On Friday, B.Riley adjusted the financial outlook for Tilly's (NYSE:TLYS), reducing the price target to $6 from the previous $7 while retaining a Neutral stance on the shares. The adjustment follows Tilly's second-quarter earnings report, which was released after market close on Thursday, showing gross margin (GM) and EBITDA surpassing consensus predictions.
The retailer experienced a 1.8% increase in sales, with a slight uptick in both store and e-commerce revenue. Year-over-year, the operating margin showed improvement, registering at negative 0.5% of sales compared to negative 1.7% in the second quarter of 2023.
The company's selling, general and administrative expenses (SG&A) experienced a 180 basis point increase to 31.2%, primarily driven by higher costs in payroll, digital marketing, and software as a service (SaaS) investments. Despite this, gross margin rose by 300 basis points to 30.7%, exceeding the consensus of 27.9%.
This was attributed to better product margins and favorable buyout and distribution (BDO) costs. Merchandise margin also saw a 270 basis point rise due to improved markdowns and initial markups (IMU), while BDO costs leveraged by 30 basis points collectively against higher sales.
As of August 31, quarter-to-date comparable store sales were up 1.0% year-over-year, with trends showing improvement during the peak back-to-school season. However, a seasonal fade is anticipated. The company's private label showed strong performance, though it faced inventory shortages in some top-selling categories.
Tilly's provided third-quarter revenue and earnings per share (EPS) guidance that fell below consensus, taking into account an approximately $18 million revenue pull-forward into the second quarter due to a calendar shift related to the 53rd week included in the previous year.
Tilly's is actively managing its lease expenses, with approximately 80 lease decisions to be made in fiscal year 2024, 60% of which have already been addressed.
The company is working towards securing more favorable lease terms to better reflect the high single-digit decrease in consumer traffic and conversion rates. While the potential for improved leases exists, sales and merchandise margins need further recovery for significant progress in occupancy leverage.
The company is also focusing on inventory management and optimizing markdowns. Looking beyond the third quarter, the comparisons are expected to be relatively easy, and key metrics should show improvement. Nevertheless, structural challenges, such as inherently higher store labor costs, and persistent macroeconomic headwinds, are likely to slow the impact of turnaround initiatives.
Tilly's continues to refine its marketing strategies to establish a sustainable connection with its target demographic. The report concludes with an expectation of business growth and margin recovery for Tilly's, contingent upon a substantial improvement in sales and merchandise margin trends.
In other recent news, Tilly's Inc. reported mixed results for its first quarter of 2024, with a decrease in net sales and pretax operating results, despite an improvement in product margins. Both B.Riley and Roth/MKM adjusted their financial outlook on Tilly's, reducing the price target to $7.00 and $6.00 respectively, while maintaining a neutral stance on the stock.
These adjustments followed Tilly's first-quarter performance, which surpassed consensus in gross margin and EBITDA, but also saw a decline in sales and operating margin.
The company's quarter-to-date performance showed total comparable sales down by 8.4% year-over-year. However, there were signs of recovery following the resolution of issues with newly implemented distribution software. Tilly's private label offerings fared well, and there are expectations for sequential improvements in key metrics.
Tilly's is actively managing lease expenses, with nearly 100 lease decisions anticipated in fiscal year 2024. The company aims to secure favorable lease terms that reflect the high single-digit declines in consumer traffic and conversion. B.Riley anticipates that advantageous lease agreements could lead to long-term occupancy leverage, given a more significant recovery in sales and merchandise margin.
Tilly's is implementing new marketing strategies and operational tools to enhance business performance. Positive signs in inventory, particularly in the junior section, support optimism for the second half of the year.
InvestingPro Insights
In light of B.Riley's recent adjustment of Tilly's financial outlook, current data from InvestingPro provides additional context. Tilly's operates with a notable debt burden and analysts have recently revised their earnings expectations downward for the upcoming period, reflecting the challenges the retailer faces. Despite the company's efforts to manage expenses and optimize inventory, Tilly's is not expected to be profitable this year, as indicated by a negative P/E ratio of -3.43. Furthermore, with a 6-month price total return of -35.98%, the stock has experienced significant volatility, which is a trend that investors should monitor closely.
InvestingPro Tips highlight that Tilly's is quickly burning through cash and does not pay a dividend to shareholders, which could be a concern for income-focused investors. Additionally, the company's valuation implies a poor free cash flow yield, suggesting that its current stock price may not fully reflect the underlying financial health of the business. For those interested in further analysis, there are additional InvestingPro Tips available for Tilly's at https://www.investing.com/pro/TLYS, providing a deeper dive into the company's performance and potential investment risks.
InvestingPro Data underscores the revenue growth challenges, with a slight decrease of -3.67% over the last twelve months as of Q2 2025. However, the gross profit margin remains relatively strong at 41.65%, indicating that Tilly's is still able to maintain a level of profitability on the cost of goods sold. The market capitalization of $142.89M suggests that Tilly's is a smaller player in the retail sector, which may contribute to the high price volatility observed in its stock. With these insights, investors can better assess Tilly's position within the competitive landscape and the potential risks and opportunities associated with the company's stock.
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