Tilly's Inc. 2027 Q2 Earnings Call

Thank you. Good afternoon, and welcome to Tilly's Fiscal 2026 second quarter earnings call. Nate Smith, President and Chief Executive Officer, and Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results, followed by a Q&A session with analysts. 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, September 2, 2026, and actual results may differ materially from current expectations based on various factors affecting Tilly's business. 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 2026 second 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 I will include a Q&A session after our prepared remarks. I now turn the call over to Nate.

Thanks, Garr, and to all for joining us today. Good afternoon. A couple of weeks ago, I completed my first full year at Tilly's, and I can say without a doubt that it's an exciting time being part of the team. The company has once again executed with discipline, delivering our third straight quarter of double-digit comp sales growth in the second quarter, with that momentum holding strong through back to school in July and August. In reflecting on this past year, we have clearly demonstrated a consistency in execution that we can be proud of. I'd like to acknowledge some important achievements that speak to the turnaround momentum that we have been building over the last year.

First, we have now produced four consecutive quarters and 13 consecutive months of year-over-year comparable net sales growth, including our 12.1% comp sales increase in the recently completed second quarter and our 14.6% comp sales increase in fiscal August to begin the third quarter. Next, we have now delivered seven consecutive quarters of year-over-year product margin improvement. We are not only seeing stronger full price sales overall, but we are also seeing significantly improved average unit retails on aged clearance items from the impact of the AI price optimization investment we made last year. We have been delivering higher sales on lower inventory levels so far this year, further aiding our product margin gains. Third, we have now posted five consecutive quarters of year-over-year profit improvement on the bottom line.

This has been driven not only by improved merchandise assortments, tighter inventory planning and management, and sharper pricing decisions, but also through significant efficiencies in store and distribution labor management, and stable home office expenses as sales have grown. Finally, the collection of these improvements has now returned us to profitability on a trailing four quarters basis, as well as on a year-to-date basis for fiscal 2026. It is just under $2 million of profit over the past four quarters and $400,000 of profit on a year-to-date basis. These are important milestones cleared in our turnaround story as we work towards producing what we currently believe will be our first profitable fiscal year since 2022. We are encouraged by our progress, but we are not finished. We intend to keep executing and building upon the momentum we have generated.

From a merchandising perspective in the second quarter, all departments but footwear posted double-digit percentage comp sales gains. Performance was once again strong across both proprietary and third-party brands in apparel, with few exceptions. These results reflect an assortment that was well-positioned for our critical back-to-school season. In terms of store performance, all geographic markets posted comp sales gains in the fourth quarter. Strong conversion, units per transaction, and average sale growth fueled the performance in our stores. We believe this demonstrates the strength of our assortment and the effectiveness of our customer engagement. In terms of store real estate, we opened one new store in each of late July and early August, and we currently expect to open one additional store in mid-November.

We also closed one store in mid-July and currently expect to close one store in each of late September and December, and two more at the end of January to finish the year with 218 total stores in operation. In fiscal 2027, we are tentatively targeting to open five to eight new stores, depending on available opportunities and our ability to achieve appropriate lease economics. Our digital business grew by 20.9% in the second quarter. Expanding our presence across the platforms our customers use most, including TikTok and other emerging channels, has been an important evolution of our online capabilities. We believe our improved focus on social media platforms has helped reach new audiences based on our TikTok follower count nearly doubling to over 325,000 and our one-year active loyalty program membership growing by 20% to 4.6 million members since this time last year.

We need both stores and online performing well to reach our profitability goals, and we are encouraged by our customers' response to our product offerings and content across all touchpoints. In terms of technology investments, I already noted our investment in AI price optimization that was launched in October last year. We are also about to launch an AI-driven smart inventory allocation tool to improve accuracy in terms of units, sizing, and balance across our fleet of stores and online. We will also implement RFID in our stores in early 2027, starting with footwear, to improve customer experience and in-store efficiency relating to size availability. These investments clearly indicate that we are moving forward with confidence and conviction as we continue to invest in the future of our business while we continue building our turnaround momentum.

In closing, I want to once again thank and recognize our stores, field management, distribution centers, and home office teams for everything they've accomplished together this past year. There is still work ahead of us as we work toward returning to historical levels of profitability, but we are encouraged by the progress we've made and confident in the direction of the business. We look forward to updating you as we continue to execute against our long-term plan. I will now turn the call over to Mike to walk through the details of our fiscal 2026 second quarter operating performance and to introduce our third quarter outlook.

Thanks, Nate. Details regarding our operating results for the second quarter of fiscal 2026 compared to last year's second quarter were as follows. Total net sales were $163.5 million, an increase of $12.3 million or 8.1%. Total comparable net sales, including both physical stores and e-commerce, increased by 12.1%, marking our third consecutive quarter of double-digit comparable net sales increases. Total net sales from physical stores increased by 5.1%, despite operating 12 fewer stores or 5.2% less than at the end of last year's second quarter, and represented 78.9% of total net sales for the quarter, compared to 81.1% last year. E-commerce net sales increased by 20.9% and represented 21.1% of total net sales for the quarter, compared to 18.9% last year. Gross margin, including buying, distribution, and occupancy expenses, improved by 300 basis points to 35.5% of net sales from 32.5% of net sales last year.

Product margins improved by 140 basis points compared to last year, primarily due to improved full price selling of inventories that were more current in terms of aging and improved productivity from selling of clearance items. Buying, distribution and occupancy costs improved by 160 basis points due to carrying these costs against higher net sales this year. Lower occupancy costs associated with our reduced store count were largely offset by higher e-com shipping expenses associated with e-com net sales growth. Total SG&A expenses were $49.9 million or 30.5% of net sales, compared to $46.4 million or 30.7% of net sales last year. SG&A improved by 20 basis points as a percentage of net sales due to carrying these expenses against higher net sales this year. Bonus accruals associated with our significantly improved operating performance exceeding budgeted sales and earnings targets added $1.5 million to the quarter.

Marketing expenses increased by $0.8 million in support of our net sales growth. Store payroll and related benefits increased by $0.6 million but improved by 70 basis points as a percentage of net sales. Pre-tax income was $8.5 million or 5.2% of net sales, compared to $3.1 million or 2.1% of net sales last year. Income tax expense was $86,000 or 1% of pre-tax income, compared to an income tax benefit of $41,000 or 1.3% of pre-tax income last year. Both years' income tax results include the continuing impact of a full non-cash deferred tax asset valuation allowance. Net income was $8.4 million or $0.27 per diluted share, compared to $3.2 million or $0.10 per diluted share last year, representing an improvement of $5.2 million or $0.17 per diluted share compared to last year's second quarter.

As Nate noted earlier, this represents our fifth consecutive quarter of year-over-year profit improvement, and we have now returned to profitability on a trailing four quarters basis for the first time since the end of fiscal 2022, and we are profitable on a year-to-date basis for the first half of fiscal 2026. On our debt-free balance sheet, we ended the second quarter with total cash and investments of $62.2 million, an increase of $11.5 million compared to $50.7 million at the end of last year's second quarter. We had no borrowings at any time with available undrawn borrowing capacity of $63.3 million under our asset-backed credit facility at the end of the second quarter. Total balance sheet inventory decreased by 1.3% compared to the end of last year's second quarter, while being several percentage points more current within 90 days aged than a year ago.