Hello, and welcome to Tilly's Second Quarter 2023 Results Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this call 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 2023 second quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, Executive Vice President and CFO, will discuss the company's results and then host a 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, August 31, 2023. 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 2023, second quarter earnings release. This 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. Our second quarter results exceeded our previously announced estimated outlook ranges for both net sales and earnings per share. The trend of our comp sales results improved to negative high single digits for each of June and July, following a negative 11.3% start in fiscal May. This improved sequential comp sales performance, coupled with diligent expense management, produced better bottom line results than we anticipated for the quarter. Our spring/summer product categories performed better during the second quarter than in the first quarter of this fiscal year, resulting in improved relative performance across all geographic markets, with the most significant improvement coming from our home state of California, where 40% of our stores reside. For the quarter, on a percentage basis, comps were positive in the Northwest, single-digit negative in 8 of our geographic markets, including both Southern and Northern California, and double-digit negative in the remaining 5 markets. In terms of store transaction metrics, total transactions were down low double digits, while the average transaction value increased by low single digits compared to last year. From a merchandising perspective, for the second quarter, girls and footwear comped positive, women's and boys were single-digit negative, while men's and accessories were each double-digit negative on a percentage basis. All departments improved sequentially from their first quarter performance, and most have improved further from the second quarter performance during August. We are optimistic that our new Chief Merchandising Officer and new Vice President of Merchandise Planning, both of whom joined us in May, will help us continue to improve our performance going forward. In terms of store real estate, we expect to open 3 new stores in each of the third and fourth quarters, bringing our total new store count to 7 for the year. We closed 2 stores during the second quarter. We continue to believe that we have ample opportunities to grow our total store count over the next several years. As we've said in the past, we will be very selective in our approach to new store openings and will only open new stores that reflect what we believe to be appropriate lease economics to drive acceptable profitability relative to the sales environment we expect. Turning to the third quarter of fiscal 2023, which includes the peak of the back-to-school season. Total comparable net sales through August 29, including both physical stores and e-commerce, decreased by 3.9% versus the comparable period of last year, continuing the sequential improvement in our comp sales trends in recent months. We have seen back-to-school shopping patterns this year that seem to indicate that our customers have been shopping later than in prior years, even seeing stronger results following what we anticipated to be the peak back-to-school shopping weeks for certain stores before then seeing results start to soften in the post back-to-school period. Given this backdrop amid the broader economic environment, we are anticipating that our comp sales results may likely revert to pre-back-to-school levels, following what was a need-based purchasing period during August. Overall, we feel good about our back-to-school and holiday merchandise assortment, and despite ongoing macroeconomic challenges, we are cautiously optimistic that we can produce a better comp store sales trend over the back half of the year than what we produced in the first half. We will continue to manage our business diligently relative to the environment with the goal of improving performance over time. I will now turn the call over to Mike to discuss our second quarter operating results in more detail and to introduce our third quarter outlook.

Thanks, Ed. Our second quarter operating results compared to last year were as follows: Net sales were $160 million, a decrease of 5%. Net sales from physical stores decreased by 5.3% and represented 81.1% of total net sales compared to 81.5% last year. E-commerce net sales decreased by 3.4% and represented 18.9% of total net sales compared to 18.5% last year. Comparable net sales, including both physical stores and e-commerce, decreased by 8.5%. We ended the second quarter with 246 total stores compared to 242 total stores last year. Gross margin, including buying, distribution, and occupancy expenses, was 27.7% of net sales compared to 30.9% of net sales last year. Buying, distribution, and occupancy costs deleveraged by 170 basis points and increased by $0.9 million collectively, predominantly from occupancy costs as a result of operating additional stores and carrying these costs against a lower level of net sales this year. Product margins declined by 150 basis points compared to last year's second quarter, primarily as a result of higher markdowns and estimated inventory valuation reserves, but improved by 90 basis points sequentially from this year's first quarter. Total SG&A expenses were $47 million, or 29.4% of net sales compared to $46.8 million, or 27.8% of net sales last year. SG&A deleverage as a percentage of net sales occurred due to carrying these costs against lower total net sales. The largest SG&A increases were from noncash store impairment charges of $0.8 million and increased corporate payroll and benefits of $0.4 million, primarily due to the impact of wage increases for employee retention. Partially offsetting these increases were a variety of smaller savings across several expense line items. Operating loss was $2.7 million, or 1.7% of net sales, compared to operating income of $5.2 million, or 3.1% of net sales last year. Other income was $1.2 million compared to $0.2 million last year, primarily due to earning higher rates of return on our marketable securities this year. Income tax benefit was $0.3 million, or 23.2% of pretax loss, compared to income tax expense of $1.5 million, or 28.4% of pretax income last year. The decrease in income tax rate was primarily attributable to the low level of pretax loss and certain discrete tax impacts associated with stock-based compensation. Net loss was $1.1 million, or $0.04 per share compared to net income of $3.8 million, or $0.13 per diluted share last year, an improvement of $0.36 per share sequentially from our first quarter results. Weighted average shares were $29.8 million this year compared to 30.2 million diluted shares last year. Turning to our balance sheet, we ended the second quarter with total cash and marketable securities of $104 million and no debt outstanding compared to $116 million and no debt at the end of the second quarter last year. We ended the second quarter with inventories at cost up less than 1% per square foot and down 3% per square foot in units. Total capital expenditures for the first half were $6.3 million compared to $6.9 million last year. We currently expect our total capital expenditures for fiscal 2023 to be in the range of approximately $15 million to $17 million, primarily for new store construction, information technology, and distribution systems enhancements. Turning to the third quarter of fiscal 2023. Based on our quarter-to-date net sales results and current and historical trends, including August typically representing just over half of third quarter net sales volume, we currently expect our total net sales for the third quarter of fiscal 2023 to be in the range of approximately $166 million to $171 million. SG&A to be approximately $50 million, pretax loss to be in the range of approximately $1.8 million to $4.3 million, our estimated income tax rate to be approximately 26%, and loss per share to be in the range of $0.05 to $0.11 based on estimated weighted average shares of approximately 29.8 million. We expect to have 249 total stores opened at the end of the third quarter, an increase of 2 from 247 total stores at the end of last year's third quarter.

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

Thank you for your question. I would like to get more insight into the anticipated decline in comparable sales for the remainder of the quarter. It appears that, as you mentioned, we might see a drop once need-based purchasing decreases. However, if I'm not mistaken, the comparable sales were somewhat easier to manage last year during September and October. Could you elaborate on the factors at play there?

Sure, Matt. We're already observing it. We've been monitoring performance before, during, and after the back-to-school peaks based on when various schools resumed classes, and we've identified a consistent trend: once the back-to-school peak period concludes, the business tends to slow down. You are correct that the comparisons are more favorable in the final two months of the quarter, but we are still noticing that decline despite the easier comparisons. August was indeed the most challenging comparison, yet we experienced our strongest months. This situation may seem counterintuitive when viewed purely from a comparative standpoint, but it reflects the pattern we are witnessing. We were just slightly negative in the second week of August after experiencing a 10% decline in the first week, then we had a 3% increase in the third week, followed by a 5% decrease in the final week of August, and we are down in the high single digits this week. This trend is visible in our store performance. Other companies have also noted similar situations, indicating that back-to-school shopping behaviors appeared to be more need-driven, resulting in a tighter peak. Now that the need period is largely over, with over 90% of back-to-school shopping completed and fewer than 20 stores currently experiencing peak conditions, the majority have already finished their critical back-to-school peak. This is the dynamic we're observing in our results, and we are factoring this into our outlook.

And then maybe just could you talk about what's contemplated in the ticket versus transaction within the comp outlook. Any changes there, maybe just less benefit from ticket on a year-over-year basis? Or anything to call out on that front relative to what you experienced in 2Q?

Our comp dynamics have been pretty consistent most of the year. It's been a decline in traffic and a decline in transactions period. The average transaction value has actually been slightly up interestingly. So there's just fewer transactions occurring, but they are occurring at a similar or even slightly higher rate.

And that's coming from AUR? Or is that coming from a bigger basket?

It's a low single-digit change. So there's nothing dramatic to call out on either item.

And then just one other one for me on the gross margins. I know you don't explicitly put out a gross margin outlook, but you can back into it on an implied basis. It just seems to look relatively flat in the third quarter versus the second. I noted that despite the uptick in revenue, so I just wondered if you can maybe speak to the dynamics on the D&O costs, maybe, Mike, or just more pressure on merge margin. What's the dynamic there?

Sure. So it's as it has been in recent quarters, it continues to be occupancy that is the major part of deleverage within the non-product cost of goods sold. We're starting the quarter with 4 more stores than last year's third quarter. So dollars are added. We're going to end the third quarter with 2 more stores than last year. And carrying those costs against what we're expecting to be a negative comp for the quarter. So it's kind of deleverage. Occupancy causes most of it. We are anticipating product margins to be somewhat lower than last year's third quarter, but again, sequentially improved in third quarter versus second quarter, and second quarter was improved sequentially from first quarter. So on the worst end of our outlook, it might be a 100 basis points of product margin decline. It will be less than 100 basis points on the better end.

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

And can you just talk a little bit about what was working for back-to-school for you guys?

Sure. There was no single brand or category that was dominant for sure. We saw improvement from the first quarter to the second quarter pretty much across all categories, being apparel, footwear, accessories. We saw improvement there. I would say the improvement continued into August in the Boys and Girls category. But I can't call out any single category or brand that drove it. It was across the board.

And then did I hear you correctly, did you say that girls and footwear were positive comp in the quarter?

For the second quarter, yes, Girls and footwear.

That's correct.

Can you just elaborate on that? I mean, that's pretty good strength compared to the rest of the business. What are you seeing within those segments?

The Girls assortment was definitely improved over last year. So that drove that part of the business. Footwear has been pretty decent for us all year, and it's multiple brands that are driving that, some Nike, some Converse, that's driving that business.

Okay. And when you think about the product pipeline going into holiday, how are you feeling about that?

I feel really positive about it. With the new merchandising leadership joining us recently, they are implementing changes where possible. I believe they have done a great job refining the assortment for the future based on the current trends and the opportunities they have recognized in our business. Therefore, I expect we will have a strong assortment for the holidays.

And then lastly, I know that on the last earnings call, you were anticipating some pretty heavy promotional activity in kind of seasonal categories, short swim sandals. I'm wondering how that played out, how much of a drag that was on the product margin? And how are you situated with your seasonal inventory coming out of the quarter?

I don't think it had a dramatic impact one way or the other. The seasonal categories improved their performance in the second quarter sequentially from first quarter and continued to be better in August. Generally speaking than they were in the second quarter. You'll remember how just terrible the start to the first quarter was, especially here in California with all of just the torrential rain that we had repetitively through February and March. So we did have a really slow start to the spring season, and we do have a little bit more spring/summer merchandise right now than we did a year ago. But again, we're expecting third quarter product margins to be sequentially improved versus second quarter and for the decline versus last year to narrow in the third quarter than what it was in the second quarter and what it was in the first quarter. So we've contemplated everything that we think we need to contemplate to deal with anything that we need to deal with as we close out the spring/summer season and get deeper into fall as the third quarter moves on.

Yes. We'll be in pretty good shape in terms of the quantity of inventory that we have in shorts and swim. It helps that most of the country has been 100 degrees the last two weeks. But those negative trends in the seasonal categories really continued into August, which we anticipated early on when we made adjustments to inventory flow wherever we could.

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

And let me say congratulations on the improving trend. Maybe you can circle back to the CMO situation. Just wondering how much of the holiday assortment is actually going to be owned, so to speak, by the new CMO.

I can't specify a percentage, Jeff. However, there are several aspects she felt positive about that were already in progress. We are making adjustments by focusing more on some of the stronger brands compared to what we had planned. I would say this is one area where we believe there are ongoing trends, and we are revising our forecast to potentially increase orders in areas where we anticipate stronger performance.

And then I just wanted to circle back to inventory for a second. If we assume kind of the midpoint of your Q3 guidance, where do you think that we would see inventory per foot be roughly at the end of Q3?

I think per foot, it will be down to some extent. As always, we do everything we can to try to manage inventory as tightly to the sales trends as possible. Q2 sales were down 5%. Our unit inventory per square foot was down 3%, so pretty close there. We're going to aim to keep that relationship as tight as we can.

And then just as far as the lease decisions, how far are we through those decisions for this year? And then I guess, what are you seeing on renewals?

We're mostly done for this year unless something unusual or opportunistic comes up. We have a substantial pipeline we're working on, and when we decide to speed up our store openings for expansion, we'll be well-positioned to make that happen quickly. Regarding lease renewals, everything is going well so far. We are satisfied with the economics of the renewals we are seeing, and we will continue to carefully evaluate each lease renewal to ensure that the economics align with our future expectations.

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

Thank you all for joining us on the call today. We look forward to sharing our third quarter results with you at the end of November. Have a great evening.

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