Release Date: September 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Second-quarter net sales were in the middle of the outlook range and breakeven earnings per share beat expectations.
- Improved product margins for the first two quarters of fiscal 2024 relative to last year.
- New brand marketing strategy and first-ever brand campaign launched to redefine purpose and connect with target customers.
- Positive response to the new campaign across digital platforms, indicating potential for stronger consumer affinity.
- Net sales from physical stores increased by 2%, and e-commerce net sales increased by 1.3%.
Negative Points
- Comparable net sales remained negative, with a 7.8% decrease for the 13-week period ended August 3, 2024.
- Total SG&A expenses increased to $50.8 million, up from $47 million last year.
- Pretax loss and net loss expected in the range of $11.6 million to $8.7 million for the third quarter of fiscal 2024.
- Challenges in improving sales results in the current consumer environment, with structural issues impacting performance.
- Significant increase in labor costs, particularly in California, with average hourly rates for store payroll 32% higher than in 2019.
Q & A Highlights
Q: Looking back at this company pre-COVID, it was a very consistent company, fairly profitable, strong cash flow generation. And there were times where you went through a rough patch like the one you have recently, but you always came out of it strong and got back to normalized levels. That doesn't seem to have happened this time around. So can you please describe what has changed structurally in the business that is preventing this from happening?
A: Several things. Number one, if you look at the record of the last three years or so, it was declining sales year after year, besides '21, which was a weird year for everybody. A lot of it had to do with the pandemic and the changes in behavior of employees, et cetera. We addressed all that stuff since I came in, but there's a lot of work to do in order to get it back on track to where we were. (Hezy Shaked, Executive Chairman of the Board, Interim President, Chief Executive Officer, Chief Strategy Officer)
Q: But it seems like something more structural has changed, because you guys don't seem to be able to break out of the funk that you've been able to do so historically. And you're also talking about a very difficult consumer environment, which it is. However, there are plenty of comparable consumer apparel retailers that are doing just fine right now. So it seems like, again, there's something more structural, which is what I'm really trying to gain a grasp of.
A: I can say that it's something specific I can tell you. I can tell you that many decisions we've made in the past didn't work out. Now, we have to change them; it's including systems, et cetera. But it's not one thing that is broken. There was a lot of things that we had to address, and we are. And like any situation that happened before, it takes time to turn it around. (Hezy Shaked, Executive Chairman of the Board, Interim President, Chief Executive Officer, Chief Strategy Officer)
Q: What are the primary structural issues that have impacted Tilly's performance since 2019?
A: Our sales per square foot in store have dropped quite significantly since 2019, so that's the first structural issue. Another primary issue is the cost of labor. Our average hourly rate for store payroll is 32% higher than it was in 2019, mainly due to minimum wage increases, especially in California where almost half of our stores are located. This has created a big disconnect as sales have not increased to match the higher labor costs. (Michael Henry, Chief Financial Officer, Executive Vice President)
Q: Can you provide more details on the new brand marketing strategy and its expected impact?
A: We have established a new brand marketing strategy to redefine our purpose to our target customer. This includes implementing this strategy across our social media content, curating a roster of micro influencers, and expanding our brand reach into new online media platforms. We launched our first-ever brand campaign with the tagline "Discover Your Style," emphasizing personal style as a driving force towards confidence and mental wellness. The full impact of this campaign won't be known for some time, but we've seen positive responses across our digital platforms since launch. (Michael Henry, Chief Financial Officer, Executive Vice President)
Q: What are the expectations for the third quarter of fiscal 2024?
A: We expect total net sales to be in the range of approximately $140 million to $146 million, translating to a comparable net sales decline in the range of 6% to 2%. SG&A is expected to be approximately $49 million. We anticipate a pretax loss and net loss in the range of approximately $11.6 million to $8.7 million, with a near-zero effective income tax rate. Loss per share is expected to be in the range of $0.39 to $0.29. We expect to have 246 total stores open at the end of the third quarter. (Michael Henry, Chief Financial Officer, Executive Vice President)
Q: How has the macroeconomic environment impacted Tilly's core customer demographic?
A: The macroeconomic environment remains challenging for our core customer demographic of teens, young adults, and young families. Certain merchandising decisions on our part also limited our performance in the second quarter. We are working to correct these issues going forward. (Michael Henry, Chief Financial Officer, Executive Vice President)
Q: What are the key financial highlights from the second quarter of fiscal 2024?
A: Net sales were $162.9 million, an increase of 1.8%. Gross margin improved by 300 basis points to 30.7% of net sales. Total SG&A expenses were $50.8 million or 31.2% of net sales. Pretax loss was $0.1 million, and net loss was $0.1 million or breakeven on a per share basis. We ended the second quarter with total cash and marketable securities of approximately $77 million and no borrowings under our asset-backed credit facility. (Michael Henry, Chief Financial Officer, Executive Vice President)
Q: What steps is Tilly's taking to improve sales results in the current consumer environment?
A: We are bringing in new product collaborations, such as our recently launched partnership with NASCAR. We are introducing several new brands over the back half of the fiscal year to create new customer interest and sales opportunities. We will continue to work at connecting more deeply with our customers in authentic ways and invest in opportunities to improve our business. (Michael Henry, Chief Financial Officer, Executive Vice President)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
