Good day, and welcome to the Tilly's Fourth Quarter and Full Year 2024 Earnings Conference Call. All participants will be in 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 Gar Jackson, Investor Relations. Please go ahead.

Good afternoon, and welcome to the Tilly's Fiscal 2024 Fourth Quarter Earnings Call. Michael Henry, Executive Vice President, Chief Financial Officer, will discuss the company's business and operating results. Then he and Hezy Shaked, Co-Founder, Executive Chairman, President and Chief Executive Officer, will 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 12, 2025, 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 Fourth 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. 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.

Thank you, Gar, and everyone on the call for joining us today. The fourth quarter of fiscal 2024 was disappointing, particularly following what was our best comp sales performance since 2021 during the third quarter. We made several organizational changes in our merchandising team during the fourth quarter with the goal of beginning to stabilize and then turning our sales trajectory around. We believe in our merchandising team's abilities. Merchandising has not been easy when many of our best traditional brand partners have been facing their own significant operating challenges. We are adapting our brand and assortment mixes to attempt to improve sales and changes will continue as we progress through fiscal 2025. We believe our spring assortment is on trend based on the brief period of positive comps we saw in stores when weather turned warmer. We have planned meaningfully reduced inventory commitments throughout fiscal 2025 compared to fiscal 2024 to target faster turns and further improvement in product margins. We have reassessed inventory needs by product category and set targets that aim to move us back toward historical norms that this company has been able to produce repeatedly in its past. Beyond merchandising adjustments, we've targeted significant expense reductions during fiscal 2025 from the combination of continued diligent scrutiny of every store lease decision, strict management of store distribution and corporate payroll and negotiated reductions in contractual commitments across operational departments with the support of many of our business partners. At the same time, we plan to continue investing in our business in terms of expanded marketing efforts, carefully selected new store opportunities and pursuit of operating efficiencies, all with the goal of improving our performance. Now I will turn to the specifics of our fiscal 2024 fourth quarter operating performance compared to fiscal 2023's fourth quarter before…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Okay, thanks for taking my question. I guess the first one I had was just around tariff impact or potential tariff impact. Maybe you can just lay out for us -- I know you do have some private label products, but I don't think there is a tariff impact on that. Can you just refresh our memories around potential tariff impact?

Yes let me take it -- this is Hezy. So we looked into it, by the way, Monday, and it will be a minor effect about very few of the vendors we're using for private label. Actually, it's only one at this stage, indicated that they might have to split the increased cost with us. And it's not significant with this particular vendor, but this is the information we have as of right now. I expect it will have some effect. It's hard to quantify at this stage.

And then as you're sort of thinking about the Doge backdrop that we're in and the potential impact to the consumer overall, the recession were as sort of being talked about. I guess, how are you thinking about that? Do you feel like the changes you're making to merchandise assortment can offset that? I guess, just any thoughts around that.

That is the hope, right? I mean, the headwinds we're going to have, like everybody else does, will be there. And the hope is that by the time we get our merchandising everything in line, we should be able to mitigate it, but there's no guarantee.

Yes, and then I just kind of have a more strategic or structural question for you. I'm just kind of looking at your cash balance and CapEx, how are you thinking about store openings this year? Are you planning to open any or are we in more of closure mode at this point? What should we anticipate for CapEx this year? And then I also wanted to ask you, and this is something that has been down a little bit more, but I apologize for the multipart question here. But on e-commerce, I just wonder if it might make sense for you to fulfill e-commerce out of your stores and not have a separate e-commerce fulfillment center.

Sure. I will start from the last one. We do a hybrid, we fill from the stores as well as we do from e-comm in the event that we don't have it in the e-comm building, it comes from the closest store to the customer. So at this stage, it's not something we are considering doing complete shipping from the stores. On your first question on the CapEx, we are still opportunistic any situation that we believe the ROI is going to be short. We capitalized on that. We did open two stores recently and are both very profitable and I think we will see great results on those two. We do have kind of a place marker for additional stores in case we find the right location that makes sense. But overall, I think my goal will be to probably close more unprofitable stores than open new ones.

Yes. Jeff, I'll add some details on that. One store opened already about just last week, actually, there's a second one that's planned to open in August currently. We know of seven store closures that will take place as of now, three in the first quarter and four in the second quarter. That's what we know as of this moment. And as Hezy referenced, the placeholder that we have in our budget is just five stores. So it's a limited number. And as you noted, we'll be very opportunistic about that. It doesn't mean we're going to open five, we only have two as we have right now. and we have seven closures. There could be more closures as we go through the year and work through all of our lease decisions, but that's the latest information we have as of today.

And sorry, Mike, how many lease decisions do you have this year?

Well, just like every other recent year, we've been renegotiating leases for several years. And as we do these things, they tend to go one to two to three years, at a time. So every year, there's roughly about 80 lease decisions to make it seems, and that's right in the neighborhood of how many we'll have to deal with this year.

And the next question comes from Matt Koranda with Roth Capital.

Just backing up to the fourth quarter results and the comp, just wanted to see sort of if you could maybe just give a little commentary on the down 11% comp for the fourth quarter, it's a little below the range you gave. And I just wanted to see kind of what might have fallen short kind of later in the quarter.

We started off really -- go ahead, Hezy.

No. You can take that.

Okay. Obviously, when we released Q3 earnings and gave our outlook, we acknowledge what our comps were through the early stage of the quarter. So November was the weakest month of the quarter by far. We were down 21% in fiscal November and then we were down 6% to 7% in each of December and January, just to give you the cadence of the quarter.

And then just in terms of the trends quarter-to-date, I know you did -- the release says sort of minus 6%, roughly in terms of comp in February or expecting minus 8% to 3%. Maybe just can you talk about the sensitivities in the range [indiscernible] what brings to the bottom and the top end of that range? And then just any way you can unpack sort of any of the trends at all that you saw in February. I know a lot have been kind of calling out some softness in the month of February progressively as we went through the month. But just wanted to see if you could note any kind of changes that you were seeing in your business?

Sure. So in fiscal February. Week three was the softest of the month. And then in week four is when we got a nice little heat wave, especially here in California. And so I noted in our prepared remarks that we did see positive comps in our stores. That was a 4-day period when we had really nice seasonal weather and saw a pretty significant change in the trajectory of our business and with a lot of parts of our spring assortment really popping during that period. So in the aggregate, fiscal February finished at minus 5.7% and that was inclusive of that short window of time where we saw positive comps in our stores gives us some cautious optimism that as we get into better, more warmer weather as we get deeper into the quarter that our assortment seems to be on trend, and we should see some response from it as we get into more spring seasonal weather. We do have a later Easter this year. So it is going to get a little worse before it gets better because of the shift out of Easter. Easter was March 31 last year versus April 20 this year. So our outlook range kind of encapsulates right where we are. The cautious optimism, I mentioned have seen some warmer weather and better performance can lead us towards the upper end and kind of nothing really got better than what we're anticipating and knowing that things are going to get tougher in March because of the later Easter, the typical Easter shift that happens every year and one way or the other, that could lead us towards the bottom end. 2022 was the last fiscal year where Easter is in the precise location as it is this year. So that's what we're using to model kind of how the cadence of the quarter goes.

And then maybe just for Hezy, can you just talk higher level about sort of what inning we are in terms of the merchandising and assortment change? When will the new team sort of fully have their fingerprints on all products that are in the stores? Maybe just level set everybody on sort of when we should expect that productivity come into play?

Sure. Absolutely. Let me take you back a little bit, by the way, as you know, we missed the merchandise for Christmas, fourth quarter. That was the reason I changed the top merchant. We've realigned the merchant team. We have a lot of good talent there, but the direction was wrong. And I think by July, we should see the results of the merchant team effort. I also got to remind you what's happening here is we had to mark down a lot of the merchandise because it was just the wrong direction. And that affects everything including your comps because you're comping dollars. And we are going through this merchandise, we're clearing it, as you can see, our inventory is down. And we expect to clear all that by the same time, we should see some results in July.

And then maybe just last one for Mike. Can you just comment on what's embedded in the cash balance guide at the end of the quarter in terms of inventory? Are we assuming that the inventory balance is down year-over-year at the end of the quarter? Maybe talk about sort of where you see inventory normalizing. And then I guess the other kind of higher-level question on the balance sheet is just like what would cause you to tap the credit facility? At what point will we see you drawing on that, if and when?

Sure. So as I noted in our prepared remarks, we're planning to operate with lower unit inventories all year long. We took a really hard look at our inventory needs by product category being a lot more-strict about how we're viewing that. We've simply been buying too much in recent years and so worked real hard with the teams to realign our inventory plans kind of from a bottoms up perspective, by product category and feel confident that we have a good plan in place to have inventory very well managed as we go throughout the year. So we should be below last year's levels all year long at the end of each quarter, and that's been planned into our merge plan budget for the year. So long as we don't have something approaching about a minus 10-comp consistently all year long, we should not have to access our credit facility. As I mentioned, based on our February comp run rate of minus 5.7%, we could run that all year long, and we would not have to touch our credit facility at all. So we have a borrowing free balance sheet and so long as we don't have a deterioration in our con trend from where we are and closer to about that minus 10 level. we shouldn't have to access our credit facility at any point in time.

And the next question comes from Jeff Van Sinderen with B. Riley Securities. Please go ahead.

I just wanted to sort of follow up around the thinking on the credit line and the cash balance. And just wondering if there are other areas you feel you can reduce SG&A, given kind of the run rate of the business?

So we have. That was in our prepared remarks as well. We've renegotiated a lot of contractual commitments with the assistance of several of our business partners. We had to absorb another year of minimum wage increases that, for the first quarter, would all things being equal cost us about $400,000. But with another swing at trying to be super tight on our payroll metrics. We actually expect our payroll dollars to be down in the first quarter despite that minimum wage increase. Hezy and I ran every single department head over the calls with their departmental budgets. We have looked at literally everything. So we expect to see some favorability as we go through our lease decisions. We expect to see some favorability out of payroll in all facets, as I mentioned, whether it's store payroll distribution, or corporate office because of the changes we've made and the plans we have in place. And we've looked at every major contractual commitment that we have looking for anywhere that we can squeeze expense and those things are factored in and also have an impact on our ability to manage our way through the year without accessing our credit facility because of it.

Would it be fair to say, Mike, that if your business starts to turn up, which you sound cautiously optimistic that it can and hopefully, around the summertime, it will -- and let's just -- if we assume for a second that you are comping positive in third quarter, let's say, or second quarter, would it be fair to think that with the reductions you've made so far that the SG&A dollars can be down year-over-year? I just want to kind of clarify the thinking on that.

That would be our expectation, yes, that we could manage through this year with a lower total dollar value of SG&A than what we had in '24.

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 on the call today, and we look forward to sharing our results with you as we go through the year. Thank you.

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