TILLYS INC

Previous wording

Tillys is a destination specialty retailer of casual apparel, footwear, accessories and hardgoods for men, women, boys and girls. We believe we bring together an unparalleled selection of iconic global, emerging, and proprietary brands rooted in an active and outdoor lifestyle. The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened our first store in Orange County, California. As of May 4, 2024, we operated 246 stores in 33 states, averaging approximately 7,253 square feet per store, compared to 248 total stores at the same time last year. We also sell our products through our e-commerce website, www.tillys.com.

Current wording

Tillys is a destination specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls. We believe we bring together an unparalleled selection of iconic global, emerging, and proprietary brands rooted in an active and outdoor lifestyle. The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened our first store in Orange County, California. As of August 3, 2024, we operated 247 stores in 33 states, averaging approximately 7,252 square feet per store, compared to 246 total stores at the same time last year. We also sell our products through our e-commerce ("e-com") website, www.tillys.com.

Previous wording

We believe the uncertain and inflationary economic environment, including elevated fuel costs, increased levels of credit card debt with higher interest rates, multi-year lows in consumer savings, and a shift in consumer preferences for experiences over goods following the COVID-19 pandemic has had, and is likely to continue to have, a significant, adverse impact on our consumers spending and, by extension, our operating results. Persistent inflation has also resulted in increased costs for many products and services that are necessary for the operation of our business, such as product costs, labor costs, shipping costs, and digital marketing costs, among others. For example, store payroll and payroll related expenses represented approximately 47% of our total selling, general and administrative expenses in the first quarter of fiscal 2024. Our average hourly rate for store payroll in the first quarter of fiscal 2024 was 31% higher than in the pre-pandemic year of fiscal 2019 and 5% higher than in the first quarter of fiscal 2023. Minimum wage increases are estimated to cost us an additional $2 million during fiscal 2024 compared to fiscal 2023. These and other cost increases may continue to have a material adverse impact on our results of operations and financial condition in fiscal 2024, particularly if the broader economy is negatively impacted by recessionary impacts for an extended period of time.

Current wording

We believe the uncertain and inflationary economic environment, including elevated fuel costs, increased levels of credit card debt with higher interest rates, multi-year lows in consumer savings, and a shift in consumer preferences for experiences over goods following the pandemic has had, and is likely to continue to have, a significant, adverse impact on our consumers spending and, by extension, our operating results. Persistent inflation has also resulted in increased costs for many products and services that are necessary for the operation of our business, such as product costs, labor costs, shipping costs, and digital marketing costs, among others. For example, store payroll and payroll related expenses represented approximately 47% of our total selling, general and administrative expenses in the first half of fiscal 2024. Our average hourly rate for store payroll in the first half of fiscal 2024 was 32% higher than in the pre-pandemic year of fiscal 2019 and 4% higher than in the first half of fiscal 2023. Minimum wage increases are estimated to cost us an additional $2 million during fiscal 2024 compared to fiscal 2023. These and other cost increases may continue to have a material adverse impact on our results of operations and financial condition in fiscal 2024, particularly if the broader economy is negatively impacted by recessionary impacts for an extended period of time.

Previous wording

Net sales reflect revenue from the sale of our merchandise at store locations and through e-commerce, net of sales taxes. Store sales are reflected in sales when the merchandise is received by the customer. For e-commerce sales, we recognize revenue, and the related cost of goods sold at the time the merchandise is shipped to the customer. Net sales also include shipping and handling fees for e-commerce shipments that have been shipped to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns expected in the future stemming from current period sales. We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions.

Current wording

Net sales reflect revenue from the sale of our merchandise at store locations and through e-com, net of sales taxes. Store net sales are reflected in sales when the merchandise is received by the customer. For e-com net sales, we recognize revenue, and the related cost of goods sold at the time the merchandise is shipped to the customer. Net sales also include shipping and handling fees for e-com shipments that have been shipped to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns expected in the future stemming from current period sales. We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions.

Previous wording

Our comparable store net sales are defined as sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates of the prior year. A remodeled, relocated or refreshed store is included in comparable store net sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% in any fiscal month. We include sales from our e-commerce platform as part of comparable store net sales as we manage and analyze our business on a single omni-channel basis and have substantially integrated our investments and operations for our stores and e-commerce platform to give our customers seamless access and increased ease of shopping. Comparable store net sales exclude gift card breakage income and e-commerce shipping and handling fee revenue. Some of our competitors and other retailers may calculate comparable or “same store” net sales differently than we do. As a result, data in this Report regarding our comparable store net sales may not be comparable to similar data made available by other retailers.

Current wording

Our comparable store net sales are defined as net sales from our physical stores open on a daily basis combined with net sales from our e-com website compared to the same respective fiscal dates of the prior year. A remodeled, relocated or refreshed store is included in comparable store net sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% in any fiscal month. We include net sales from our e-com website as part of comparable store net sales as we manage and analyze our business on a single omni-channel basis and have substantially integrated our investments and operations for our stores and e-com website to give our customers seamless access and increased ease of shopping. Comparable store net sales exclude gift card breakage income and e-com shipping and handling fee revenue. Some of our competitors and other retailers may calculate comparable or “same store” net sales differently than we do. As a result, data in this Report regarding our comparable store net sales may not be comparable to similar data made available by other retailers.

Previous wording

Gross profit is equal to our net sales less our cost of goods sold. Cost of goods sold reflects the direct cost of purchased merchandise as well as buying, distribution and occupancy costs. Buying costs include compensation and benefit expense for our internal buying organization. Distribution costs include costs for receiving, processing and warehousing our store merchandise, and shipping of merchandise to or from our distribution and e-commerce fulfillment centers, and to our e-commerce customers and between store locations. Occupancy costs include the rent, common area maintenance, utilities, property taxes, security and depreciation costs of all store locations. These costs are significant and can be expected to continue to increase relative to business growth. The components of our reported cost of goods sold may not be comparable to those of other retail companies.

Current wording

Gross profit is equal to our net sales less our cost of goods sold. Cost of goods sold reflects the direct cost of purchased merchandise as well as buying, distribution and occupancy costs. Buying costs include compensation and benefit expense for our internal buying organization. Distribution costs include costs for receiving, processing and warehousing our store merchandise, and shipping of merchandise to or from our distribution and e-com fulfillment centers, and to our e-com customers and between store locations. Occupancy costs include the rent, common area maintenance, utilities, property taxes, security and depreciation costs of all store locations. These costs are significant and can be expected to continue to increase relative to business growth. The components of our reported cost of goods sold may not be comparable to those of other retail companies.

Previous wording

Our selling, general and administrative, or SG&A, expenses are comprised of store selling expenses and corporate-level general and administrative expenses. Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-commerce receiving and processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functions such as executive management, legal, accounting, information systems, human resources, impairment charges and other centralized services. Store selling expenses generally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to net sales and store growth but will be expected to increase over time to support the needs of our company. SG&A expenses as a percentage of net sales are usually higher in lower volume periods and lower in higher volume periods.

Current wording

Our selling, general and administrative ("SG&A") expenses are comprised of store selling expenses and corporate-level general and administrative expenses. Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-com receiving and processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functions such as executive management, legal, accounting, information systems, human resources, impairment charges and other centralized services. Store selling expenses generally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to net sales and store growth but will be expected to increase over time to support the needs of our company. SG&A expenses as a percentage of net sales are usually higher in lower volume periods and lower in higher volume periods.

Previous wording

(1)Our comparable store net sales are defined as sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates of the prior year. A remodeled or relocated store is included in comparable store net sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% in any fiscal month. We include sales from our e-commerce platform as part of our comparable store net sales as we manage and analyze our business on an omni-channel basis and have substantially integrated our investments and operations for our stores and e-commerce platform to give our customers seamless access and increased ease of shopping. Comparable store net sales exclude gift card breakage income, and e-commerce shipping and handling fee revenue.

Current wording

(1)Our comparable store net sales are defined as sales from our physical stores open on a daily basis combined with net sales from our e-com website compared to the same respective fiscal dates of the prior year. A remodeled or relocated store is included in comparable store net sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% in any fiscal month. We include sales from our e-com website as part of our comparable store net sales as we manage and analyze our business on an omni-channel basis and have substantially integrated our investments and operations for our stores and e-com website to give our customers seamless access and increased ease of shopping. Comparable store net sales exclude gift card breakage income, and e-com shipping and handling fee revenue.

Previous wording

(2)The number of stores and the amount of square footage reflect the number of days during the period that stores were open. E-commerce sales, e-commerce shipping and handling fee revenue and gift card breakage income are excluded from net sales in deriving average net sales per retail store and average net sales per square foot.

Current wording

(2)The number of stores and the amount of square footage reflect the number of days during the period that stores were open. E-com net sales, e-com shipping and handling fee revenue and gift card breakage income are excluded from net sales in deriving average net sales per retail store and average net sales per square foot.

Previous wording

(3)E-commerce net sales include e-commerce sales and e-commerce shipping and handling fee revenue.

Current wording

(3)E-com net sales include e-com net sales and e-com shipping and handling fee revenue.

Previous wording

First Quarter (13 Weeks) Ended May 4, 2024 Compared to First Quarter (13 Weeks) Ended April 29, 2023

Current wording

Second Quarter (13 Weeks) Ended August 3, 2024 Compared to Second Quarter (13 Weeks) Ended July 29, 2023

Previous wording

•Net sales from physical stores were $92.8 million, a decrease of $5.0 million or 5.1%, compared to $97.8 million last year, with a comparable store net sales decrease of 8.6%. Net sales from physical stores represented 80.1% of total net sales this year compared to 79.1% total net sales last year. We ended the first quarter with 246 total stores compared to 248 total stores at the end of the first quarter last year.

Current wording

•Net sales from physical stores were $132.3 million, an increase of $2.5 million or 2.0%, compared to $129.8 million last year, with a comparable store net sales decrease of 7.9%. Net sales from physical stores represented 81.3% of total net sales this year compared to 81.1% total net sales last year. We ended the second quarter with 247 total stores compared to 246 total stores at the end of the second quarter last year.

Previous wording

SG&A expenses were $45.1 million or 38.9% of net sales, compared to $43.2 million, or 34.9% of net sales, last year. The primary components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:

Current wording

SG&A expenses were $50.8 million or 31.2% of net sales, compared to $47.0 million, or 29.4% of net sales, last year. The primary components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:

Previous wording

Operating loss was $20.8 million, or 17.9% of net sales, compared to $17.3 million, or 14.0% of net sales, last year primarily as a result of the combination of decreased net sales and increased SG&A expenses noted above.

Current wording

Operating loss was $0.9 million, or 0.5% of net sales, compared to an operating loss of $2.7 million, or 1.7% of net sales, last year primarily as a result of the combination of the factors noted above.

Previous wording

Net loss was $19.6 million, or $0.65 net loss per share, compared to $12.0 million, or $0.40 net loss per share, last year.

Current wording

Net loss was $0.1 million, or $0.00 net loss per share, compared to a net loss of $1.1 million, or $0.04 net loss per share, last year.

Previous wording

Gross profit was $24.3 million, or 21.0% of net sales, compared to $25.9 million, or 21.0% of net sales, last year. Product margins improved by 130 basis points primarily due to the combination of a lower markdown rate and improved initial markups. Buying, distribution, and occupancy costs deleveraged by 130 basis points collectively, despite being $0.8 million lower than last year, primarily due to carrying these costs against a lower level of net sales this year.

Current wording

Gross profit was $74.2 million, or 26.6% of net sales, compared to $70.3 million, or 24.8% of net sales, last year. Product margins improved by 210 basis points primarily due to the combination of improved initial markups and lower total markdowns. Buying, distribution, and occupancy costs deleveraged by 30 basis points collectively, despite being $0.6 million lower than last year, primarily due to carrying these costs against a lower level of net sales this year.

Previous wording

Income tax benefit was $13,000, or 0.1% of pre-tax loss, compared to $4.2 million, or 26.1% of pre-tax loss, last year. The decrease in this year's effective income tax rate was primarily attributable to the continuing impact of a full, non-cash deferred tax asset valuation allowance.

Current wording

Income tax benefit was $17.2 thousand, or 0.1% of pre-tax loss, compared to an income tax benefit of $4.6 million, or 25.9% of pre-tax loss, last year. The decrease in this year's effective income tax rate was primarily attributable to the continuing impact of a full, non-cash deferred tax asset valuation allowance.

Previous wording

Working capital at May 4, 2024, was $50.0 million compared to $71.5 million at February 3, 2024, a decrease of $21.5 million. The primary changes in our working capital during the first quarter of fiscal 2024 were as follows:

Current wording

Working capital at August 3, 2024, was $51.4 million compared to $71.5 million at February 3, 2024, a decrease of $20.1 million. The primary changes in our working capital during the first half of fiscal 2024 were as follows:

Previous wording

A summary of operating, investing and financing activities for the thirteen weeks ended May 4, 2024 compared to the thirteen weeks ended April 29, 2023 is shown in the following table (in thousands):

Current wording

A summary of operating, investing and financing activities for the twenty-six weeks ended August 3, 2024 compared to the twenty-six weeks ended July 29, 2023 is shown in the following table (in thousands):

Previous wording

Net cash used in operating activities was $25.7 million this year compared to $16.2 million last year. The $9.5 million increase in net cash used in operating activities compared to last year was primarily due to lower net sales.

Current wording

Net cash used in operating activities was $15.2 million this year compared to $3.9 million last year. The $11.3 million increase in net cash used in operating activities compared to last year was primarily due to lower net sales.

Previous wording

Net Cash Used in Investing Activities

Current wording

Net Cash Provided by (Used in) Investing Activities

Previous wording

Net cash used in investing activities was $1.6 million this year compared to $13.7 million last year. Net cash used in investing activities in the first quarter of fiscal 2024 consisted of purchases of marketable securities of $29.5 million and capital expenditures totaling $2.1 million, partially offset by maturities of marketable securities of $30.0 million. Net cash used in investing activities in the first quarter of fiscal 2023 consisted of purchases of marketable securities of $24.5 million and capital expenditures totaling $4.3 million, partially offset by maturities of marketable securities of $15.1 million.

Current wording

Net cash provided by investing activities was $4.6 million this year compared to net cash used of $15.1 million last year. Net cash provided by investing activities in the first half of fiscal 2024 consisted of maturities of marketable securities of $48.5 million, partially offset by purchases of marketable securities of $39.3 million and capital expenditures totaling $4.6 million. Net cash used in investing activities in the first half of fiscal 2023 consisted of purchases of marketable securities of $53.9 million and capital expenditures totaling $6.3 million, partially offset by maturities of marketable securities of $45.1 million.

Previous wording

On April 27, 2023 (the “Closing Date”), we entered into an asset-backed credit agreement and revolving line of credit note (the "Note" and, collectively, the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender (the “Bank”). The Credit Agreement provides for an asset-based, senior secured revolving credit facility (“Revolving Facility”) of up to $65.0 million (“Revolving Commitment”) consisting of revolving loans, letters of credit and swing line loans, with a sub-limit on letters of credit outstanding at any time of $10.0 million and a sub-limit for swing line loans of $7.5 million, which replaced our previous senior unsecured credit agreement. The Credit Agreement also includes an uncommitted accordion feature whereby we may increase the Revolving Commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions. The Revolving Facility matures on April 27, 2026. The payment and performance in full of the secured obligations under the Revolving Facility are secured by a lien on and security interest in all of our assets.

Current wording

On April 27, 2023 (the “Closing Date”), we entered into an asset-backed credit agreement and revolving line of credit note (the "Note" and, collectively, the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender (the “Bank”). The Credit Agreement provides for an asset-based, senior secured revolving credit facility (“Revolving Facility”) of up to $65.0 million (“Revolving Commitment”) consisting of revolving loans, letters of credit and swing line loans, with a sub-limit on letters of credit outstanding at any time of $10.0 million and a sub-limit for swing line loans of $7.5 million, which replaced our previous senior secured credit agreement. The Credit Agreement also includes an uncommitted accordion feature whereby we may increase the Revolving Commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions. The Revolving Facility matures on April 27, 2026. The payment and performance in full of the secured obligations under the Revolving Facility are secured by a lien on and security interest in all of our assets.

Previous wording

As of May 4, 2024, we were in compliance with all of our covenants, were eligible to borrow up to a total of $57.7 million and had no outstanding borrowings under the Credit Agreement. The only utilization of the letters of credit sub-limit under the Credit Agreement was a $2.0 million irrevocable standby letter of credit.

Current wording

As of August 3, 2024, we were in compliance with all of our covenants, were eligible to borrow up to a total of $63.0 million and had no outstanding borrowings under the Credit Agreement. The only utilization of the letters of credit sub-limit under the Credit Agreement was a $2.0 million irrevocable standby letter of credit.