Good day, and welcome to the Tilly's, Inc. First Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Gar Jackson, IR. Please go ahead.

Good afternoon, and welcome to the Tilly's Fiscal 2024 first quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results; then he and Hezy Shaked, Executive Chairman and Interim President and Chief Executive Officer, will host a 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, June 6, 2024, 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 2024 first quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. This call may also contain certain references to certain non-GAAP measures. Reconciliations of those measures to their most directly comparable corresponding GAAP measure can be found in our earnings press release on our website. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Mike.

Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our first quarter net sales and pretax operating results were both within our estimated outlook ranges provided during our March earnings call. After a tough start to the first quarter, our comp sales results remain negative each month, but improved on a relative basis in both March and April, with March being the stronger of the two, benefiting from the earlier Easter this year. Like certain others in our competitive space, we continue to face headwinds from macro consumer environment, yet we were able to generate 130 basis points of product margin improvement relative to last year's first quarter despite our decline in net sales. As we discussed during our last earnings call, we have been challenging every aspect of our business as we work toward improving our operating results. For example, we continue to evaluate initial pricing decisions to better align ourselves with our competition in certain product categories. We have reconsidered certain of our promotional pricing and markdown practices to drive improved average unit retail values. We believe that we are beginning to see the impact of these efforts based on the improvement in our first quarter product margins compared to last year's first quarter. However, while we believe our efforts have the right focus to lead us toward making more meaningful improvements over the longer term, in light of the current environment, we caution that there can be no guarantee that we can continue to produce this kind of improvement in the short-term. From a marketing perspective, we have been testing new ideas to focus on creating greater connectivity with our existing customer base and to attract new customers. We believe these new efforts give us a chance to build greater customer following and generate…

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Marni Shapiro with The Retail Tracker. Please go ahead.

Hey guys, thanks for taking my question. I'm curious, I know sales are going to be challenged and you had some issues with the distribution centers in this quarter. But if somebody spends a lot of time in your stores, there are definitely some noticeable changes in the front of the store, particularly on the junior side. And I'm curious if you are seeing any green shoots at this point? And how -- because what I'm seeing is it's selling quickly, it's very on trend. It is a small part of the inventory. But I'm curious if you were able to impact a more significant percentage of the inventory for the back half of the year and what this can look like? I'm not standing ahead of myself, but just trying to see where this is going.

It's fine. Short of telling you exactly what's going on, I'll try to address that. So what you're seeing is part of the initiatives that we started back in the beginning of February. It's going to get more and more meaningful, obviously, as some of the decisions are already filtered in. I can tell you that we see positive signs but we cannot expand too much on it because we don't want to get ahead of ourselves. Overall, you see more and more of the right trend in our inventory.

Thank you. I mean it feels great. And can we just also talk about as things begin to improve because you guys have a long history -- your customer, when they're in the fold, they're very loyal to you. How are you thinking about sort of bringing in lapsed shoppers or more importantly, bringing in younger shoppers? Have you -- will you start to drive marketing as things improve, kind of hold back until you can drive traffic into something that you feel really proud of? Is that how we should think about marketing?

No, not at all. We started our -- a new campaign, the way we believe we should be presenting ourselves a couple of months ago. As we go, it's going to be more and more meaningful, and more and more things would be seen in the public. We are still at the exploration stage of exactly what is the age of our customer, what the age of the customer we want to have is, remember, we started all this process February, and we're in June now. So we're getting toward the end of figuring out what we need to do, and we start implementing a lot of it. But you'll see the results, third and fourth quarter.

Fantastic. I'm telling you the front of your stores already looks so much better. The merchandise is turning so fast. I wish I could just bring it in myself. It looks great, so best of luck guys.

You actually -- I don't know how you know that, but you're absolutely spot on. We increased several categories, and we're chasing it constantly.

Yes. It looks fantastic.

Thank you.

Thank you.

Thank you. Thanks, Marni.

Thank you. The next question comes from Jeff Van Sinderen with B. Riley FBR. Please go ahead.

Hi, everyone. So I guess my first question, just to follow-up on the line of thinking on merchandise and performance there. I don't know if you gave the relative or spoke to the relative performance of the guide side of the business versus the growth side of the business, men's and women's. Any color you can add there? Just wondering kind of relative performance between the two genders.

Yes. I can give you a little bit. So one of the questions that we faced, right, is what is the balance between men and women, male and female. What it is today, what it is we want to have. I think we're in the right spot right now. So the balance we have today, which I'm not going to quote exactly how much it is, is where we're going to go forward for the remainder of the year. There's always a discussion internally, do you lead with men, do you lead with ladies. Obviously, there's many different opinions. I believe that we lead with men's. And my line is always the same, that guys don't shop in girls store, but girls will shop in guys store. Now granted in the last five years, it's changing a little bit, but this is where our head is.

Okay. And then any update you can give us on the plans for the CEO search, where that stands? And then any changes to the merchant team?

No changes of plan in either positions.

Okay. And then one more, if I could squeeze it in. Just wondering where you stand on lease negotiations for 2024 and how many stores you might end up closing this year?

I don't think we have an update that we can give you right now. As you know, we look -- renegotiating leases and hoping to shut down any losing locations. We don't have a lot of them, but we still have some. There is no update on that yet.

Jeff, it's hard to pin down to a specific number when we have so much still in play to negotiate. But what I can tell you at the moment is we have two remaining new stores to open, one in July, one in mid-November. And then we have four to five known store closures at this point that will happen towards the end of the year. But those numbers can change obviously as a result of -- we have dozens and dozens of leases left to deal with for this year. So that's the best we can tell you at this moment.

Okay. And I'm sorry, the total that you still have to deal with is roughly what?

I don't have a specific number in front of me.

Okay. Alright, thanks for taking my questions.

Thank you.

The next question comes from Mitch Kummetz with Seaport Research. Please go ahead.

Yes. Excuse me, thanks for taking my questions. Mike, you mentioned the $18.4 million hit to the third quarter on sales. Can you say or maybe what you think that might translate from an earnings standpoint?

I can't until we figure out how back-to-school starts and what comp assumption I might think we're headed for in 3Q, I don't know what that's going to look like. The start of the back-to-school season is going to be in the last three weeks of July, the last three weeks of the second quarter is when we're going to start to see the early reads on the back-to-school season. The three largest sales weeks of the second quarter, actually the final three weeks of the second quarter for that reason. And as I mentioned, that very final week last year was the start of the third quarter and shifted forward because of the impact of that 53rd week in fiscal 2023. So until I have a prelim read on what back-to-school means and what direction we're headed, I can't be any more specific at this time. But it certainly is going to create something of an earnings hit when you're starting from an $18 million hole compared to last year's fiscal third quarter.

And how much of the sales benefit are you anticipating in the second quarter given that shift?

It's approximately a $15 million benefit to the second quarter because just as I noted for the third quarter, you have the same dynamic from last year's start of second quarter, end of second quarter shifting. So on the one hand, when you look at our outlook of a total sales number of $160 million to $165 million, last year's second quarter was $160 million. So on raw number, you say, oh, that's growth, isn't that positive comp? But as we noted, it's actually not. It's a negative comp in our outlook range of 7% to 10%. But because of the impact of that back-to-school week shifting into the second quarter, it adds a significant amount of sales.

Yes. And then I noticed that your quarter-to-date comp, the minus 8.4%, is pretty much right in the middle of your quarterly range. I'm just curious how you think about back-to-school. It seems like over the last, I don't know, maybe a year, that the consumer is showing up for events more than they are in between events and obviously, back-to-school is an event. Are you essentially assuming that your comp on back-to-school is kind of within that down 7% to 10% range? Or is there a reason to believe that it could be better than that given that, that's an event period?

It could end up being better than what we're suggesting. Sitting here, I have no visibility to what back-to-school behavior is going to be like. So we're not counting on something that we can't see. What we have is May is down 8.4%. That's consistent with our comp run rate of the last four quarters. If you look back, our comp has been in this minus 8% to 9% range. This is now starting the fifth quarter in that realm. So our range contemplates that it could get a little better, particularly towards the end. I do not expect it to deteriorate back into negative double digits. I do think there's opportunities for us to potentially outperform this negative 7% to negative 10% range, but that would require back-to-school getting off to a good start. And I just don't know what that's going to look like, because as I sit here, I'd love to think that I can predict the future, but I darn sure cannot.

Okay, all right thanks guys. Good luck.

The next question comes from Matt Koranda with ROTH Capital. Please go ahead.

Hi, guys. Maybe just following up on the second quarter outlook and the May-to-date comps. Anything you can call out, Mike, in terms of weekly cadence that you saw that was notable? Any help there in terms of just -- anything you saw around the Memorial Day holiday, if that was notable at all?

Sure. So I noted in our prepared remarks that upon the implementation of our new merch allocation tool and the new warehouse management system, we did have some complications in the immediate aftermath of that. So May bounced around quite a bit. The first week and the last week of May were both negative single digits, and the in-between weeks were negative low double digits as we are having some complications with replenishment to stores with the new systems communicating with each other properly. So we did experience some slowdown in the middle two weeks of the month, but believe we're back on track. We did see better results in the final week of fiscal May and have seen a little bit better results this week, starting off June, now that product has started to reflow back out to stores and get out there. So we'd like to think the worst of it is behind us in terms of any of the implementation impacts and that, if anything, we should stay consistent to potentially having an opportunity to see some better results going forward. But again, with those large three weeks at the end of the quarter, basically, one-third of the quarter sales volume is going to be in those last three weeks of the quarter. So really difficult to know sitting here, as far away from that as we are, what exactly that's going to look like. But we're cautiously optimistic, as Hezy noted earlier, that we'll continue to see better and better things out of our assortment as we go forward.

Okay. That seems fair. But I guess we're also not counting on necessarily a pickup relative to what we saw in aggregate in May in terms of the comps, not much on one at least. Okay. And then in terms of inventory, I'm curious, was the warehouse management system one of the reasons for the slightly heavier inventory per store that we're seeing on a year-over-year basis? Or is there something else going on in terms of inventory that you can call out? And then maybe just -- Hezy, where are we heavier than we want to be? I was curious based on one of the earlier questions, just what are you chasing in particular, that's really moving for you that's working? It would be helpful to get a little bit on those.

Yes. Yes, we're chasing the best sellers. Yes...

Go ahead, sorry...

Yes. So let me also address the inventory for a second. There's two things here. As far as the merchandise, we changed a little bit on how we look at things and how we do it. I can give you a little bit. We are bringing inventory a little earlier. And instead of spreading it, let's say, over three or four months, we're bringing a larger portion earlier, so we're never out of sizes. That's one of the things we do, and that's maybe part of the reason you see more inventory in the store. The inventory thing will actually be something that we're focusing on this coming week, which is, as we changed the way we look at gross margins, we looked at two things or three things as I told you guys before, we looked at the initial cost and the negotiation there. We looked at the initial IMUs and then how we do markdowns. In the past, unfortunately, we gave the merchandise away, it's way under cost. There was no reason for that, but it happened. We're looking at it differently today. It's not necessary at all times to sell things at a fire sale. Due to that, there will be some changes and some fluctuation in the inventory until we fine-tune it, but that will produce better margins.

And the other thing I'd...

Yes. Go ahead, Mike.

The other thing I'd add to that, Matt, is some of it was a little bit of timing difference, too, because when you're looking purely at the balance sheet, again, because of that weird 53rd week that happens every six to seven years, you're comparing two offset weeks. They're not comparable weeks. So it was a temporary timing difference. It's why I added the notation that as we entered this week, our inventories were actually down 3% on a like-for-like week. So it's just a little bit of a timing difference there, especially ahead of the implementations that we knew were coming. We did consciously try to help offset any potential risk as we went through those. So it's just a temporary condition, nothing of significant concern.

Okay. Fair enough. Maybe if I could just ask one more on what I guess I'm imputing in the outlook from a gross margin standpoint. It almost seems like we might see flat to up gross margins in the second quarter based on my math at least. Maybe just talk about what you're seeing on sort of the margin front and product markdowns. It sounds like maybe we got a little bit better there. So that's a good guy offsetting the BD&O deleverage that we may still experience. But maybe just if you could add a little bit more to that.

Yes, Mike, let me answer that. So we do expect gross margin improvement. This is exactly what we're working on. We can't estimate yet what it will be for second quarter, and everything is up in the air right now. We are working on so many different things that it will be very hard to predict until the future. So you can expect that it will be flat to up. I just can't tell you how much it will be up.

Okay, great. Appreciate it guys, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Henry for any closing remarks.

Thank you all for joining us today. We appreciate your interest, and we look forward to sharing our second quarter results with you in early September. Thanks, and have a good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.