Tilly’s Inc. (NYSE: TLYS) Q4 2020 earnings call dated Mar. 11, 2021
Corporate Participants:
Gar Jackson — Investor Relations
Edmond Thomas — President and Chief Executive Officer
Mike Henry — Executive Vice President, Chief Financial Officer
Analysts:
Jeff Van Sinderen — B Riley & Co — Analyst
Matt Koranda — ROTH Capital Partners — Analyst
Mitch Kummetz — Pivotal Research — Analyst
Presentation:
Operator
Greetings and welcome to Tilly’s Inc Fourth Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson.
Gar Jackson — Investor Relations
Good afternoon and welcome to the Tilly’s fiscal 2020 fourth quarter earnings call. Ed Thomas, President and CEO and Michael Henry, CFO will discuss the company’s results and then 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 the same 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 and analysis only as of today, March 11, 2021 and actual results may differ materially from current expectations based on various factors affecting Tilly’s business including impacts of and the company’s action and response to the ongoing COVID-19 pandemic. 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 2020 fourth quarter earnings release which was furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. Today’s call will be limited to one hour and we’ll conclude with a Q&A session after our prepared remarks. I now turn the call over to Ed.
Edmond Thomas — President and Chief Executive Officer
Thanks, Gar. Good afternoon everyone and thank you for joining us today. Fiscal 2020 was an incredibly challenging year. I’m very proud of our team’s fourth quarter accomplishments and finishing the year including a positive overall comp, significantly improved top line and bottom line performance from our e-com business, and improved earnings per share compared to last year’s fourth quarter along with a strong debt-free balance sheet.
This was our strongest fourth quarter earnings per share performance since fiscal 2012’s fourth quarter. We believe these results are quite remarkable considering the significant restrictions on store operating hours and customer traffic during the quarter, high overall unemployment in the broader economy, and other operational challenges posed by the pandemic. In terms of merchandising results for the fourth quarter compared to last year, women’s and footwear were our strongest departments with double-digit percentage increases in comparable net sales, men’s was just shy of flat and girls decreased in the low-single digits, accessories and boys decreased by double-digits.
We believe that an improved overall assortment and the introduction of several new brands drove the strong performance of women’s and footwear. Weakness in third-party brands and denim were the primary causes of net sales decline in boys. Weaker hydration and backpack businesses were the primary causes of net sales decline in accessories. Hard goods including skateboards, bikes, roller skates and certain snow products were launched in 20 stores during the fourth quarter after being soft launched online during the third quarter. Hard goods represented less than 2% of total net sales during the fourth quarter, but we have been encouraged by the customer response to these new offerings so far.
In terms of merchandising priorities for fiscal 2021, we intend to expand offerings of our proprietary RSQ brand, which was our number one overall brand in terms of net sales in fiscal 2020. This expansion will include new product categories as well as a broader sizing and fit offerings within denim. We also intend to continue to introduce new third-party brands, which we believe will drive additional customer interest in our overall merchandise assortment. We also intend to expand hard goods into 80 of our stores with greater breadth in our product offerings during the spring expecting that the draw of individual outdoor activities will continue to be meaningful throughout 2021.
Turning to real estate, we currently have seven new stores planned to open during fiscal 2021 that were originally signed to open during fiscal 2020. These new stores are dispersed among our existing markets and are a mix of both mall and off-mall stores. The first store just opened in Las Vegas on March 1st, two are planned to open by the end of April, and the remaining four are scheduled to open in early May. We intend to continue to open a mix of both mall and off-mall stores over time, but we will be very selective and only pursue those opportunities wherein we believe the economics are appropriate to the environment inclusive of conservative internal sales estimates and good co-tenancy expectations.
With respect to our existing store portfolio, we have addressed approximately 95% of our store leases relative to the rents we withheld during the pandemic shutdown period last year. In many cases, we have negotiated ongoing adjusted rents while we remain in this pandemic environment. We currently have one known store closure that will take place at the end of March. Turning to the first quarter of fiscal 2021, total comparable net sales have decreased 4.6% through March 8th versus the comparable period last year. Comparable net sales were positive in both physical stores and e-com during last year’s period before the pandemic began adversely impacting our operations.
As a reminder, all of our stores were abruptly closed midway through last year’s first quarter and remained closed into the second quarter due to the impact of the COVID-19 pandemic across the country. This year, stores have been operating with significant government-mandated restrictions on customer traffic and reduced operating hours compared to last year’s pre-pandemic period. Assuming our stores and e-com can remain in operation this year, we would expect that total net sales and earnings per share to be substantially better than last year for the first and second quarters of fiscal 2021. However, at this time, specifics are impossible to predict with any certainty until we see how our business performs as we begin to anniversary last year’s store shutdown period.
To further complicate any efforts to predict our business, we have also been experiencing meaningful product delivery delays from Southern California ports impacting almost 20% of our planned retail inventory receipts during the first several weeks of the quarter. Delivery delays have ranged up to a full month at this time and across a variety of product categories. We do not currently have good visibility as to when the situation will be fully resolved. As a result of these delays, we may at times temporarily carry higher inventories than last year. We are carefully monitoring events and adjusting to the best of our ability as we get more information.
In closing, we believe we have successfully managed our way through one of the toughest years in recent retail history. We remain excited about the future of Tilly’s business and dedicated to continuing to push through the challenges posed by the pandemic. Although so much remains uncertain for now, we are hopeful that we can continue to position the business for success in the evolving environment as we proceed through fiscal 2021. We intend to remain conservative in our approach to managing our business over the near-term in order to protect our longer-term prospects in light of the continued volatility and uncertainty in the retail environment. I will now turn the call over to Mike to provide details on the fourth quarter operating performance and balance sheet. Mike?
Mike Henry — Executive Vice President, Chief Financial Officer
Thanks, Ed. Good afternoon, everyone. Details of our fourth quarter operating performance compared to last year’s fourth quarter were as follows: Total net sales were $177.9 million, an increase of $5.4 million or 3.2% compared to $172.5 million last year. Total comparable net sales including both physical stores and e-commerce increased 2.5%. Comparable net sales from physical stores decreased 12.3% and represented 68.9% of total net sales compared to 80.7% of total net sales last year. E-commerce net sales increased 66.5% and represented 31.1% of total net sales compared to 19.3% of total net sales last year.
We ended fiscal 2020 with 238 total stores compared to 240 total stores at the end of fiscal 2019. In fiscal 2020, we opened two new stores and permanently closed four stores. Gross profit including buying, distribution and occupancy expenses was $58.3 million or 32.7% of net sales compared to $52.1 million dollars or 30.2% of net sales last year. Product margins improved by 210 basis points primarily due to reduced total markdowns. Buying, distribution and occupancy costs improved by 40 basis points collectively. Occupancy costs improved by $2.3 million and 170 basis points as a percentage of net sales compared to last year. Distribution expenses increased by $2.8 million and deleveraged by 140 basis points primarily due to an increase in e-com shipping costs of $3.1 million associated with a significant increase in e-commerce orders. Buying costs improved by 10 basis points.
Total SG&A expenses were $44.1 million or 24.8% of net sales compared to $43.6 million or 25.3% of net sales last year. The 50 basis point improvement in SG&A was primarily driven by a $2.5 million reduction in store payroll and related benefits expenses and a $1 million reduction in print advertising expenses, partially offset by increased e-com marketing and fulfillment costs of $4 million in the aggregate due to the significant increase in e-com activity. Operating income improved to $14.1 million or 7.9% of net sales compared to $8.5 million or 4.9% of net sales last year as a result of the combined impact of the factors just noted.
Other expense was $0.1 million compared to other income of $0.6 million last year primarily due to earning lower interest rates on our investments and approximately $0.2 million in costs associated with our new ABL credit facility. Income tax expense was $5.1 million or 36.6% of pre-tax income compared to $2.8 million or 30.9% of pre-tax income last year. Net income improved to $8.9 million or $0.29 per diluted share compared to $6.3 million or $0.21 per diluted share last year. Weighted average shares were 30.1 million this year compared to 29.9 million last year.
Turning to our balance sheet, we ended fiscal year with cash and marketable securities totaling $141.1 million including $2.2 million of withheld store lease payments and no debt outstanding compared to $139.9 million with no withheld store lease payments or debt outstanding last year. We ended the quarter with inventories per square foot down 0.7%. Total capital expenditures for fiscal 2020 were $8.2 million compared to $14.3 [Phonetic] million in fiscal 2019 primarily due to the reduction in new store openings this year as a result of the pandemic. As of March 9, 2021, our total cash and marketable securities were $138.7 million including $2.1 million of withheld store lease payments and no debt outstanding compared to $115.5 million as of comparable fiscal date last year.
As a reminder, in late February 2020, we paid a cash dividend to stockholders of $1 per share or $29.7 million in the aggregate. Per the terms of our ABL credit facility, we are temporarily prohibited from paying dividends or repurchasing our own stock until November 2021. Turning to the first quarter of fiscal 2021, as I noted earlier, total comp sales have decreased 4.6% through March 8th including a decrease of 13.3% in comparable store net sales and an increase in e-commerce net sales of 40.6%.
Comps were negative in February but have been positive so far in March. Given all stores were closed as a result of the pandemic halfway through the first quarter last year, we would expect our total net sales and earnings per share for the first quarter this year to be substantially better than the $77 million in total net sales and loss per share of $0.59 we reported for last year’s first quarter as long as stores and e-com can remain in operation.
As we begin to anniversary last year’s store shutdown period next week, the unknowable factors include how store performance will compare relative to pre-pandemic performance levels and how e-com will perform as it goes up against last year’s significant increase that we experienced during the store shutdown period. These factors are impossible to predict with any certainty and therefore we will not be providing any specific earnings guidance at this time. Operator, we’ll now go to Q&A.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Jeff Van Sinderen with B Riley & Co.
Jeff Van Sinderen — B Riley & Co — Analyst
Hi, everyone. First, let me say congratulations on the strong Q4 metrics. Amazing to see positive comps there, especially given the backdrop. As we’re thinking about the port delays in inventory. I know your inventory is down a little bit on a comp basis, but I think you said about 20% of your receipts are impacted by the delays in a variety of categories. I guess I’m wondering how much of that has impacted Q1 and how much of that do you expect to impact Q2 and are the delays changing your ordering plans going forward?
Edmond Thomas — President and Chief Executive Officer
It’s pretty hard right now, Jeff, to quantify whether it’s a Q1 impact, a Q2 impact, but I’m sure it’s going to touch both quarters.
Jeff Van Sinderen — B Riley & Co — Analyst
Yeah, it’s shifting [Speech Overlap] Yeah, it’s shifting as we go.
Edmond Thomas — President and Chief Executive Officer
And it’s really a moving — it really is a moving target. So it’s really hard to get any kind of visibility. The brands are having just as difficult a time of getting visibility to when it will get better or when that will come in. So, right now, our inventories are in pretty good shape. So we’re pretty good about that, but obviously, the longer the delays go on, it will have some impact on us.
Jeff Van Sinderen — B Riley & Co — Analyst
Okay. And then, just wanted to — I know this is also really hard to predict, but just thinking about the e-com business given the comparisons and I think you are about 30% e-com penetration in Q4 or low-30s. How do we think about or how are you thinking — I know you can’t predict it, but how are you thinking about where your e-com business penetration might go. Is 30% the level or do you think it comes downs from there as the stores ramp back. At this point, what’s your best guess? What’s your latest take on that?
Edmond Thomas — President and Chief Executive Officer
Well, I think that we — as you know, we had a pretty under-developed e-com business going in pre-pandemic and we’ve created a lot of positive momentum in building that business and I don’t think it’s totally just because the stores were closed. I think a lot of it was, we saw growth in areas that out of areas of states that we don’t have any store presence. So we have very little. So we feel that e-com will continue to grow in a good way and at a decent pace even with the stores fully operating. So there still remains a pretty significant opportunity for that business to become big, bigger.
Mike Henry — Executive Vice President, Chief Financial Officer
Yeah, I think we’re thinking it’s going to stay somewhere call it maybe the mid-20% best guess. It’s not — it’s unlikely to stay at the low-30s [Phonetic] with all stores being open right because that penetration is going to shift between the two — between the two channels, but it’s — we certainly think it’s going to be higher than where we ended fiscal ’19 when it was only 16% of total sales. We don’t think it’s going to revert all the way back down to where to it was. I think we’ve made a lot of progress, we’ve invested in technologies and capabilities that we didn’t have two years ago.
So we do think it’s going to remain a bigger piece of the business and it’s good to see that through this past year while that increase occurred on the top line, we also improved product margins and bottom line profitability of our e-com business. So it’ll be a healthier contributor to the overall business than it has been traditionally in pre-pandemic times.
Jeff Van Sinderen — B Riley & Co — Analyst
If I could squeeze in one more, you put up a really strong operating margin around 8% for Q4, I think, and I’m just wondering how you thinking about that within the context of things. I know that last year obviously there were some unusual things around expenses, but I guess what I’m getting at is do you think 8% is sort of, I won’t say the new normal for you, but do you feel like you’ve moved up I guess in terms of what kind of the normal status quo operating margin might be for you?
Mike Henry — Executive Vice President, Chief Financial Officer
Over time we expect to continue to improve the operating margin performance of this business. Each quarter is a little bit different under normal circumstances, right? If you look back at the history of Q1, it’s the smallest revenue quarter that puts a lot more pressure on cost and leverage points on cost during the first order in particular. So 8% doesn’t become the run rate each and every quarter going forward because of the change in volume and the mix between stores and e-com, but generally speaking we still feel like under normal conditions if everything can stay operating in all the COVID caveats, we would expect to continue to push this business through the mid-single digits and into the high-single digits in operating margin in the future. We think that’s a realistic goal and certainly part of our thinking in how we’re trying to manage the business.
Jeff Van Sinderen — B Riley & Co — Analyst
Okay, great to hear. Thanks for taking my questions and best of luck.
Edmond Thomas — President and Chief Executive Officer
Thanks, Jeff.
Operator
And our next question is from Matt Koranda with ROTH Capital Partners.
Matt Koranda — ROTH Capital Partners — Analyst
Hey guys, good afternoon. Thanks for the preliminary commentary as well on I guess February, but I wanted to get a sense for how we should think about transaction values and any color you can provide on sort of how it compares maybe on a two-year stack going forward in 1Q versus kind of more normal times in 1Q ’19 maybe directionally you’d help us with sort of traffic and transaction values relative to that marker.
Mike Henry — Executive Vice President, Chief Financial Officer
Yeah, I don’t have any two-year stacks for any of that information. Thus far in the first quarter compared to last year, which would have been the last pre-pandemic weeks at this stage, traffic has been down 28%. The conversion rate has increased by a high-single digit percentage and average transaction value has been up low-teens. So, traffic is certainly down on top of a meaningful decline last year in the prior year at the same time, but it seems that we’re doing a good job of converting those who come in and they are buying more than they have in the past when they are coming in.
Matt Koranda — ROTH Capital Partners — Analyst
Got it. That’s helpful, Mike. And then just on the strong gross margins from this last quarter, it seems like you called out markdown activity relatively low. How sustainable do you think that is heading into kind of more of the reopening or maybe you’re competing a bit more for traffic over the next several months? Can you talk a little bit about the markdown environment and how you see that playing out?
Mike Henry — Executive Vice President, Chief Financial Officer
Yeah, this is one of those things. It’s a question mark in the current environment, right, depending on how close store performance is relative to pre-pandemic levels, what the next with e-com is and then further complicated by this port delay situation that we’re dealing with that is also unpredictable of what exactly is that going to mean for when the products come in? How seasonally appropriate are they when they do come in? A good thing between Q1 and Q2 is that’s the spring-summer assortment, so it’s not a massive assortment shift between Q1 and Q2.
So as long as we can get those products in somewhere in a reasonable amount of time, we expect our product margins to remain pretty consistent as they always typically are. They don’t tend to move around by more than 100 basis points plus or minus. Historically, our Q4 performance was a bit of an outlier to the good. So all those unknowns in play, I wouldn’t expect that we’ll continue to see plus 200 basis points in product margins going forward. I think if anything, there might be a little bit of pressure on that because of those factors that we just mentioned.
Edmond Thomas — President and Chief Executive Officer
Yeah and just to add to that, we’re much better at managing merchandise margins and have been for the past year than what we were in the past and we’ve never been bad at it, it’s just that we’ve got better and the inventory management disciplines within the organization are really good as is merchandise margin and we have not changed nor do we anticipate changing our promotional strategy where we’re just not a promotional company and if you see a promotion out there, most of the time it’s a planned promotion at a decent margin.
Matt Koranda — ROTH Capital Partners — Analyst
Got it, okay. Last one just really quickly, you mentioned a bit of distribution deleverage and it looks like probably mostly just e-com mix, but anything one time in the quarter to call out just in terms of like maybe excess costs in terms of outbound shipments channeled around parcel carriers that kind of caused you a little bit of a headache there or is that just the mix of e-com in that distribution deleverage?
Mike Henry — Executive Vice President, Chief Financial Officer
It’s primarily the mix of e-com. I mean if you look back at the last several quarters of our performance, the very same things have been the same impacts, whether you’re looking at the buying, distribution, occupancy bucket or you’re looking at the SG&A bucket. It’s been the same key things that are primary drivers of movement in the dollars. So while costs were higher from the carriers, it’s more the e-com penetration, significant increase in e-com activity is what the primary driver of the increase in the cost is.
Matt Koranda — ROTH Capital Partners — Analyst
Okay, understood. I’ll jump back in queue, guys. Thank you.
Edmond Thomas — President and Chief Executive Officer
Thank you.
Operator
In our last question comes from Mitch Kummetz with Pivotal Research.
Mitch Kummetz — Pivotal Research — Analyst
Yeah, thanks for taking my questions. Mike, I think you said on the quarter, occupancy dollars were down. I feel like that’s been the trend. Can you give us some sense of how you expect that line item to flow in ’21 from a dollar standpoint?
Mike Henry — Executive Vice President, Chief Financial Officer
It will continue to be reduced because of all of the negotiations that we have completed, the specific impact from quarter-to-quarter is really going to move somewhat with depending on where comps land out. So I can’t get terribly more specific than that not knowing exactly how stores versus e-com is going to shake out, but we should see year-over-year some continuing favorability because if you think back 12 months, a lot of these negotiations that we did during this past pandemic year hadn’t been accomplished yet. So we should continue to see some favorability through that line for each of the next couple of quarters, not into the second half I’d say.
Mitch Kummetz — Pivotal Research — Analyst
Okay and then hard goods, I think you said penetration was 2% in the quarter, can you maybe speak to how you expect that to ramp through the year and is that largely incremental? I mean I imagine there are some forced plays being pulled from other areas, but do you feel like that’s more incremental than not. And again, kind of where those percentages go?
Edmond Thomas — President and Chief Executive Officer
It’s largely incremental, but I don’t expect it to ramp up to much bigger numbers other than the fact that we are going to expanded into a lot more stores. So in the spring. So that — so far, the initial test we’ve done in stores has been good and we’ll continue to build it from there, but I don’t — I wouldn’t expect a major overall change in our merchandise mix assortment in the store by just adding hard goods. There’ll be some tweaks to it, but nothing major coming out.
Mitch Kummetz — Pivotal Research — Analyst
Okay and then just lastly, maybe on February I mean there have been some delayed tax refunds but now we’ve got stimulus coming. Did the tax refund delays, do you think that hit February and how are you thinking about the business with stimulus to be happening later this month in the next month and are you ready to capitalize on this just given where the inventory is?
Edmond Thomas — President and Chief Executive Officer
I think it’s hard to tell whether the stimulus impacted February or not. The fact is, as we stated is traffic has been down and the shopping is not back to normal yet and our conversion is really healthy, as Mike said, and industry-wide, I mean the traffic has been off, still significantly off and I think it’s going to be a while before you see traffic start to normalize. So I think that’s a bigger challenge and certainly the tax refunds and the stimulus should help in terms of driving sales.
Mike Henry — Executive Vice President, Chief Financial Officer
Yeah, in the middle of February where we saw that really severe winter weather snap hit, we did see our business decelerate everywhere. So we were actually positive comp overall in the first week of February and then we were down double-digits each of the next two weeks when all severe weather hit. I think we had 43 total stores closed for up to a week at one point, not all of them were closed the full week but varying degrees and then the fourth week of February got back into single-digit negative and then week one of March was positive. So we saw a blip there in week two and week three of February, partially because of the weather. It’s really hard for us to tell how tax refunds or stimulus impacts factor in.
Mitch Kummetz — Pivotal Research — Analyst
Got it. Totally understand. All right, thanks guys, good luck.
Mike Henry — Executive Vice President, Chief Financial Officer
All right, thank you.
Operator
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to CEO, Ed Thomas for closing remarks.
Edmond Thomas — President and Chief Executive Officer
Thank you all for joining us on the call today. We look forward to sharing our first quarter results with you in early June. Have a good evening everyone.
Operator
[Operator Closing Remarks]