Tilly's, Inc.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Greetings, and welcome to the Tilly’s Incorporated Third Quarter 2020 Earnings Results Conference Call. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Gar Jackson. Thank you, Gar. You may begin.

[Gar Jackson:]

Good afternoon, and welcome to the Tilly’s fiscal 2020 third quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company’s results and then host a Q&A section. 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.

[Ed Thomas:]

Thanks Gar. Good afternoon, everyone, and thank you for joining us today. We continue to adapt to this rapidly evolving COVID-19 environment and its impact on retail. We have gone from having our stores open for only 50% of total available operating days in the first quarter to 65% in the second quarter to 94% in the third quarter all with restrictions on operating hours and customer traffic upon store reopenings that began during the second quarter. We entered the third quarter with 33 of our California indoor mall stores closed for the entire month of August, began reopening these stores throughout September and reopened the final eight stores on October 7. As we announced in early September, back to school days were meaningfully delayed, compared to prior years, which got us off to a very weak start to the quarter in August. However, as schools announced their later reopening dates, our business began to rebound to a degree later in the quarter. Compared to the respective fiscal months of last year August net sales decreased 35%, but then September net sales increased 22%, and October net sales increased 10%. Altogether this resulted in a total net sales decrease of 9% for the third quarter, which we view as an encouraging result particularly in light of our August results and the significant number of stores that were closed for a portion of the quarter. Our e-commerce business continued to thrive during the third quarter, generating 57% net sales increase was significantly improved product margins and bottom line profitability, compared to last year. We have function with a digital first mindset during this pandemic period and it has driven significant improvement in our e-commerce assortment management, resulted in expanded and more profitable digital spend, additional customer convenience enhancements including curbside pickup, and operational improvements in our e-commerce distribution center. All these factors have combined to drive meaningful improvement in our e-commerce business, which we hope to sustain and build upon going forward.

[Michael Henry:]

Thanks, Ed. Good afternoon, everyone. Details of our third quarter operating performance, compared to last year’s third quarter were as follows

[Operator:]

Our first question comes from David Buckley with Bank of America.

[DavidBuckley:]

Hi guys, good afternoon. Thanks for taking my question. Mike, just on your last comment on margins, could you just discuss the e-com profitability outlook for the fourth quarter? Any type of surcharge pressure you expect to incur? And then whether or not you expect product margins to improve again in the fourth quarter?

[MichaelHenry:]

So again, we’re not providing any specific guidance to anything given how unpredictable the environment is. But I think directionally, we would expect some of the trends that we saw in the third quarter to carry into the fourth quarter. So we have seen meaningfully improved regular price selling, full price selling on e-com for several months now that probably isn’t going to change, we think during the fourth quarter. Certainly, added shipping charges in such with the high increase in e-com sales that we’re anticipating. But year-over-year e-com has certainly improved its profitability relative to historical years from a combination of the operational improvements that we mentioned, but also the full price selling that’s been significantly stronger for most of the year at this point. So I don’t think that’s going to change.

[DavidBuckley:]

Okay, great. And can you just discuss how these store capacity issues over Black Friday or since then and so how are you managing them?

[EdThomas:]

Yes, we have. It varies by state, county, actually just a little while ago California announced some further restrictions on capacity. But we’ve managed it well, the teams have managed it well, our conversion rates are actually up, which is a good thing. And it’s a challenge sometimes, but overall we’ve gotten through it pretty successfully.

[Operator:]

Thank you. Our next question comes from Jeff Van Sinderen from B.Riley & Company.

[JeffSinderen:]

Good afternoon, everyone. Let me just say COVID aside congrats on underlying strong performance. It’s great to see. Maybe just as a follow-up, if you can touch on what you’ve seen around Black Friday weekend? And I know you said trends improved since then. So just wondering maybe regionally, I know obviously it depends by region, anything to call out in terms of trends, maybe where it’s a little bit more open versus where it’s a little bit more restricted?

[MichaelHenry:]

Sure. Yes, on Black Friday in particular sales were well off in stores they were down over 30% on that particular day. And Thanksgiving Day, no stores were opened this year last year most stores were opened for some number of hours on Thanksgiving Day. So between those two days combined, we lost close to $5 million in top line volume relative to last year. But then interestingly since then store comps have been positive each day following Black Friday. So as we think about the fourth quarter, I think we’re anticipating that some of the traditional big shopping days of the quarter might not be as high of a peak on those particular days, but maybe you, kind of, stretch business out across other days as we go through the quarter.

[EdThomas:]

Our traffic patterns have been pretty similar to what’s been publicly reported by different companies. So I wouldn’t say our traffic patterns are any different materially. But like Mike said, it’s encouraging to see our performance post Black Friday in the stores has been a little bit better than what it had been trending going into Black Friday.

[MichaelHenry:]

Yes, I think in particular, because of that dynamic on Thanksgiving Day and Black Friday itself, all areas were down meaningful double digits across Black Friday weekend, but we’re recovering ground with each day it seems so far.

[JeffSinderen:]

Okay. Well, good to hear that the trends improving. And then I just wanted to touch on inventory, I know inventory per foot is down, maybe you can speak a little bit more about how you’re, kind of, working through management of inventory in Q4, given what seems to be sort of erratic traffic and even some recent lockdown activity?

[MichaelHenry:]

We planned fourth quarter with the idea that stores were likely to be meaningfully negative. Thankfully, the negative that we reported so far 14% has not been as bad as we thought it was going to be. We also planned for e-com to be up more than it has been so far. So in a way we are, kind of, off on both assumptions, I think stores have been better than we thought it would be so far. We thought e-com would be very strong, we thought it would be even stronger than it has been so far, thinking that, that is likely to continue as we go through the rest of the quarter like I was mentioning earlier some of these peak days we think it’s more likely do not that we’re going to lose some ground on those traditional peak days, but that hopefully based on the signs we’re seeing, we’ll do better in between those peak days and maybe at least with what we’ve seen so far. Maybe stores can end up better than how we planned. So I think we feel pretty good about how we planned inventory overall, and we made the comment that we think our inventories are well positioned for the holiday season. We’re constantly making changes every single week and sometimes intra-week, as we continue to read the business.

[EdThomas:]

Yes, just to add a little to that is, we feel really good about our inventory levels right now. It’s been -- it’s always challenging to balance the inventory between channels. But, I think, Jeff, as you know, we have the ability to fulfill out of our stores for e-commerce as necessary. And we’ve done that for a long time and we continue to do that. So any balancing issues that we may have, we can offset it by that ability alone. So I feel pretty good about where we’re at.

[JeffSinderen:]

Okay, that’s helpful. And then if I could just squeeze in one more. Any comment on supply chain around hard goods?

[EdThomas:]

Well it’s -- we’re really at the early stages of it. So we’re not -- I think the supply chain is challenging for sure, but it seems to be getting little bit better. So more to come on that later as we get further into it.

[Operator:]

Our next question comes from Matt Koranda with ROTH Capital Partners.

[MattKoranda:]

Hey guys, thanks. Just wanted to get a little bit more color on your Q4 revenue commentary expecting net sales to be lower year-over-year. So I guess we’re comping flat overall quarter-to-date. It looks like traffic declines, sort of, improved sequentially and the November tickets up. You said trends are improving, sort of, post-Black Friday. Are we factoring in, sort of, some degradation in traffic for the latter portion of this month? What are the other headwinds that we should be factoring in, because it sounds like things have gotten better since the numbers you provided?

[MichaelHenry:]

Yes, Matt. I think, we are thinking about to some of the responses we just had with Jeff. Some of those peak days, we’re anticipating that we’ll probably lose some ground on those peak days just as we saw on Black Friday in particular, right? Based on what we’ve seen so far, we think during those big days there is a sector of the population that isn’t going to be as comfortable going out to stores and being in large crowds and long lines and things of that nature. It’s why we, kind of, planned stores to be even more negative than they have been so far for the quarter and that there would be some shift of that over to the e-com side. So far thankfully stores have performed better than we thought, it would be really nice if that could continue through the rest of the fourth quarter. But as we’ve seen over this entire period of the last several months, so much changes, so quickly and it’s so unpredictable. We’re just trying to make sure that we stay in a place that we think is reasonable and conservative and to make sure that we give our company the best chance to be successful and yet protect ourselves from downside risk at the same time.

[MattKoranda:]

Okay, fair enough. And then on the e-commerce side of the business, I was just curious about capacity from your standpoint. I mean, do we have enough in terms of shipping slot allocation from your providers? Maybe you could also discuss, sort of, the use of curbside and how important that has been to the e-commerce business over the last quarter or so? And how you expect it to play out for the remainder of the holiday?

[EdThomas:]

Yes. We definitely have enough capacity. So far we have not been negatively impacted by some of the shipping carrier issues that you’re probably hearing about in terms of delays or anything like that. We have not -- and just to, kind of, repeat a little bit of what I said to Jeff, we have the ability to fulfill out of our stores as a backup, if inventory -- if we have inventory in the stores, but not in the e-com distribution center. We’ve had that ability for a long time and we take advantage of where necessary. So I feel pretty good about where we’re at and we should be in decent shape through the holiday season.

[Operator:]

Thank you. Our next question comes from Mitch Kummetz with Pivotal Research.

[MitchKummetz:]

Yes. Thanks for taking my questions. Ed you mentioned that women’s was up mid-singles on the quarter. Could you maybe speak a little bit more to that? And to what extent is that, because you’re tapping into some of these trends have been bolstered by COVID like comfort or maybe even fitness?

[EdThomas:]

Generally, our women’s business across the board was improved across the board really. And part of what’s driving that is the West of Melrose brand in collection that we introduced over a year ago. That’s been really strong for us and just keeps continues to get better as we build as the brand gets better recognition. So I would say that’s probably some of its comfort in the categories that you would expect during these times. But it really is good across the board in women’s. No one is specific brand.

[MitchKummetz:]

Got it. And then on the other categories, you mentioned they were down, but you generally, kind of, speak to the order of magnitude, I was hoping you might be able to do that?

[EdThomas:]

Well, all categories with the exception of Women’s were down in Q3. They’re all improving across the board; all of them have improved so far quarter-to-date. So we’re seeing

[MitchKummetz:]

Is there anything that was worse than others in the quarter? I feel like footwear’s are little bit more challenged over the last couple of quarters. And I was just curious, if that was still, footwear was the worse category?

[EdThomas:]

Well, footwear for us was down, but it’s comping positive right now. And I would say probably the most challenging part of our business was our Kids business.

[MitchKummetz:]

Boys in particular?

[EdThomas:]

Our boys and girls. Yes, boys in particular, that was a little softer than we expected.

[MichaelHenry:]

And then the accessories area too, because of the backpacks.

[EdThomas:]

And the backpacks is a major, as you know, it’s a major category for us.

[MitchKummetz:]

Yes, and then I guess last thing, you mentioned some of the restrictions in California, and I know that LA County is sort of re-imposed some stay at home orders. I’m wondering to what extent you’re seeing any impact from that already. And or -- is that impacting consumer sentiment or people’s willingness to want to get out in the stores or how do you see that sort of translate if at all?

[EdThomas:]

It’s hard to really quantify it, honestly. But I mean, just today, they’ve announced our reduced capacity or capacity limitations and the percentages are different across the state, depending on the county. So there is no question that is a challenging thing for us to deal with -- for everybody to deal with. But it’s probably the right thing to do at this point. So hard to quantify it, how much of an impact it is. Other than the fact that I think you have less people browsing stores and the people that are coming in are real purchasers, which really contributes to an improved conversion rate for us.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

[Ed Thomas:]

Thank you all for joining us on the call today. Happy holidays to everyone and please stay safe. Have a good evening everyone.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a great evening.