Greetings. Welcome to the Tilly's, Inc. Third Quarter 2022 Earnings Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin.

Good afternoon, and welcome to the Tilly's Fiscal 2022 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 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, December 1, 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 2022 third 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 will include a Q&A session after our prepared remarks. I will now turn the call over to Ed.

Thanks Gar. Good afternoon, everyone, and thank you for joining us today. Our third quarter sales performance was stronger than we anticipated throughout the quarter, resulting in both topline and bottom line results exceeding our outlook and analyst consensus estimates for the third quarter. As expected, we saw a deceleration in sales trends from month-to-month as we anniversaried last year's early holiday shopping that was driven by supply chain concerns and other pandemic-related factors in the later stages of the quarter. Not surprisingly, as we lap those prior year conditions amid this year's highly inflationary environment, all geographic markets comped double-digit negative and most merchandising departments comped double-digit negative with the exceptions of footwear, which was just slightly negative and accessories, which was led by strengthened backpacks, but still decreased by a single-digit percentage overall. Also, not surprisingly, customer store traffic and conversion both declined by high single-digit percentages compared to last year's record results. Despite current economic challenges associated with inflation, we continue to believe that Tilly's has meaningful future growth opportunities in many of our existing markets, particularly California, Texas, the Northeast and greater Chicago area. With very few exceptions, our new store openings over the past several years have met or exceeded our expectations, and we believe it is important for our long-term earnings potential to continue to grow our store base, along with our e-comm business. In the third quarter, we opened five new stores. In the fourth quarter, we have opened two new stores so far with two more we'll be opening in a few more days, bringing our total new store openings to 11 for the year. We anticipate closing two stores in mid-January, bringing our fiscal year store count to 249. For fiscal 2023, we have a preliminary expectation of opening up to 15 stores, assuming we can negotiate what we believe to be appropriate lease economics relative to the retail environment. At this time, two of those potential new stores have fully executed leases, and we are engaged in active negotiations on the remainder. In addition to new stores, we continue to invest in company infrastructure during fiscal 2023 to support our future growth plans. We plan to upgrade our warehouse management systems to create greater efficiencies in managing inventory between our stores, e-commerce and our two distribution centers, as well as to improve distribution labor efficiency. We are also planning to upgrade our merchandise planning and allocation systems with the goals of improving inventory efficiency and reducing the volume of inventory transfers. In total, including 15 new stores, we preliminarily expect our total capital expenditures for fiscal 2023 not to exceed $25 million. Turning to the fourth quarter of fiscal 2022, we are off to a softer start than expected. Total comparable net sales through November 29, including both physical stores and e-comm decreased by 18.5% versus the record comparable period of last year. For Thanksgiving weekend, Thursday and through Cyber Monday, we saw an improved relative trend with total comparable net sales decreasing 13.4% compared to last year and a high single-digit negative comp on Black Friday specifically. Assuming our fourth quarter sales exceed third quarter sales, as has been the case throughout our history, except for last year, we believe we have an opportunity to produce an improved comp sales trend for the fourth quarter relative to recent quarters, although still below last year due to the much more difficult economic conditions in play this year. We will continue to manage our business prudently relative to the current environment, but remain focused on our longer-term goals of continued growth and improved operational performance. I now turn the call over to Mike to discuss our third quarter operating results and fourth quarter outlook in more detail.

Thanks, Ed. Our third quarter operating results compared to last year were as follows: Total net sales were $177.8 million compared to a company record of $206.1 million last year. Last year's results were fueled by unprecedented pandemic-related factors, along with supply chain concerns about the holiday season, which we believe pulled sales forward into the third quarter last year. Total comparable net sales, including both physical stores and e-commerce decreased by 14.9%. Total net sales from physical stores were $141.5 million compared to $165.3 million last year, with a comparable store net sales decrease of 15.8%. Net sales from physical stores represented 79.6% of our total net sales this year compared to 80.2% last year. E-commerce net sales were $36.3 million compared to $40.8 million last year. E-comm net sales represented 20.4% of total net sales this year compared to 19.8% last year. We ended the third quarter with 247 total stores, a net increase of four stores since the end of last year's third quarter. For additional perspective, our total comparable net sales for the third quarter increased by 8.7% relative to the pre-pandemic third quarter of fiscal 2019. Gross profit, including buying, distribution and occupancy expenses, was $54.6 million or 30.7% of net sales compared to a company record of $76.7 million or 37.2% of net sales last year. Buying, distribution and occupancy costs deleveraged by 360 basis points collectively due to carrying these costs against a significantly lower level of net sales this year compared to last year. Product margins declined by 300 basis points this year, primarily due to an increase in more normalized markdown rate compared to last year when full price selling was at record levels. For additional perspective, product margins were down less than 100 basis points compared to the pre-pandemic third quarter of fiscal 2019, primarily due to lower initial markups and a higher markdown rate. Total SG&A expenses were $48.3 million or 27.1% of net sales compared to $47.7 million or 23.2% of net sales last year. The primary increases in SG&A compared to last year were $0.6 million from store payroll due to having four net additional stores, along with higher hourly wage rates and $0.5 million from corporate payroll due to wage inflation. Partially offsetting these increases were a $1.8 million reduction in bonus expense due to the lack of any bonus accrual this year and a $0.6 million reduction in marketing costs. Operating income was $6.3 million or 3.6% of net sales compared to a company record of $29 million or 14.1% of net sales last year. Other income was $0.7 million compared to zero last year, primarily due to earning higher rates of return on our marketable securities investments and the absence of any costs associated with our former ABL credit facility, which were included in last year's results. Income tax expense was $1.8 million or 26.3% of pretax income compared to $8.2 million or 28.1% of pretax income last year. Net income was $5.1 million or $0.17 per diluted share compared to a company record of $20.8 million in net income and $0.66 per diluted share last year. Weighted average shares were 30 million this year compared to 31.4 million last year. Turning to our balance sheet; we ended the third quarter with total cash and marketable securities of $105.8 million and no debt outstanding. This compared to $155.6 million and no debt outstanding last year. Since the end of last year's third quarter, we paid special cash dividends to stockholders of $30.9 million in December 2021 and repurchased 1,258,330 shares of our common stock for a total of $10.9 million during this year. We ended the third quarter with inventories per square foot down 6.9% compared to last year, following being up 4.1% to last year at the end of the second quarter. Total year-to-date capital expenditures were $11.9 million this year compared to $10.9 million last year. We expect our total capital expenditures for fiscal 2022 to be approximately $19 million at the end of the year. Turning to our outlook for the fourth quarter of fiscal 2022; we remind you that last year's fourth quarter was a historic anomaly for us with fourth quarter sales below third quarter sales for the first time ever due primarily to supply chain concerns and other pandemic-related factors, which we believe pulled some holiday season sales into the third quarter last year. While some level of similar customer behavior may have been repeated this year amid the current highly inflationary environment at this time, we assume that our fourth quarter sales performance will revert to a more traditional cadence such that it would be the largest sales quarter of the year. Based on our quarter-to-date net sales results through November 29, 2022, that I had shared earlier and our pre-pandemic historical sales build patterns we currently anticipate our total net sales for the fourth quarter of fiscal 2022 to be in the range of approximately $183 million to $188 million, SG&A to be approximately $54 million to $55 million, pretax income to be in the range of approximately $0.8 million to $2.6 million, our estimated income tax rate to be approximately 27% and earnings per diluted share to be in the range of $0.02 to $0.06 based on estimated weighted average diluted shares of approximately $29.9 million. This compares to a company fourth quarter record of $204.5 million in net sales and $0.38 in earnings per diluted share for the fourth quarter last year and total net sales of $172.5 million and earnings per share of $0.21 in the pre-pandemic fourth quarter of fiscal 2019.

We'll now go to our Q&A session.

Hello. This is Rick Magnusen for Jeff Van Sinderen. Can you provide more insight into how you are planning incoming inventory for spring? And do you expect inventory to be up or down on a square foot basis at the end of fourth quarter?

Hi Richard. We expect inventory to be down on a per square foot basis by the end of the fourth quarter. Looking ahead to next year as a whole, it's important to remember that 2021 was exceptionally strong. Throughout the year, we've been comparing ourselves to that, which is reflected in the negative double-digit comparisons we've experienced. The last month of those comparisons will be February. In February 2022, we had a positive 15% comparable sales increase. After that, we'll be facing this year's negative double digits. There is some optimism that if we can maintain our merchandise assortment trend, we have a chance to return to positive comparisons starting in 2023, especially after February, which is a smaller month. We anticipate improving our business in 2023 and performing better in the spring than we did this year.

All right. No, that sounds good. And can you provide some detail on the different trends that you saw in Cyber Monday and Black Friday sales in e-comm?

It was pretty erratic. I think we were going up against a lot of our competitors who were much more aggressive promotionally than us, and we elected, as we consistently do, not to play the aggressive promotion campaign and may have somewhat negatively impacted our demand. But overall, it was close to what we expected.

Okay. And then can you remind me what is the comparison easier for e-comm?

Well, as I just mentioned, we are going to face double-digit comparisons in total business. Spring will begin right after February. We had similar performance trends between stores and e-commerce. E-commerce was up in single digits in February, but then it decreased in double digits for the next four months. It was still negative in July and August before returning to double digits in September, October, and November. This pattern is similar to how the stores performed.

Okay. And then my last question is, what are you seeing in brick-and-mortar this week, if you can speak to that?

I wouldn't call it particularly strong. So it's not.

No, I would say that typically after Black Friday weekend, there’s usually a lull as people move past the promotions and excitement of Black Friday and Cyber Monday. We're currently experiencing that lull. We believe that the overall patterns for holiday shopping will happen later this year compared to last year. This may explain why our start to the fourth quarter was weaker than expected. We had mentioned that some early holiday shopping shifted into October, and it also extended into early November due to supply chain issues last year. This year, everyone has more inventory than needed, creating a pretty promotional environment. We anticipate that the holiday season will develop, albeit later than last year, and we have factored this into our outlook.

Additionally, as we look ahead to the next few weeks, the quality of our inventory, in both quantity and mix, is in excellent shape. We feel confident that we are well positioned to capitalize on business opportunities if they arise.

Our next question comes from the line of Mitch Kummetz with Seaport Research.

Starting with the Q4 to-date comp, I think, Mike, in the press release, and it's down 18.5%. Do you know what that is on a sales basis? And then also, do you happen to know what both comp and sales are for that period versus three years ago?

I only have the comparable number that we just reported. We haven't finalized fiscal November yet. We're currently in the process of closing fiscal November, so I don't have the complete sales numbers to share at this early stage.

Okay. You mentioned the pull forward last year due to supply chain issues and COVID. Can you remind us how last year you achieved a 12.5% comp, if I recall correctly? Could you share how that performance flowed through the fourth quarter on a monthly basis, so we can have a clearer comparison?

Yes. Last year, in November, we saw a strong comparable sales increase of 21% compared to 2020. December's growth was about half of that at 10.5%, and January was up 4%. As the quarter progresses, these comparisons become easier. Despite a slow start in November, historical trends indicate that we should be around the $180 million mark for the fourth quarter, following the $178 million reported for the third quarter. Traditionally, the fourth quarter is larger than the third, except for last year, so reaching $180 million seems reasonable. While I can't predict any unforeseen changes, I remain optimistic that the holiday season will normalize, similar to previous years. Our third quarter also showed nearly a 9% growth compared to 2019, which, combined with the nine additional stores we have now, supports the expectation of a positive fourth quarter compared to 2019. Thus, despite the slow start, the metrics suggest that business will pick up, albeit later than last year.

Yes. And do you have a sense as to how much of the quarter is in the books through November 29? I imagine the vast majority is still in front of you?

The largest sales occur around Christmas, as expected, with Thanksgiving week being one of the peak weeks. The final full weekend before Christmas and the last full week before that are the busiest times of the quarter. Typically, the first week right after Christmas also sees significant sales, but the weeks in January tend to be much slower. Consequently, most of the quarter's performance will be concentrated after December.

Okay. And then lastly, Ed, there's been a lot of talk on other retail earnings calls about how challenging the apparel environment is, in particular. Can you just elaborate on what you guys are seeing?

The apparel environment has been tough. I believe part of the issue is that there isn't a dominant trend, especially for our target age group. We've noticed that long bottoms have performed well for us, which is encouraging. However, traditional categories that usually do well have slowed down. I think this is due to both economic factors and the absence of a strong trend.

Our next question comes from the line of Matt Koranda with Roth Capital.

This is Ray on for Matt. Most of my questions were already asked, but maybe if you guys can talk a little bit about how Black Friday, Cyber Monday, I guess, how much of that sorry, okay. Maybe like Q4, how much of the revenue actually come from Black Friday and Cyber Monday and kind of like understanding that last year was a little bit out of the norm.

I don't have any data points on Black Friday as a piece of the quarter. I mean, it's in the top five sales volume weeks of the quarter, top four, but the real bulk of the business comes around Christmas typically. And again, because of the difference of last year to this year it's going to come later. There is an extra day of shopping before Christmas to say later this year. So there's still a lot of business to be done yet. We did see during the Black Friday weekend, as we referenced, the month as a whole was down 18%. We were down worse than that in the first three weeks of November. And then Black Friday weekend was down about 13%, and Black Friday itself was only down 9%. So during that particular peak weekend, we saw a meaningful improvement in the trend of our business. And given that we are expecting a later flow of the holiday shopping versus what it was last year, we'd expect to see similar sorts of behaviors during those key peak weeks in the mid- to latter part of December in particular.

It looks like we have reached the end of the question-and-answer session. I will now turn the call back over to Michael Henry for closing remarks.

Hi. Unfortunately, it's Ed. Thank you for joining us on the call today. We look forward to sharing our fourth quarter results review in mid-March 2023. Have a good evening.

Thanks, everybody.

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