There are several stocks with huge potential that investors might miss, and Tilly’s Inc. (TLYS, Financial) is one of them. The company posted excellent quarterly results, including a 7.35% increase in net sales. Further, net sales for the first nine months increased 4.3%.
Tilly’s is the leading specialty retailer of West Coast inspired apparel, footwear and accessories for young men, young women, boys and girls. The company offers unparalleled merchandise assortment of 600 brands and five proprietary, exclusive brands available both in stores and online. Currently, the company operates 225 stores in 32 states.
Strong third-quarter results
On Nov. 30, 2016, the Irvine, California-based company reported its financial results for the third quarter ended Oct. 29. The company’s net sales increased 7.35% to $152.11 million, compared to $141.69 million for the comparable prior-year period. Comparable store sales (including e-commerce sales) for the reported quarter increased 4.4%, compared to 3.9% in the third quarter of 2015.
Gross profit for the reported quarter increased 7.46% to $47.97 million, compared to $44.64 million in the prior-year period. The gross profit margin increased 31.54% from 31.5% in the same period last year.
Tilly’s operating income increased 97.96% to $10.67 million, compared to $5.39 million in the year-ago quarter. Operating income as a percentage of net sales increased 7.01% from 3.8% in the same period last year. Net income increased 128.47% to $6.42 million, or 23 cents per diluted share. Net income as a percentage of net sales increased 4.22% from 1.98% in the prior-year period.
The company’s EBIT increased 99.07% to $10.77 million, compared to $5.41 million for the comparable prior year period. Cost of sales increased 7.30% to $104.14 million, compared to $97.05 million. Selling, general and administrative expenses for the reported quarter decreased 4.97% to $37.3 million, compared to $39.25 million in the same period last year.
Tilly’s ended the quarter with cash and cash equivalents of $43.38 million, a decrease of 14.97% from the year-ago quarter. Further, total long-term liabilities for the reported quarter decreased 11.12% to $37.09 million, compared to $41.73 million for the comparable prior-year period.
Attributes of the quarter
Gross margin increased 110 basis points primarily due to lower buying, distribution and occupancy costs. Selling, general and administrative expenses decreased mainly due to lower non-cash store impairment charges, corporate payroll savings and several other smaller expense reductions. Further, operating income increased primarily due to the reductions in selling, general and administrative expenses.
First nine months results overview
The following chart shows Tilly’s financial results for first nine months of 2016.
| Metrics | Nine months ended October 2016 | Nine months ended October 2015 | % change |
| Net sales | $408.74 million | $391.9 million | 4.3% |
| Gross profit | $119.39 million | $117.29 million | 1.79% |
| Operating income | $8.93 million | $8.62 million | 3.6% |
| Net income | $5.11 million | $4.66 million | 9.66% |
| EBIT | $9.2 million | $8.66 million | 6.23% |
| Cost of sales | $289.34 million | $274.62 million | 5.36% |
| Selling, general and administrative expenses | $110.46 million | $108.67 million | 1.65% |
| Net cash provided by operating activities | $19.59 million | $6.4 million | 206.09% |
Projections
Tliiy’s expects its fourth quarter comparable store sales and operating income will be in the range of flat to more than 2% and in the range of $7.5 million to $9.5 million. The company further expects its EPS in the range of 15 cents to 20 cents.
Additionally, Tilly’s has engaged several initiatives for its fiscal 2016. To improve the perception of value, the company has enhanced its promotional strategies and has launched a new reward program. It has taken steps to improve the economics for its under-performing stores. Other initiatives include: shortening of product lead time, driving customer engagement, reinstitute store clustering for new store opportunities and establishing omni-channel capabilities.
Tilly’s specialty
Thirty percent of Tilly's total sales are from exclusive, proprietary labels, including three of its top 10 performing brands overall. No third party brand exceeds 5% of the company’s total sales. Approximately half of Tilly’s stores are off-mall, which creates a niche with a flexible real estate model. Further, the company has significant e-commerce growth and ample room for store growth.
Management
During the third quarter, Tilly’s appointed Jon Kubo to the newly created position of Chief Digital Officer. This appointment will help Tilly’s to lead its critically important e-commerce business, along with digital marketing and will create consistency in digital consumer experiences across all interaction points.
On a concluding note
Overall, Tilly’s is a rock-solid company with a strong balance sheet, long history of stable and healthy product margins, remarkable white space opportunity, significant e-commerce growth opportunity and experienced management team. Finally, with the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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