quarter performance. Fiscal August produced our first month of comparable net sales growth since February 2022. Our third quarter comparable net sales, while a decline of 3.4%, was the best quarterly comp we have produced since the end of fiscal 2021. Our e-com net sales for the comparable 13-week period ended November 4, 2023, increased by 4.9%, which was our best quarterly e-com comp sales result since the end of fiscal 2021. Our store traffic increased for the second consecutive quarter relative to last year, although comp sales in stores remained negative. We believe our renewed marketing efforts via social media and our recently launched brand campaign are beginning to take root when considering our improved store traffic for the last two quarters. We also just launched a new marketing sponsorship with the Los Angeles Chargers, collaborating with them on community outreach events aimed at mental health awareness and support for young people, which ties in with our longstanding support of the Tilly's Life Center and its mission with respect to young people's mental health. During the quarter, we continue to invest in our business by upgrading the quality of our search engine for our website and relaunching our mobile app with significantly improved speed. We are also in the process of implementing a new price optimization tool that is intended to help us drive improved pricing decisions and merchandise management efficiency in the future, which we currently expect to launch in early 2025. So although our overall business results are not yet where they need to be, we are making every effort to try to turn things around and believe we are beginning to make some progress, albeit not as quickly as we would like. Turning to the specifics regarding our fiscal 2024 third quarter operating results compared to fiscal 2023's third quarter results. Net sales were $143.4 million, a decrease of 13.8%, primarily due to the previously discussed impact of the 53rd week in last year's retail calendar, which resulted in an $18.4 million net sales shift out of the third quarter and into the second quarter compared to last year. Net sales from physical stores decreased by 16% and represented 77.6% of total net sales compared to 79.6% last year. Ecom net sales decreased by 5.4% and represented 22.4% of total net sales compared to 20.4% last year. Comparable net sales for the 13-week period ended November 2, 2024, including both physical stores and e-com, compared to the 13-week period ended November 4, 2023 last year, decreased by 3.4%, with a decrease in comparable net sales in stores of 5.6% and an increase in e-com net sales of 4.9%. We ended the third quarter with 246 total stores compared to 249 total stores at the end of the third quarter last year. Gross margin including buying distribution and occupancy expenses was 25.9% of net sales compared to 29.3% of net sales last year. Buying distribution and occupancy costs deleveraged by 320 basis points despite being $0.7 million below last year in the aggregate due to carrying these costs against a lower level of net sales this year. Product margins were within 10 basis points of last year's third quarter. Increased markdowns and related inventory aging reserves were almost fully offset by improved initial markups. Total SG&A expenses were relatively flat at $51.3 million or 35.7% of net sales compared to $51.2 million or 30.8% of net sales last year. SG&A deleveraged as a percentage of net sales due to carrying these expenses against a lower level of net sales this year. Primary SG&A variances compared to last year's third quarter were attributable to lower total store payroll and related benefits of $0.9 million and lower non-cash store asset impairment charges of $0.6 million, largely offset by increased econ fulfillment expenses of $1.1 million. Pre-tax loss was $12.9 million, or 9% of net sales, compared to last year's pre-tax loss of $1.2 million, or 0.7% of net sales. Income tax benefit was $5,000, a near-zero tax rate compared to a benefit of $0.3 million, or 28% of pre-tax loss last year. The lower income tax rate this year was primarily due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets. Net loss was $12.9 million, or 43 cents per share, compared to last year's net loss of $0.8 million, or 3 cents per share. Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $52 million and no debt. Net inventories were up 11.8% compared to the end of the third quarter last year, due foremost to our decision to pull forward certain inventory receipts into the latter half of October to help smooth out weekly receipt flows to improve operating efficiencies in our stores distribution center, and help ensure timely delivery to stores for Black Friday weekend. Total year-to-date capital expenditures for the first three quarters were $6.7 million compared to $10.5 million last year. Turning to the fourth quarter of fiscal 2024, we're off to a disappointing start in terms of net sales, although it meaningfully improved product margins compared to last year. Comparable net sales through December 3, 2024 decreased by 15.3% relative to the comparable period ended December 5, 2023, due in part to the timing shift of Thanksgiving and Black Friday weekend this year. On a shifted basis, lining up the timing of last year's Thanksgiving holiday and Cyber Monday to this year's, comparable net sales through December 3, 2024 decreased by 9.6% relative to the comparable period ended November 28, 2023. Based on current and historical trends, we currently expect the following for our fiscal 2024 fourth quarter operating results. Total net sales to be in the range of approximately $149 million to $156 million, translating to a comparable net sale decline in the range of 9% to 5%, respectively. We currently expect to generate product margin improvements of approximately 200 basis points relative to last year's fourth quarter. SG&A to be approximately $52 million before factoring in any potential non-cash store asset impairment charges which may arise. Pre-tax loss and net loss to be in the range of approximately $13 million to $9.5 million, respectively, with a near zero effective income tax rate due to the continuing impact of the previously disclosed full non-cash valuation allowance on our deferred tax assets. Loss per share to be in the range of $0.43 to $0.32, respectively, based on estimated weighted average shares of approximately $30 million. We recently opened three new stores in November and currently expect to close at least 10 predominantly underperforming stores near the end of the fourth quarter, which would bring our total store count to 239 at the end of the fiscal year, a net decrease of nine from the end of fiscal 2023. In closing, we continue to challenge every aspect of our business in search of improvements in the near term, while also thinking strategically about where we need to be over the longer term. We look forward to continuing to share details of our efforts. Operator, we'll now go to our Q&A session.