Greetings and welcome to Tilly's, Inc. Third Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions ] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson of Investor Relations.

Good afternoon and welcome to the Tilly's fiscal 2021, third-quarter earnings call. Ed Thomas, President and CEO, and Michael Henry, CFO will discuss the Company's results and then host the Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the Company's website at tillys.com. For 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, December 2nd, 2021, 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 2021 third quarter earnings release, which was furnished to the SEC today on Form 8-K, as well as our other filings with the the SEC referenced in that disclaimer. Today's call will be limited to 1 hour, and I will include a Q&A session after our prepared remarks. I now turn the call over to Ed.

Thanks, Gar. Good afternoon everyone and thank you for joining us today. Fiscal 2021 continues to be a record setting year for us with record net sales and earnings per share for each quarter thus far. We have already surpassed our total net sales for all of last year and our year-to-date third quarter earnings per share have set a record relative to any full fiscal year. Our third quarter net sales grew by 47% over last year, with us being fully operational this year in a more normalized back-to-school season. And our comparable net sales grew by 27% over fiscal 2019 's pre -pandemic third quarter. Our strong operating results over the past year improved our third quarter ending cash and investments position by $30 million, compared to last year, which led our Board of Directors to approve a special cash dividend -- a second special cash dividend of $1 per share to shareholders of record as of December 7th 2021, with payments scheduled for December 15th, 2021. Our first special cash dividend of the year, also $1 per share, was paid on July 9th. The back-to-school season in third quarter were as strong ever driven by a compelling overall merchandise offering in a much improved consumer spending environment. Relative to the pre -pandemic third quarter of fiscal 2019, comparable sales of Women's, Men's, Growth and Accessories increased by double-digit percentages, while Footwear and Boys increased by high single-digit percentages. Hard goods, which we did not have as a material part of our assortment in 2019, produced $1.6 million in total net sales during the third quarter. We now have portions of this assortment in roughly 200 of our stores. We expanded our Sustainability shop on our website during the third quarter with the introduction of over 40 styles…

Thanks, Ed. Good afternoon, everyone. The third quarter produced record quarterly net sales for us and tied our best quarterly earnings per share, which was just set a quarter ago. Details of our third quarter operating performance compared to last year's third quarter by line item were as follows Total net sales of $206.1 million increased by $65.8 million or 46.9%, compared to $140.3 million last year. Total net sales from physical stores were $165.3 million, an increase of $60.7 million or 58.1% compared to $104.6 million last year, with a much more normalized back-to-school season this year, that was free of pandemic force store closures. Net sales from physical stores represented 80.2% of our total net sales compared to 74.5% of total net sales last year. E-commerce net sales were $40.8 million, an increase of $5.1 million or 14.3% compared to $35.7 million last year. E-com net sales represented 19.8% of total net sales compared to 25.5% of total net sales last year. We ended the third quarter with 243 total stores, a net increase of 5 stores compared to the end of the third quarter last year. Total comparable net sales relative to fiscal 2019 is pre -pandemic third quarter increased 27.4% with increases from physical stores of 18.3% with positive comp, sales growth across all markets and from e-commerce of 80.5%. In the third quarter of fiscal 2019, physical stores represented the 85.3% of our total net sales, while e-commerce represented 14.7% of our total net sales. Gross profit, including buying, distribution, and occupancy expenses, improved to $76.7 million or 37.2% of net sales, which is a record for us in our history as a public Company, compared to $40.7 million or 29% of net sales last year. Buying, distribution, and occupancy costs improved by 690 basis…

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operators Instructions ] Our first question is from Jeff Van Sinderen with B. Riley. Please proceed.

Hi, everyone. And let me say congratulations on the strong metrics, it's great to see. Maybe you can give us a little bit more color on the digital versus in-store sales that you saw over Thanksgiving week. If you could touch on Black Friday and Cyber Monday, just curious any thoughts around that? How it differed versus the same period in 2020, and 2019? And then also as a follow-up to that, I know you're continuing to grow e-comm, which is terrific. I'm just wondering if you think that that is going to stay close to 20% or how we should think about that as concentration of the business as you open more stores and so forth?

Hey, Jeff. How are you?

I'm all right.

Okay. So I guess I'll start. Over Thanksgiving weekend, our store sales were like really strong, so the traffic was good, sales were strong, stronger than e-comm business. But e-comm business remains steady, and Mike, can add-on to whatever I say. But as far as e-comm, I think it's going to continue to grow, there's no question about it. We are still in the very early stages of e-comm and a lot of the changes we put in place in the last couple of years have helped grow it. We definitely get the benefit of the stores being closed for a while, but still we're seeing decent growth out of there and we expect that to continue. My guess is it will be north of 20% of our business going forward.

I would agree with that. Jeff, we have to remember as we look at third quarter, we were still dealing with pandemic store closures during that period last year. So there was a heavier shift towards e-com last year. And the reverse has happened this year and has been that way really all year long. Our stores have just resurged so significantly. It's been amazing to see. And the same was true through Black Friday weekend or for the month of November as a whole. Stores were strong double-digits up. E-com was up single-digits relative to just last year. Relative to 2 years ago, e-com was nice and strong and robust still. I think in a more normalized environment, I'd have to agree with Ed that as things settle down and we get back to something that's normal, and I would say nothing is still normal as we exist today. It's hard to predict anything with certainty. But I think it probably will be in the mid 20% somewhere around 25% makes sense to me. I think the pendulum has swung heavy to stores right now because of just what's gone on in the environment. So it will probably swing back the other way a few points I would think, as we settle in coming out of this pandemic.

Okay. Good. And then just as a follow-up, since we are talking about e-comm, I know you mentioned the new mobile app and it sounds like you still have some more IT investments you're planning for 2022. So I guess maybe if you can frame for us a little bit the benefits that you're starting to see from the mobile app and where we are, what inning we're in, I guess, around that. It sounds like there's still quite a bit more to come.

Yeah. We're definitely in early -- we just reintroduce the mobile app last week. So it's -- we don't have enough experience with it, but we made it more user-friendly, the navigation is better, we integrated loyalty into it and we can -- we'll continue. We have a number of enhancements that we think we -- that we're going to make in 2022 to the mobile app. But our old mobile app was pretty antiquated. We hadn't upgraded that in a while, so that -- the first step was to get it upgraded and more responsive. Then the other thing that we're investing in that we mentioned was, we're upgrading our existing e-com platform, which is -- what a best way to describe it, It's more mobile friendly. So that will take place in the first half of next year.

Okay, great. So more positive to look forward to there. Thanks for taking my questions and continued success.

Thanks, Jeff.

Thanks, Jeff.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question is from Marni Shapiro with Retail Tracker. Please proceed.

Hey guys, congratulations. The stores have been just amazing, pleasure to be shopping in them lately.

Thanks Marni.

I'm curious if we could just parse out a little bit on some of the delivery delays. I'm curious if -- I'm looking at your stores and the assortments. Are there parts of the assortment that are getting a little bit harder hit? In particular, I'm noticing you guys are turning anything, what I would call, sexy-pretty, very fast. And I wasn't sure if what I was seeing was you were turning it really fast or the inventory was delayed, so it wasn't set quite as high as you want. So I'm just curious if you could talk a little bit about, across the store where you're seeing that kind of impact the hardest, or no impact and it's just selling out?

Women's inventory in general is too light right now. Part of it is because of turning fast and part of it is supply chain issues. But we have enough inventory to continue the momentum through impasse Christmas. And I would say that the point delays or more impact -- has more impact on some of the shoes. In particular, our shoe business would be -- it's good, but it'd be a lot better if we weren't delayed with some of the big brands.

Yes, I'd say that's exactly right. Footwear is the hardest hit from these delivery delays. I mean, honestly, if we could get more Nike and Converse, we'd take every bit of it we could get, we just can't get it. And they've talked about the challenges they are facing.

Yeah.

We are turning faster at healthier product margins. I noted in our prepared remarks that we ended the third quarter up 29% on a per square foot basis in inventory. Our teams did such a great job of trying to pull as much forward as they could and make sure that we were prepared to go through Black Friday weekend and the holiday season as best we could. As we sit here today, that inventory is now in the teens. We're running at about plus 20 and the inventories is up in the teens. So overall we have plenty enough apparel to have a good holiday season we think. Footwear is that most challenging area that I agree with Ed. If we had enough of the right things, our footwear business would be even stronger than it is. It was up plus 9. It would be even stronger.

Well, that's impressive. And then, just I guess following on the footwear where, was jewelry -- you have a really nice jewelry assortment, hair, things like that. At times, I was in there and it was beautifully stocked. At times I was in there and I was like, "Oh. I wish they had more. " Was that hurt too, or was that just -- it was selling so fast?

I think it was more fast the pace of selling than anything else.

I love that answer.

I wouldn't call that out as a major supply chain issue. So it had some impact in across a few of the brands, but overall, no.

That's fantastic. Well, best of luck with the rest of the holiday season.

Thank you.

Our next question is from Matt Koranda with Roth Capital. Please proceed.

Hey, guys. Thank you, and great quarter, by the way. On the outlook for Q4, I guess embedded in the guidance, if I'm doing the math right here, is that it looks like potentially gross margins do erode a bit quarter-over-quarter, in the fourth quarter. And I just wanted to clarify, is that the base case assumption and where are the headwinds coming from specifically? Because it doesn't look like it's coming from the merchandise margins. You said they were going to be up year-over-year. So any additional clarity there would be helpful.

Sure. Matt, historically, fourth quarter product margins are the lowest of any quarter. That's always been true of our business purely because of the level of promotions that happen naturally during, normally, during the holiday season. So sequentially, Q3 to Q4, product margins are lower in Q4 than Q3. They always are. There's nothing unusual about that, completely normal, completely expected. In Q4, relative to last year and to two years ago, as we noted, we're expecting another 50 to a 100 basis points of improvement in our product margins on top of last year, which was already 210 basis points, better than 2019. So we're seeing the healthiest product margins we've seen in many years, if not ever, in the fourth quarter, and it has been a less promotional environment. Now, there are some additional costs in this particular fourth quarter that are different than history that impact distribution in particular. You've probably seen the news about all the shipping surcharges from the FedEx and UPS and that crowd and there's certainly some extra costs this year that, was not there last year. We've had to institute retention bonuses for labor protection just to get through the holiday season to make sure we have plenty enough labor to be able to serve the peak need of the holiday season. And then of course there is some bonus elements within the buying group that flow through the buying costs that hit gross margin. And on the SG&A side there's some of the same things. We've had to implement retention bonuses for store employees to protect the labor force there. We've accelerated some -- any minimum wage increases that we knew were coming as of January 1, we've gone ahead and just implemented them early. And there's been some other compression type of issues with store payroll that we've addressed as well. So as you look sequentially, and that's why we say we're expecting SG&A to be about 26%. And all of you as the analysts were pretty close before the call. It was -- I think you all have an average of 26.5, so not far off there. But between corporate bonuses for having such a stellar year, and then the things that I just mentioned about store payroll, labor challenges. There are some added expenses that were not part of the model in the past.

Fair enough. Very detailed. Thank you, Mike. And then just -- I guess on the dividend cadence, I'm curious now that you guys have basically done two special dividends this year. It looks like you're going to backfill most of the cash that you pay out on the December dividend within this quarter alone. Should we be expecting a 2-time a year cadence on a go-forward basis? Or what's the thought process there? I'm just curious if I could get your latest thinking?

Twice a year is not in the plan. It's something that we discussed as we've told everybody in the past, we've discussed it pretty regularly as a Board, and discussed what the options are proper use of cash. So there's nothing -- I wouldn't assume that it's going to be twice a year going forward. But I also wouldn't assume if we do anything it's going to be in the same form. So I don't know yet.

Yes. I mean, we've had such a stellar year, obviously, each quarter has been so incredibly strong beyond anything that any historical data would point you to. Our Board just acknowledged the cash-generation has been so fantastic why not do another one? And honestly, it caught me off guard too, that they did another one at this particular time. They're just looking at the performance of the business, the cash generation, and decided that why not do another one now, and reward our loyal shareholders for sticking in with us through all this? So they'll make their determinations as they go forward and can't predict for sure what that might look like.

Okay. Great. One more from me, maybe if I can. Maybe, in saying to ask this early here, but any early learning's or behavioral changes for traffic or anything that you've observed around the new variant? I mean, It's probably just too early to tell, but any new observations?

No. Not on this new variant, no. We can't really tell anything yet. It's way too new, it's not as widespread as Delta became or the -- just the initial peak of the pandemic, obviously, so.

And even before the new variant, traffic is still very unpredictable, and it's all -- it can be incredibly good, and it could be incredibly bad, but we're just going to manage our way through it like we have for the last several months.

Yeah, overall, traffic is up substantially to last year. I'm looking at some data I have for the month of November. Traffic for the month of November was up 38% in stores. Pretty amazing. I've never seen a number like that. Relative to 2 years ago, it was down 1% for us. So it still lags 2019, but it's very robust compared to last year in stores.

That's great. Very helpful, guys. Nice job, and I'll jump back in queue.

Thanks, Matt.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Ed Thomas for any closing remarks.

Okay. First of all, I'd like to just do a shout out to our incredible team of employees, home office, distribution center and field. What they've done in the past several months has just been amazing, and I can't thank them enough for their teamwork. Lastly, thank you for joining us on the call today, we look forward to sharing our fourth quarter results with you in March, have a good evening.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation.