Tilly's, Inc.

and welcome to TILI's first quarter 2025 earnings 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.

Good afternoon, and welcome to the Tillich Fiscal 2025 First Quarter Earnings Call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results. Then he and Hezi Shaked, Co-Founder, Executive Chairman, President, and Chief Executive Officer, will 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 analysis as of today, June 4, 2025, 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 2025 first quarter earnings release, which is furnished to the SEC today on form 8K, as well as our other filings of 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 now turn the call over to Mike.

Thanks, Gar, and to all joining us today. Our fiscal 2025 first quarter net sales were within our outlook range provided during our March earnings call. Our first quarter comparable net sales decrease of 7% was a sequential improvement from our 11.2% comparable net sales decrease in the fourth quarter of fiscal 2024. The comparable net sales trend of our business has continued to improve in fiscal May, starting the second quarter, with a decrease of just 2.2%. Consequently, we believe our merchandise assortment is on trend and moving us in the right direction, and we are encouraged to see signs of potential stabilization in our business. As we look ahead in fiscal 2025, the potential impact of tariffs on product costs remains a concern, yet the currently known impacts on our product costs appear to be relatively minor. We have worked closely with all of our proprietary and branded partners to attempt to mitigate as much tariff impact as is reasonably possible. While tariffs have generally become less burdensome in recent weeks, we all realize this could change given the evolving nature of the tariff situation. Despite external uncertainties, we are actively pursuing opportunities to build Mindshare with current and prospective customers, and we've had a busy last couple of months on the marketing front, which we believe has contributed to some degree to the sequential improvement in the comparable net sales trend of our business. In early March, we launched our Tilly's TikTok shop, introducing a new source of Tilly's content with a digital storefront for today's generation of consumers. We hosted a launch party in West Hollywood attended by various youth culture influencers and celebrities. Our shop has grown to a level that began outperforming our daily order volume through Amazon in mid-April and continues to grow. During festival season in Palm Springs, We participated in an event featuring professional surfing talent and popular DJs that drew a reported 10,000-plus attendees in aggregate across the two weekends. In late April, the legendary boxer Mike Tyson made an appearance in our Blue Diamond store in Las Vegas in support of his namesake licensed product line we carry. In late May, we hosted Travis Barker in our Irvine Spectrum store to promote his product collaboration with our longtime brand partner Hurley. These efforts are aimed at solidifying our authentic position at the intersection of youth culture, fashion, and music, with the goal of building greater customer affinity for Tilly's, which in turn will hopefully aid our efforts toward improving our business results. Turning to our operating results for the first quarter of fiscal 2025 compared to last year's first quarter. Total net sales were $107.6 million, a decrease of 7.1%. Net sales from physical stores decreased by 7.4%. while e-commerce net sales decreased by 5.8%. Net sales from physical stores represented 79.8% of total net sales compared to 80.1% last year, while e-commerce net sales represented 20.2% of total net sales compared to 19.9% last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 7%. We ended the first quarter with 238 total stores a net decrease of eight stores compared to a year ago. Gross margin, including buying, distribution, and occupancy expenses, was 19.8% of net sales compared to 21% of net sales last year. Product margins improved by 40 basis points compared to last year, primarily due to higher initial markups, partially offset by increased inventory valuation reserves. Buying, distribution, and occupancy costs deleveraged by 160 basis points despite being $0.8 million below last year in the aggregate due to carrying these costs against lower total net sales. Total SG&A expenses were $44 million, which included non-cash, store asset impairment, and other asset write-off charges of $1.2 million. The $1.1 million decrease in total SG&A compared to last year was primarily due to reduced store payroll and related benefits of $0.9 million and lower non-cash asset write-off charges of $0.5 million, partially offset by increased marketing expenses of $0.7 million. SG&A deleveraged by 190 basis points as a result of carrying these costs against lower total net sales. Pre-tax loss was $22.3 million, or 20.7% of net sales, compared to $19.6 million, or 16.9% of net sales last year. Income tax benefit was $139,000 or 0.6% of pre-tax loss compared to $13,000 or 0.1% of pre-tax loss last year. Both year's income tax results include the continuing impact of a full non-cash deferred tax asset valuation allowance. This year's benefit also includes the refund of certain income tax credit carry-forwards and state income tax carry-back claims. Net loss was $22.2 million, or 74 cents per share, compared to $19.6 million, or 65 cents per share last year. On our debt-free balance sheet, we ended the first quarter with total liquidity of $92.6 million, comprised of cash and marketable securities of $37.2 million, no borrowings at any time, and undrawn borrowing capacity of $55.4 million under our asset-backed credit facility, which has been extended with Wells Fargo Bank through June 2027. Total balance sheet inventory and unit inventories were 3.8% and 10.9% lower, respectively, than at the end of last year's first quarter. Looking at the second quarter of fiscal 2025, as noted earlier, total comparable net sales for fiscal May ended May 31, 2025, decreased by 2.2% compared to last year, continuing our sequential improvement in sales trend that began in the first quarter relative to fiscal 2024's fourth quarter. Based on current historical trends, we estimate the following ranges for the second quarter of fiscal 2025. Net sales of approximately $150 to $158 million, translating to a comparable net sales range of a decrease of 5% to flat, respectively. SG&A of approximately $48 to $49 million, excluding any potential non-cash asset impairment charges. A near zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax asset. Earnings in the range of a net loss of approximately $2.7 million to net income of $2 million, respectively, and per share results of a net loss of 9 cents to net income of 7 cents, respectively. We expect to end the second quarter with 232 total stores in operation after closing seven stores and opening one new store during a quarter. This compares to 247 total stores at the end of last year's second quarter. At this time, we expect to close two additional stores in the third quarter, and there are up to potentially 15 additional store closures which could occur towards the end of the fiscal year, depending on the outcome of lease renewal negotiations with landlords. We expect to end the second quarter with a debt-free balance sheet and total liquidity of approximately $106 to $111 million. comprised of cash and investments of approximately $43 to $48 million and available undrawn borrowing capacity of approximately $63 million under our credit facility. Based on current projections, we expect to remain a debt-free company throughout fiscal 2025. We estimate it would take a consistent comparable net sales decrease of approximately 10% or more over the course of the remainder of the fiscal year to require any level of borrowing this year. In closing, we believe our product assortment is on trend. We are working to drive customer engagement in creative ways, and we believe we are controlling what is controllable. We believe we are beginning to see signs of stabilization in our business, and we're aiming to make further improvements from here over time. Operator, we'll now go to our Q&A session.