Greetings. Welcome to Tilly’s, Inc. Fourth 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 ] Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson of Investor Relations. You may begin.

Good afternoon, and welcome to the Tilly’s fiscal 2021 fourth 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. 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, March 10, 2022, 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 fourth 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 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 was our most profitable year ever. Our fourth quarter comparable net sales grew by 12.5% and our earnings per share of $0.38, represented our best fourth quarter earnings in our public company history. From a product perspective, all departments comp positive in the fourth quarter, with accessories men’s and boys, especially strong with double-digit percentage increases. As we began fiscal 2022, we have seen good early reads from our spring assortment offerings in shorts, dresses and more fashionable tops. Red graphic tees with retro content from the 1990s and Y2K era are growing in popularity. We’ve launched a print on demand T-shirt initiative through a third-party service provider, that is off to a nice start and we expect this initiative to grow over the course of fiscal 2022 and beyond. In footwear, global brands are driving growth for us. Although adequate and timely supply remains a moving target, with the ongoing supply chain challenges. Swim has also hit disproportionately by the supply chain delays. But we still expect this category to be meaningful – a meaningful contributor to the spring/summer season. The return of in-person school festivals and travel has driven a strong bags business. Long bottoms continue to do well with a combination of new fits proportions, colors and fabrics. We believe the newness that is available across several departments will continue to be important in driving sales. The positive momentum in our business for the past five quarters continued into the early part of the first quarter of fiscal 2022, although our comparable net sales have recently started to decline relative to last year. Given the unique impacts of last year’s pent-up demand exiting 2020’s pandemic restrictions and federal stimulus payments, which created a…

Thanks, Ed. Good afternoon, everyone. The fourth quarter of fiscal 2021 produced our best fourth quarter earnings per share in our public company history and fiscal 2021 as a whole produced a company record earnings per share of $2.06, far surpassing any previous fiscal year. Details of our fourth quarter operating performance compared to last year’s fourth quarter by line item were as follows. Total net sales of $204.5 million increased by $26.6 million, or 14.9% compared to $177.9 million last year. Total net sales from physical stores were $152.2 million, an increase of $29.6 million or 24.2% compared to $122.5 million last year. Net sales from physical stores represented 74.4% of our total net sales compared to 68.9% of total net sales last year. E-commerce net sales were $52.3 million, a decrease of $3.1 million, or 5.6% compared to $55.4 million last year, but still 57% above the fourth quarter of fiscal 2019. E-comm net sales represented 25.6% of total net sales compared to 31.1% of total net sales last year. Consumer behavior in 2021 favorite stores over E-comm compared to last year during which stores were more constricted in hours and customer occupancy limits than this year. We ended the fiscal year with 241 total stores, a net increase of three stores compared to the end of fiscal 2020. Gross profit, including buying distribution and occupancy expenses, improved to $70.4 million, or 34.4% of net sales compared to $58.3 million, or 32.7% of net sales last year. Buying distribution and occupancy costs improved by 190 basis points collectively, despite increasing by $1.9 million in total due to leveraging these costs against higher net sales. Product margins declined by 20 basis points, primarily due to higher sales return reserves and reduced inventory shrink favorability than last year, the combination…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B.Riley. Please proceed with your question.

Hi, everybody. Maybe if we can just circle back to supply chain for a second, I guess kind of your view – as you’re looking at your supply chain dashboard, how that looks now, I know that I understand there are still some delays gone through the ports. And then maybe if you can give us more color on kind of how you’re thinking about the inflationary influences on your business, maybe what you’re seeing from vendors, in terms of price increases from them, and how you’re thinking about passing those increases on to your customer?

Okay, Hi, Jeff. As far as the supply chain goes, there’s a couple of categories that have been impacted more than most of the categories, shoes as one where we’ve seen and shoes happens to be a very hot category for us. But we’ve seen some slowdown in the shoe replenishment area from multiple brands, not just one brand. And then probably, to a lesser extent, some of the seasonal categories, particularly shorts and swim, we’ve been delayed in getting those receipts. So we have some, but we don’t have as much as we normally have. And it appears to be opening up a little bit, as Mike said earlier, we’re expecting that the supply chain challenges will remain for several more months, but it certainly doesn’t seem to be as extreme as it had been for the last several months. So that’s kind of where we are with supply chain. I’m sorry, what was the second question?

It is inflation.

Oh, inflation. Okay.

For example, the brands and stuff?

Yeah, I think we’ve seen some price increases from some of the brands, but it hasn’t been across the Board. We expected it. And because most of our – our branded goods are all on the map pricing. It’s kind of like we’re all on the same – anybody that sells these brands is going to be in the same category. But we haven’t seen anything that’s real material. And certainly, we’ll adjust when necessary, our pricing when necessary to minimize the impact on gross margins.

And then I just add to that. As you think about the expense side of things for an inflationary standpoint, particularly I think we’re seeing something of a return to a normalization perhaps. And so if we compare it to pre-pandemic 2019, we certainly have a number of areas where costs are just significantly higher than they were three years ago. Obviously, minimum wage is a big piece of that. In 2019, it was $12 an hour. Here in California, we’re now at $15, that’s a 25% increase in the wage rate. Insurance costs are more than double what they were three years ago. In the first quarter alone, that’s going to cost us about 900,000 additional dollars than it did in 2019. Freight costs are significantly higher than they were three years ago. So there’s a number of cost pressures, in addition to the product cost increases that we’ve seen from some of the brands and yet, with a greater sales productivity that we’re expecting for this first quarter relative to the 2019 first quarter, we still have a chance to produce earnings that are as good or better than we did in 2019 if we’re at the better end of our outlook range, and hopefully, we will be. But admittedly, for all the reasons that I laid out in our prepared remarks, it is just extremely difficult to predict anything with any certainty just as been for two years running now. It’s no easier with all these different factors in play.

Right, understood. And then just a follow-up on the shorts and the swim area. Do you think having kind of a lean assortment or kind of lean inventory there is hurting business in March as we’re kind of approaching the typical seasonal Spring break time and all bad? Or do you think that’s not so much as a factor?

It’s building, so I think it’s getting better and will certainly impact spring. It’s – geographically, it varies because of weather. So as we get further into the spring with the late Easter and later Easter, I think it will get better and we’ll – I’m expecting this like supply chain for those categories to improve.

Okay. And then I think you said inventory was roughly up 7% per foot at the end of the month maybe, I think you said?

No, that was entering this week. So we were up 17%.

Entering this week.

…at the end of the fourth quarter, entering this week that was down to up 7%.

Okay. Okay, so and just in thinking about that, do I mean, I would expect everybody – I think everybody has got to get a little more promotional, especially if they have a little more inventory and slowed down? Is it fair to say that you would plan to be a little more promotional than you were at this time last year?

Certainly [Multiple Speakers]

Yeah.

I don’t think it’s not going to be drastically different than what we historically do. Our inventories really very, very clean and current.

Yep.

For sure. And I’d rather have these supply chain delays earlier in the spring than late. So I don’t think there’s much exposure there. In our category performance, quarter-to-date is positive across the Board. So there’s no real major weaknesses in any one category of business.

Yeah, we are expecting product margins to be down relative to last year, but they should be still better than they were in 2019. So it’s a little bit different answer, depending on the relativity of which period we’re talking about.

Right.

We do expect to have a little bit better product margins that we had in 2019. But they’ll be somewhat below last year, just because we’re not anticipating to have the level of full price selling that we had with the robust environment that existed at this time last year. And we do expect the need to be incrementally more promotional to keep inventories controlled.

And then just one last one, if I could squeeze it in. Just thinking about how you’re planning inventory going forward assuming the business is down at a cost, whatever 10% on a comp basis this year, last year. Do you now start to plan inventory to run below – to run negative year-over-year on a square foot basis?

That is a constantly moving target. So it’s difficult to answer that. Because quite honestly, our merchant teams have jumped through dozens of hoops to continually adjust our inventory levels relative to what we expect. And over the past year plus, I’ll tell you, there’s – we’ve gone through periods where one given week we’re thinking oh, we need to grace to go get more, go get more, get more. And but let’s seriously a week later, oops, we need to quickly reverse gears and go the other way, though.

With the supply chain issues with it early on, we made a concerted effort to pull goods forward. To combat that, and I think that helped us for sure. It’s, like Mike said, it is a moving target into sales versus inventory. And as you know, Jeff, we’ve – our comp inventories have been down for a long time. So we certainly have room to play, but we’re going to watch it very carefully in relation to the sales forecast.

Okay, thanks so much for taking my questions. I’ll take the rest offline and best of luck for the rest of the quarter.

All right. Thanks, Jeff.

Thanks.

Our next question comes from the line of Matt Koranda with ROTH. Please proceed with your question.

Hey, guys, thanks. Just as we think about modeling out the rest of 2022. I guess I just wanted a maybe a few thoughts from you guys just in terms of any other notable areas of exceptional strength in 2021, I guess back-to-school maybe comes to mind. So just trying to figure out like cadence of the year and how to think about comps for the rest of this year on the top line. And then I got another on margins after that.

Yeah, good question. Your guess is as good as ours, quite frankly. At this point, it’s difficult to predict the current week, much less any further out. So what we’re doing currently is tracking our business relative to 2019 because that was the last pre-pandemic period that had stability. Last year was a complete aberration anomaly to the positive following 2020, which is a complete aberration to the negative obviously. So if our business continues to track along the cadence of 2019, that’s what leads to the outlook range that we have currently for the first quarter. Looking at our current performance relative to 2019 and then kind of carrying that forward through the rest of the quarter. If that cadence of things continues, sales will be meaningfully below last year, every quarter, they just have to be, it’s almost common sense. So where exactly that lands out? Who knows, there’s just too many variables right now.

A lot of it will depend on the macro environment. And we’re seeing enough positive category performance where if the consumer is in decent shape and willing to spend, I think we’ll be in a good position to maybe outperform where we think we are going right now. But it’s just too much uncertainty.

Yeah, I think just in the broadest context, I’d say, we expect to do better than we did in 2019 at this time, but it’s just certainly not realistic to think we’re going to do what we did in 2021.

Got it. Just following up on the consumer comment really quickly, and then I’ll get to the margin question. But just any discernible behavioral change you guys can see in the last couple of months just, obviously, like a lot of headlines about inflationary pressure weighing on the lower end of the consumer, but just anything discernible that you guys have noticed in terms of product mix, or behavioral change that would be helpful?

No, we haven’t seen anything like that at all. And so traffic has been okay. And conversion is – was down. And I think that might be somewhat related to some of the labor challenges we’ve had. But I haven’t seen anything unusual.

I think if anything, we – just broadly, we continue to see a channel shift preference for stores relative to e-comm, that seems to be continuing. Our store traffic relative to last year is considerably up so far in the first quarter, but it’s down relative to 2019. So kind of interesting that, again, it’s one of those things that depends on what specific period you focus on. Store traffic relative three years ago was beneath where it was then. But it’s meaningfully up relative to last year. And I just think it’s with enough time having been removed from the initial reopenings coming out of pandemic restrictions. People prefer to be out in stores rather than continue to just sit home and order online, generally speaking.

Okay. Got it. That makes sense. And then just last one on the margin assumptions embedded in the EPS guide for Q1, just wondering, like, if you might be able to help out a little bit with sort of gross margin expectations versus SG&A that’s embedded in there. Got – I got the point on sort of merch margins coming down a little bit year-over-year, I would expect also probably some deleverage on the BD&O. And then just you did know, I think, in the prepared remarks, some payroll and wage pressure. So where’s the bulk of the pressure coming from? Is it more on the gross margin side or on the FX side?

It’s everywhere through the model, quite frankly. Relative to last year, we’re looking at a sales range that might be up to as much as $20 million below last year, while having increasing cost pressures, obviously, that’s going to create quite a bit of deleverage, without those facts in place. So we do think product margins relative to last year are going to be down somewhere in the 100 basis points to 150 basis points, but still up to 2019, by as much as about 50 basis points. So depending on how you’re modeling, whether you’re referencing 2019 or 2021, there’s different answers. Relative – specifically to last year, there will be deleverage in the BD&O costs, simply as a function of the lower sales. In our range, that assumption on BD&O causes, it could be up to as close to 300 basis points of deleverage in the BD&O combination of costs sits in gross margin. SG&A is going to be somewhere around 29% of sales, give-or-take a little bit here and there. Again, with increasing costs on minimum wage, insurance costs that I referenced, and things of that nature on the lower sales, it’s going to create some sizable deleverage there through the SG&A line that could be 450 basis points, 480 basis points just a function of the math.

Gotcha. Very detailed. Thank you, Mike, and thanks, Ed. Thank you.

Thanks, Matt.

[Operator Instructions] Next question comes from the line of Marni Shapiro with Retail Tracker. Please proceed with your questions.

Hey, guys, congratulations with the stores, in spite of your apparent delivery issues have looked really good. Fashions really right and looks fantastic. I’m curious, you talked about sales having fallen off compared to levels last year. But I’m curious, what that really looks like? Are you seeing the traffic changed significantly since January and February? Or is it just the compares are a lot tougher is she coming into the store and buying less than she was buying a year ago, sort of more of the complexion of it, like I’m trying to assess if your customers’ demand has gone away, or the demand just looks depressed compared to exceptional demand last year?

Yeah, it’s all about compares, as you think about last year. Our February comps last year were negative and then they started to turn positive in the first week and two of March. And then they really jumped starting in the week three of March and through the rest of the quarter. So just, for example, relative to 2019 now, because obviously relative 2019, like you said, February was down 4 last year, March was up 39, and April was up 20. And in March, in particular, we went from a plus 4 to plus 11 to plus 59 to plus 49 to plus 72. So there’s the explosion in rate of business that we’re seeing like, okay, that’s not going to be likely to happen this year when stimulus isn’t in play, pent-up demand isn’t in play. So that relativity, we’re not expecting the same kind of flow. And then of course, with the later Easter for a business like ours and the age range we serve, that’s going to push some business from march into April, as it typically does when Easter is late. And it just so happens. Fiscal 2019 was pretty close within four days on the date of Easter. So that’s why we continue to look at 2019 as a baseline to evaluate our business. So far, the average transaction value has been roughly flat year-over-year. So it isn’t that they’re necessarily spending less in the transactions that are going on. We’ve actually had more transactions, just the conversion rate is down on higher traffic than a year ago in stores.

Right, because people are actually browsing again, as opposed to coming in and purchasing and leaving and being [indiscernible]

It’s actually been better than we anticipated. So from that perspective, so…

Right, which is a good thing over time that there people are coming back and wandering around again, that’s good thing because you have more opportunity for transactions if they actually walk in the door.

Exactly. And we’re saying that throughout the whole country, it’s not limited to any one area. So that’s good, too.

And then just put follow-up on the footwear conversation, because I know this has been a problem all year. I guess when you think about it in 2022, do you see – is there any visibility as to when deliveries and footwear could start to normalize? And is it across all the brands? I know in the past, you’ve called out some of the Nike deliveries being tough as many people have. Just curious if you could put a little color behind that.

We’re getting a little bit more clarity from some of the brands, I wouldn’t call any one particular brand, and we’re getting more clarity on it. So I – it’s going to – it’s definitely going to get better. I just don’t know when it all comes together the timing of that yet.

Right. That makes sense. Well, best of luck for the next couple of weeks because it sounds like it’s going to be the toughest hurdle to get through.

Thanks.

Thank you.

And we have reached the end of the question-and-answer session. And I’ll now turn the call back over to Edmond Thomas for closing remarks.

Thank you all for joining us on the call today. We look forward to sharing our first quarter results with you in early June. Have a good evening.

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.