Tilly's Inc. (TLYS, Financial) is a specialty retailer that sells a wide range of products, ranging from footwear and accessories to casual apparel, targeting men, women and children. The company's brands represent an active and social lifestyle, and it has stores in 33 U.S. states.
Browsing through its catalogue, I think the clothes sold by this retailer look very cool and trendy. Then even cover skating and snow sports and have a plethora of pop culture items.
However, the shares of Tilly's are not trendy of late, recording losses of nearly 30% year-to-date, closing at $6.33 on June 7. The stock has lost its momentum because of weaker sales, slowing growth and deteriorating profitability.
First quarter results
Tilly's announced its first-quarter operating results on June 1, and it was hard to find any positive news. The only good news I could find was that the company has a stable balance sheet with a cash-debt ratio of 0.38, and it has been buying back shares. “Since the end of last year's first quarter, the Company repurchased 366,297 shares of its common stock for a total of $2.7 million pursuant to its stock repurchase program, which expired on March 14, 2023.”
Unfortunately, there was far more bad news. Total net sales were $123.6 million, declining $22.1 million or 15.2% compared to a year ago. Net sales from e-commerce were $25.8 million, showing a decrease of $2.5 million or 8.7%. Gross profit was $25.9 million, or 21.0% of net sales, compared to $43.8 million, or 30.1% of net sales, in the year-ago quarter.
Moving on to other key metrics, selling, general and administrative expenses were $43.2 million, or 34.9% of net sales, compared to $42.7 million, or 29.3% of net sales, a year ago. The company reported an operating loss of $17.3 million, up from $1.1 million in the year-ago period The net loss was $12.0 million, or $0.40 per share, compared to net income of $0.8 million, or $0.03 per diluted share, last year.
Inflation and recessionary concerns remain key risks for business
"We believe the highly uncertain and inflationary economic environment continues to have a detrimental impact on our pre-teen, teen, and young adult customer demographic," commented Ed Thomas, President and CEO, regarding the company's outlook. "While we believe our product assortments are trend- right, the impact of inflation and potential recessionary concerns remain a risk to our business over the near term."
This mix of macroeconomic woes gains even more importance as the retailer operates in the Consumer Cyclical sector, and the companies in this specific sector depend a lot on their operations on economic conditions and business cycles. Should a recession occur in the future it most probably will have a very negative toll on the sales and profitability of Tilly's.
On the flip side, should the macroeconomic conditions improve, the stock could perhaps bounce back. This seems unlikely in the near-term due to the company's poor outlook. For the second quarter of 2023, it estimates that net sales will be in the range of approximately $148 million to $158 million. It also expects a comparable net sales decrease of approximately 10% to 15% for the second quarter of fiscal 2023.
Tilly's estimates that SG&A expenses for the second quarter of fiscal 2023 will be in the range of approximately $49 million to $50 million, compared to $43.2 million for the first quarter. Tilly's expects its loss per share for the second quarter of fiscal 2023 to be in the range of $0.13 to $0.27 based on estimated weighted average shares of approximately 29.9 million. This may seem better than the loss of $0.40 per share for the first quarter, but the company expects a second consecutive quarter of net losses if its projections materialize.
Quarter-over-quarter, there has been a dramatic collapse in net income. For the quarter ending on Oct. 31, 2022, the net income was $5.15 million. For the following quarter ending on Jan. 31, 2023, the net income fell 94% to $309,000, and for the quarter ending on April 30, 2023, the net profits turned to a net loss of $12 million.
My take
Can the shares of Tilly's bounce back? We cannot predict the future, but based on the grim outlook and the dramatic deterioration of profitability, I do not think it's a viable possibility at this time. No amount of attractive products can make up for declining sales metrics and rising expenses across the board. It is clear to me that Tilly's is at the mercy of the general macroeconomic situation and does not have enough brand strength to beat those odds.
