Good day, and welcome to the Tilly's, Inc. First Quarter 2024 Earnings 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 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 the 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 a greater customer following and generate a positive business impact over time. We believe that it may take six to nine months before we are able to truly see and understand how these new efforts are impacting our business, but we believe they are the right efforts to help us improve over the longer term. Despite short-term challenges, we continue to invest in our business for the longer term. We implemented a new merchandise planning and allocation tool in early April, followed by the implementation of our new warehouse management software for our stores distribution center in early May. We experienced some complications in the immediate aftermath of these implementations that slowed product replenishment to stores during May, but we believe we are now starting to get back to a normal level of distribution productivity for our stores. We plan to complete the implementation of this same warehouse management software in our e-commerce distribution center this month. Additionally, we plan to implement new markdown optimization software and improve search engine optimization capabilities ahead of the holiday season. We believe these new tools are important to help generate greater operational efficiencies and improve our business over time. Over the short term, we continue to believe it will be challenging for us to improve our sales results amid the reported weakening consumer environment. It will likely take time for this cycle to pass before we see a bounce back in consumer activity among our core customer demographic. In the meantime, we continue to make every effort to seek improvements in our business and make changes that we believe can lead to better results. Our focus remains steadfast on improving our business for the long term. Now, turning to our operating results for the first quarter of fiscal 2024 compared to last year's first quarter. Results were as follows: total net sales were $115.9 million, a decrease of 6.3%; total comparable net sales, including e-commerce, decreased by 9.4%, with an 8.6% decrease from physical stores and a 10.8% decrease from e-commerce relative to the comparable 13-week period last year; net sales from physical stores represented 80.1% of total net sales compared to 79.1% last year, while e-commerce net sales represented 19.9% of total net sales compared to 20.9% last year. We ended the first quarter with 246 total stores, a net decrease of two stores compared to last year. Gross margin, including buying, distribution, and occupancy expenses, was flat to last year at 21% of net sales. Product margins improved by 130 basis points compared to last year, primarily due to the combination of a lower total markdown rate and improved initial markups. This improvement was offset by deleverage of buying, distribution, and occupancy costs despite these costs being $800,000 below last year in the aggregate due to carrying these costs against lower total net sales. Total SG&A expenses were $45.1 million, an increase of $1.9 million, primarily due to increased non-cash store asset impairment charges of $1.5 million and increased store payroll and related benefits costs of $1 million. Our average hourly rate per store payroll rose 5% over last year and was 31% higher than in pre-pandemic 2019. A variety of smaller expense reductions partially offset these two primary expense increases. SG&A deleveraged by 400 basis points as a result of carrying these costs against lower total net sales. Pretax loss was $19.6 million or 16.9% of net sales compared to $16.2 million or 13.1% of net sales last year as a result of the combined factors just noted. Income tax benefit was negligible at $13,000, essentially a 0% tax rate due to the continuing impact of a full, non-cash deferred tax asset valuation allowance. This compares to income tax benefit of $4.2 million or 26.1% of pretax loss last year. On a non-GAAP basis, in the absence of the valuation allowance, our income tax benefit would otherwise have been approximately $5.2 million. Net loss was $19.6 million or $0.65 per share compared to $12 million or $0.40 per share last year. On a non-GAAP basis, assuming a normalized effective income tax rate of 26.3% in the absence of a valuation allowance, net loss would have been $14.5 million or $0.48 per share, the exact middle of our original outlook range for the first quarter. Turning to our balance sheet. We ended the first quarter with total cash and marketable securities of $68 million and no debt outstanding under our $65 million asset-backed credit facility compared to $93 million and no debt at the end of the first quarter last year. Total inventories were up 1.8% at the end of the first quarter this year compared to the end of the first quarter last year. We ended this week with total inventories down 3% versus the comparable week last year. Turning to our outlook for the second quarter of fiscal 2024. Total comparable net sales for fiscal May ended June 1, 2024, decreased by 8.4% relative to the comparable 4-week period last year. Based on current and historical trends, we currently estimate that our total net sales for the second quarter of fiscal 2024 will be in the range of approximately $160 million to $165 million, translating to a comparable net sales decline in the range of approximately 10% to 7%, respectively, for the comparable 13-week period last year. We expect our SG&A to be in the range of approximately $48 million to $49 million in the absence of any non-cash store asset impairment charges and our effective income tax rate to be near 0% due to the continuing impact of a full, non-cash valuation allowance on our deferred tax assets. We estimate our after-tax results to be in the range of a net loss of approximately $3.9 million to $0.9 million, respectively, and per share results to be in the range of a net loss of $0.13 to $0.03, respectively. We currently expect to have 247 total stores at the end of the second quarter compared to 246 at the end of last year's second quarter. One additional note, while we are not providing any specific outlook for the third quarter today, it should be noted, as I mentioned during our last earnings call, that due to the impact of the 53rd week in fiscal 2023, there will be a meaningful shift in net sales into the second quarter from the third quarter when comparing to last year. Using last year's weekly net sales results, what was a $26.2 million back-to-school net sales week for the first week of last year's third quarter will now become the comparable week for the final week of this year's second quarter. The first week of last year's fourth quarter, which was a $7.8 million net sales week, becomes the final comparable week of the third quarter this year, creating an $18.4 million net sales decline for the third quarter of this year relative to last year's third quarter before consideration of any comp sales assumption.

We'll now go to our Q&A session. Thank you. We will now begin the question and answer session. The first question comes from Marni Shapiro with The Retail Tracker. Please go ahead.

Hey everyone, thanks for letting me ask my question. I'm aware that sales are facing challenges and there have been some issues with the distribution centers this quarter. However, if someone spends considerable time in your stores, they will definitely notice some changes at the front, especially in the junior section. I'm wondering if you're seeing any positive signs at this point. What I’ve observed is that items are selling quickly and are very much in trend. While it's a small portion of the inventory, I'm interested in whether you're able to influence a larger percentage of the inventory for the latter half of the year and what that might look like. I'm not trying to jump too far ahead, but I'm just trying to gauge the direction this is heading.

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. It feels great. Can we also discuss how things are starting to improve, considering your long history of customer loyalty? How do you plan to attract lapsed shoppers and, more importantly, younger shoppers? Will you initiate marketing efforts as conditions improve, or will you hold off until you have something you feel truly proud of to drive traffic toward? Should we think about marketing this way?

No, not at all. We started 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 in 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 in the 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’re absolutely correct. We have increased several categories, and we are continuously pursuing it.

Yes. It looks fantastic.

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' stores, but girls will shop in guys' stores. 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 position.

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 to share at this time. As you know, we are renegotiating leases and aiming to close down any unprofitable locations. We don't have many of them, but we still have a few. There is no update on that yet.

It's challenging to provide a specific number since we are still in negotiations. Currently, we have two new stores scheduled to open, one in July and another in mid-November. Additionally, we anticipate four to five store closures by the end of the year. However, these figures may change as we have many leases still to address this year. That's the most accurate information we can provide at this time.

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 a 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 certainly cannot.

Okay, alright thanks guys. Good luck.

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

Hi, everyone. I wanted to follow up on the second quarter outlook and the comparisons from May to date. Mike, can you share any insights regarding the weekly trends that stood out? Also, did you notice anything significant around the Memorial Day holiday?

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 were 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 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's 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.

That seems reasonable. However, I don’t think we can expect a significant improvement compared to what we experienced in May in terms of comparisons, at least not much of one. As for inventory, I’m wondering if the warehouse management system is one of the factors contributing to the slightly higher inventory per store that we are noticing year-over-year, or if there are other factors affecting inventory that you could highlight. Also, Hezy, could you share where our inventory levels are higher than desired? I was interested in what specific items you are pursuing that are particularly successful for you. It would be useful to get some details on that.

Yes. Yes, we're chasing the best sellers. 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 add to that, Matt, is some of it was a little bit of a 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 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 the 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.