TILLYS INC

Previous 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.

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, outdoor and social 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 November 2, 2024, we operated 246 stores in 33 states, averaging approximately 7,236 square feet per store, compared to 249 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 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.

Current wording

We believe inflation, including elevated fuel costs, increased levels of credit card debt with higher interest rates, and multi-year lows in consumer savings has had, and is likely to continue to have, a significant, adverse impact on our consumers' spending and, by extension, our operating results. 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 46% of our total selling, general and administrative expenses in the first nine months of fiscal 2024. Our average hourly rate for store payroll in the first nine months of fiscal 2024 was 31% higher than in the pre-pandemic year of fiscal 2019 and 4% higher than in the first nine months 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 and 2025, particularly if the broader economy is negatively impacted by recessionary impacts for an extended period of time.

Previous wording

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

Current wording

Third Quarter (13 Weeks) Ended November 2, 2024 Compared to Third Quarter (13 Weeks) Ended October 28, 2023

Previous wording

Total net sales were $278.7 million, a decrease of $4.9 million, or 1.7%, compared to $283.6 million last year, primarily due to a decline in comparable net sales partially offset by the calendar shift impact of last year's 53rd week in the retail calendar, which caused a portion of the back-to-school season's sales volume to shift into the second quarter this year from the beginning of the third quarter last year. Total comparable net sales, including both physical stores and e-com, decreased by 8.4% relative to the shifted 26-week period ended August 5, 2023.

Current wording

Total net sales were $143.4 million, a decrease of 13.8%. This decrease was primarily attributable to the calendar shift impact of last year's 53rd week in the retail calendar, which caused a portion of the back-to-school season's sales volume to shift into the second quarter this year from the third quarter last year, resulting in a net sales reduction of $18.4 million in this year's third quarter. Total comparable net sales, including both physical stores and e-com, decreased by 3.4% relative to the comparable 13-week period ended November 4, 2023.

Previous 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.

Current wording

•Net sales from physical stores were $111.3 million, a decrease of 16.0%. Comparable store net sales decreased 5.6% relative to the comparable 13-week period ended November 4, 2023. Net sales from physical stores represented 77.6% of total net sales this year compared to 79.6% total net sales last year. We ended the third quarter with 246 total stores compared to 249 total stores at the end of the third quarter last year.

Previous wording

Gross profit was $49.9 million, or 30.7% of net sales, compared to $44.3 million, or 27.7% of net sales, last year. Product margins improved by 270 basis points primarily due to the combination of improved initial markups and lower total markdowns. Buying, distribution, and occupancy costs improved by 30 basis points collectively, primarily due to carrying these costs against a higher level of net sales this year.

Current wording

Gross profit was $37.2 million, or 25.9% of net sales, compared to $48.7 million, or 29.3% of net sales, last year. Product margins were within 10 basis points of last year's third quarter. Buying, distribution, and occupancy costs deleveraged by 320 basis points collectively, despite being $0.7 million lower than last year, primarily due to carrying these costs against a lower level of net sales this year.

Previous 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:

Current wording

SG&A expenses were $51.3 million, or 35.7% of net sales, compared to $51.2 million, or 30.8% of net sales, last year. Primary SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:

Previous 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.

Current wording

Operating loss was $14.1 million, or 9.8% of net sales, compared to $2.5 million, or 1.5% of net sales, last year primarily as a result of the combination of the factors noted above.

Previous wording

Income tax benefit was $4.5 thousand, or 6.2% of pre-tax loss, compared to an income tax benefit of $0.3 million, or 23.2% of pre-tax loss, last year. The decrease in this quarter's effective income tax rate was due to an immaterial state tax benefit arising in a quarter with a nearly break-even pre-tax loss.

Current wording

Income tax benefit was $5.0 thousand, or 0.0% of pre-tax loss, compared to $0.3 million, or 28.0% of pre-tax loss, last year. The decrease in the effective income tax rate was due to the continuing impact of a full, non-cash deferred tax asset valuation allowance.

Previous 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.

Current wording

Net loss was $12.9 million, or $0.43 net loss per share, compared to $0.8 million, or $0.03 net loss per share, last year.

Previous wording

•Net sales from physical stores were $225.2 million, a decrease of $2.5 million or 1.1%, compared to $227.6 million last year, with a comparable store net sales decrease of 8.2%. Net sales from physical stores represented 80.8% of total net sales this year compared to 80.3% total net sales last year.

Current wording

•Net sales from physical stores were $336.4 million, a decrease 6.6%. Comparable store net sales decreased 7.4% relative to the comparable 39-week period ended November 4, 2023. Net sales from physical stores represented 79.7% of total net sales this year compared to 80.0% total net sales last year.

Previous 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.

Current wording

Gross profit was $111.4 million, or 26.4% of net sales, compared to $119.0 million, or 26.4% of net sales, last year. Product margins improved by 130 basis points, primarily due to the combination of improved initial markups and lower total markdowns. Buying, distribution, and occupancy costs deleveraged by 140 basis points collectively, despite being $1.3 million lower than last year, primarily due to carrying these costs against a lower level of net sales this year.

Previous wording

SG&A expenses were $95.9 million or 34.4% of net sales, compared to $90.2 million, or 31.8% 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 $147.1 million, or 34.9% of net sales, compared to $141.4 million, or 31.4% of net sales, last year. Primary SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:

Previous wording

Operating loss was $21.6 million, or 7.8% of net sales, compared to an operating loss of $19.9 million, or 7.0% of net sales, last year primarily as a result of the combination of the factors noted above.

Current wording

Operating loss was $35.7 million, or 8.5% of net sales, compared to $22.5 million, or 5.0% of net sales, last year primarily as a result of the combination of the factors noted above.

Previous 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.

Current wording

Income tax benefit was $21.8 thousand or 0.1% of pre-tax loss, compared to $4.9 million, or 26.0% of pre-tax loss, last year. The decrease in the effective income tax rate was due to the continuing impact of a full, non-cash deferred tax asset valuation allowance.

Previous wording

Net loss was $19.7 million, or $0.66 net loss per share, compared to a net loss of $13.1 million, or $0.44 net loss per share, last year.

Current wording

Net loss was $32.6 million, or $1.08 net loss per share, compared to $13.9 million, or $0.47 net loss per share, last year.

Previous 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:

Current wording

Working capital at November 2, 2024, was $41.8 million compared to $71.5 million at February 3, 2024, a decrease of $29.7 million. The primary changes in our working capital during the first three quarters of fiscal 2024 were as follows:

Previous 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):

Current wording

A summary of operating, investing and financing activities for the 39 weeks ended November 2, 2024 compared to the 39 weeks ended October 28, 2023 is shown in the following table (in thousands):

Previous 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.

Current wording

Net cash used in operating activities was $38.2 million this year compared to $10.5 million last year. The $27.7 million increase in net cash used in operating activities compared to last year was primarily due to lower net sales.

Previous 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.

Current wording

$83.5 million, partially offset by purchases of marketable securities of $59.6 million and capital expenditures totaling $6.7 million. Net cash used in investing activities in the first three quarters of fiscal 2023 consisted of purchases of marketable securities of $88.1 million and capital expenditures totaling $10.5 million, partially offset by maturities of marketable securities of $80.0 million.

Previous wording

Financing activities primarily consist of proceeds from employee exercises of stock options.

Current wording

Financing activities primarily consist of proceeds from employee exercises of stock options. The prior year proceeds from exercise of stock options were partially offset by taxes paid on a short-swing profit disgorgement payment made to us last year.