Daniel Griesemer - President and CEO Jennifer Ehrhardt - CFO Anne Rakunas - IR, ICR, Inc.

Neely Tamminga - Piper Jaffray Dave King - ROTH Capital Partners, LLC Jeff Van Sinderen - B. Riley & Co. Pamela Quintiliano - SunTrust Robinson Humphrey Richard Jaffe - Stifel, Nicolaus & Company, Inc. Sharon Zackfia - William Blair & Company, L.L.C. Liz Pierce - Brean Capital, LLC.

Good day and welcome to the Tilly’s Incorporated Fourth Quarter Fiscal 2014 Results Conference Call. Today’s conference is being recoded. At this time, I’d like to turn the conference over to Ms. Anne Rakunas, of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly’s fourth quarter fiscal 2014 earnings results. On today’s call are Daniel Griesemer, President and CEO and Jennifer Ehrhardt, CFO. A copy of today’s press release is available in the Investor Relations section of Tilly’s Web site at tillys.com. Shortly after we end this call, a recording of the call will be available and a replay for 30 days in the Investor Relations section of the Company’s Web site. I’d like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward looking statements reflect Tilly’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of 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 the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that’s included in our fourth quarter 2014 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. Also for today’s call, we have a limit of one hour, so when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed. And with that, I’ll turn the call over to Daniel Griesemer, Tilly’s President and Chief Executive Officer. Dan?

Thank you, Anne, and good afternoon, everyone. Thank you for joining us today. On our call I’ll be providing you with an overview of our fourth quarter performance and the key factors that drove our results. Next I’d like to highlight areas of focus for us in fiscal 2015 as we work to further advance our strategic initiatives. Then Jennifer will review our financial results in more detail and provide our outlook for the first quarter of fiscal 2015. I’ll provide a few closing comments and then we’ll open-up the call for your questions. Our fourth quarter results further illustrate the progress we’re making on our strategic initiatives to increase sales and profitability. We achieved a net sales increase of 9.2% and comparable store sales growth of 2.9%. We drove this growth through our continued focus on product differentiation and innovation, our engaging marketing activities, our improved digital capabilities and strong performance of our new stores opened during the year. We also benefited from a slight improvement in the retail environment that we began to see late in the third quarter. Our disciplined inventory management and planned promotional strategy delivered healthy product margins. And we exited the fourth quarter with inventorying well-positioned for the spring season. I am very proud of the strong execution of our entire Tilly’s team, as we delivered diluted earnings per share of $0.25, a 32% increase over the fourth quarter of last year. These results are the product of continued and diligent focus on our key initiatives not only during the fourth quarter, but throughout the entire year. These initiatives include increased product differentiation and innovation, a greater emphasis on our digital platform, and evolving our real estate strategy. I would like to discuss each one in turn. During the quarter we made significant investments in dominant on-trend products and categories which resonated well with our customers. We introduced more products and brands that are new unique or exclusive to Tilly’s. We were pleased with the performance of our new brands, including Hall of Fame and Free People, and brand expansion such as GoPro, Stance and Patrons of Peace. During the quarter we also introduced exclusive products from Neff, LRG, and Imperial Motion and several new or exclusive collaborations including offerings from Volcom, Rook, and AYC. Turning to our digital platform. During the quarter, we continued to refine and benefit from our new state-of-the-art responsive design e-commerce platform for desktop and mobile that we launched in the third quarter. We’ve had a great response to the new platform, which offer significantly improved look and feel, navigation and performance and offers a much more compelling user experience. Turning to our real estate strategy. We opened five new stores in the fourth quarter including one outlet for a total of 212 stores at the end of the year. Overall, in fiscal 2014, we opened total of 19 stores in both our heritage and new markets, representing 8% in additional gross square footage over the prior year. As a group, our new stores opened this year are performing well and in line with the new store economic model and more stringent site selection process we outlined early in 2014. Our new store performance underscores the relevance of the Tilly's concept throughout the country and the significant opportunity we believe exists to further expand the Tilly's brand. Our fourth quarter results cap a year of meaningful progress in a challenging environment. At the beginning of fiscal 2014, we outlined our key initiatives to lay the foundation for increased market share, brand awareness and improved profitability. In the second half of fiscal 2014, we began to see these initiatives generate positive results. Through operational excellence, we demonstrated our proven ability to appropriately position our merchandise offering, delivering product margins at all time high levels. We also controlled our costs, even as we continue to invest in future growth. During fiscal 2014, we opened 19 new stores including outlets. We successfully migrated our e-commerce operations to our new dedicated facility. We launched a new state-of-the-art responsive design e-commerce platform for desktop and mobile. And we rolled out a new loyalty program that now has well over a million members. Even with this focused investment in our future, we ended the year with a debt free balance sheet and cash and marketable securities of almost $85 million, an increase of 40% compared to the end of fiscal 2013. Building on this initial success, we will continue our disciplined execution of these initiatives in fiscal 2015 to drive further improvements in sales and profitability. We will continue our focus on product differentiation and innovation, applying our conviction to invest in key categories and products to maintain Tilly's standing as the destination for the most relevant assortment of action sports inspired merchandise and brands. Over the past two years we’ve invested significantly in our digital initiatives to take advantage of the extraordinary e-commerce opportunity we see ahead of us. In fiscal 2015, we expect to further leverage our new state-of-the-art e-commerce platform, dedicated e-commerce fulfillment center and omnichannel capabilities to increase our sales and profitability. We will use our new digital platform and our Tilly's Hookup loyalty program, two key elements of our digital initiatives to further build the Tilly's brand through customer awareness and loyalty. The data and enhanced customer analytics provided by these tools will allow us to more fully customize our communications with our customers. With more targeted personalized messaging, we will be able to gain greater reach and increase the effectiveness of our message to our customers. We will now be better able to engage and interact with our customers in order to drive traffic both online and in stores. Today we are also very pleased to announce the appointment of Jason Nazar to our Board of Directors. Jason is a proven tech entrepreneur. He co-founded and was CEO of Docstoc, a premier business content Web site that was later acquired by Intuit. And he also regularly contributes to Forbes, the Wall Street Journal, and Business Insider. Jason brings a wealth of e-commerce and online business strategy experience to Tilly’s and we look forward to his guidance and expertise. Turning to our real estate strategy. As a leader -- as a leading retailer of the most sought after action sports inspired brands, we continue to see the opportunity for 500 stores across the United States over the long-term. In fiscal 2015, we plan to continue to capitalize on the high-quality real estate opportunities we have to open at least 15 new stores. In addition, we expect to refresh at least in the five existing stores in our fleet to further improve comps and profitability. These stores represent high-volume stores in great locations within our heritage markets, and have the potential to see meaningful improvements by elevating the customer experience. And now, I’d like to turn the call over to Jennifer, for more detail on our financial performance in the quarter and to provide our first quarter finance -- fiscal 2015 outlook. Jennifer?

Thank you, Dan, and good afternoon, everyone. Turning to our fourth quarter performance, net sales rose 9.2% to $152.8 million compared to $139.9 million in the fourth quarter of 2013. Comparable store sales, which include e-commerce sales, increased by 2.9% compared to the same period in 2013, reflecting improved sales trends driven by progress on our initiatives and a slight improvement in the retail environment as Dan mentioned. During the quarter, we experienced continued improvement in men’s, women’s accessories and kids. Our fourth quarter comps reflect increased average transaction value and conversion, partially offset by lower traffic. Gross profit increased 13.2% to $49 million or 32.1% of net sales compared to 30.9% of net sales in the fourth quarter of 2013, representing an increase of approximately 110 basis points. This improvement was primarily due to a 40 basis point increase in product margins and lower buying, distribution and occupancy costs as a percentage of sales due to the positive comparable store sales. Selling, general and administrative expenses were $37.8 million or 24.7% of net sales, a 20 basis point improvement compared to an SG&A rate of 24.9% in the fourth quarter of 2013 and includes $1 million of non-cash store asset impairment charges compared to $1.8 million of non-cash asset impairment charges in the fourth quarter of 2013. Operating income was $11.2 million compared to operating income of $8.5 million in the fourth quarter of 2013. Our operating margin as a percentage of sales improved approximately 130 basis point in the fourth quarter of 2014, driven by higher gross margin and lower SG&A costs as a percentage of sales. Net income was $7.1 million or $0.25 per diluted share based on a weighted average diluted share count of 28.1 million shares and an effective tax rate of approximately 37%. This reflects a lower rate than expected primarily due to certain tax credits. This compares to net income in the fourth quarter of 2013 of $5.4 million, or $0.19 per diluted share, and based on a weighted average diluted share count of 28.2 million shares and an effective tax rate of approximately 36%, reflecting a one-time tax benefit related to return to provision adjustments. Turning to the balance sheet, we ended the quarter with cash and marketable securities of $84.7 million, an increase of 40% compared to the end of the fourth quarter of last year. We had no borrowings and no debt outstanding under our revolving credit facility at the end of the quarter. Cash used for capital expenditures during the quarter totaled $3.8 million compared to $6.7 million in the fourth quarter of 2013, and was primarily related to new stores and remodels. Inventory totaled $51.5 million at the end of the quarter, up approximately 3.8% on a per square foot basis compared to the prior year, and as planned to best position us for the spring season and reflecting a reductions to inventory last year. We expect inventory per square foot at the end of the first quarter to be up in the mid single digits compared to the end of the first quarter 2014 as we continue to be up against inventory reductions in the prior year. Now turning to our outlook for the first quarter of fiscal 2015. We would expect first quarter comparable store sales to increase in the low single digits range and net income per diluted share to be in the range of $0.03 to $0.05. This has been an anticipated effective tax rate of approximately 40% and a weighted average diluted share count of 28.2 million shares. First quarter 2014 net income per diluted share was $0.02, based on a weighted average diluted share count of 28.2 million. In line with the real estate strategy, that Dan outlined today, we expect fiscal 2015 capital expenditures to come in between $23 million to $26 million compared to approximately $24 million in fiscal 2014. The majority relates to the opening of at least 15 new stores during the year, at least 25 refreshes of our existing stores, as well as investments to further improve capabilities across our digital channels as we’ve discussed. Our business continues to generate healthy cash flow, providing sufficient resources to fund our growth. As always, we remain focused on stringent cost discipline, as we continue to invest in our business for the long-term growth. Now, I’d like to turn the call back over to Dan for some closing remarks. Dan?

Thanks, Jennifer. I’m pleased with our performance and earnings growth of 32% in the fourth quarter as well as the progress we made throughout the year to advance our strategic initiatives. Through solid execution, we maintained our dominant and differentiated brand experience and generated healthy product margins. We demonstrated cost discipline in operational excellence to improve our profitability in the second half of the year, and we ended the year with inventory clean and well positioned for the spring season. I’d like to thank our entire Tilly’s team and the many associates in the field for their disciplined execution and dedication during the year. Our business is fundamentally strong and I believe we have established a solid platform to further improve our sales and profitability in fiscal 2015 and to achieve our long-term growth objectives. These long-term objectives include annual square footage growth in the low double digits over 500 stores, e-commerce penetration of well over 15%, and operating margins in the high single digits. We have a talented and dedicated leadership team, best-in-class systems and distribution infrastructure to support our growth, and significant financial resources. We are confident in our strategies and the customer’s response they have driven. Our team is energized and ready to build on our 2014 performance making further progress in 2015. I’d now like to open-up the call for your questions. Operator?

Thank you. [Operator Instructions] And we'll take our first question from Neely Tamminga with Piper Jaffray.

Thank you. Good afternoon and congratulations on solid execution this quarter. Question for you around trends. Are there any kind of early spring trends you’d be willing to share with us that you're seeing? Maybe particularly in women's that may have once been latent and now are kind of stepping up a little bit or the weather is cooperating? Kind of curious what you're seeing out there in the broader landscape within casual? And then Free People, you mentioned Free People obviously a great brand to add to your repertoire. I think we counted maybe around 20 stores. Are you -- what are you thinking in terms of the potential for that brand and your broader chain? Thanks.

Okay, sure. No specific trend information that’s worth calling out; the season is still pretty young. And the spring season we’ve got really spring break that is just starting to begin. We feel very good about the product offering if you go into our stores now, you can kind of see the major points of view that we’re communicating through all of our digital platforms as well as in our windows in the store. We feel really good about where we are positioned, but nothing specific to call out there. And we commented about Free People, because it was new in the fourth quarter. We do believe it's a great brand and a great offering and compliments the other things that we're doing in our offering and we are really going to let the business dictate where else we take that. So that will -- we will be able to share that over time.

Thank you. And we will go next to Dave King with ROTH Capital. Please go ahead.

Thanks. Good afternoon everyone. I guess first congrats on the nice finish to year and then my question has to do with the outlook. I guess, Dan, first what can you say if at all about how the first quarter has progressed so far? And then, as we think about the rest of the year and I guess actually in the first quarter how should we be thinking about leverage points, particularly if the low single-digit comp environment persist for a bit. I mean, in the fourth quarter it looks like operating margin was I think fairly flat if I back out the impairment charge in the year-ago period, but you have the product margin improvement, so -- but obviously there was marketing spend and digital initiative stuff that was in there as well, so how should we be thinking about that? Thanks.

Sure. I will take the first part and then Jennifer can take maybe the leverage point. So our outlook for the first quarter is taking into consideration the performance to date and kind of our view of all of the things that we have planned for the quarter. It really is incorporated in all of that just kind of how we’re feeling about the direction of the business we’re seeing. Nice response to our strategic initiatives. Good response to our product offering, the things that we're doing on our digital platform, in our new stores continue to perform and that’s all incorporated in our view of the positive comps for the quarter.

And David with regard to leverage going forward, specifically in the first quarter, you can still expect the similar leverage that you see with buying distribution and occupancy on a positive comps. When you get into SG&A and we look at for the points that you had discussed as well, is that some of the things we’ve been doing recently around marketing and increasing advertising spend that we continue to see really good response to as well as some other puts and takes around that. You would – you’d need to see as you reference the low single-digit positive, we need to see a little bit on the higher end or up on that too to begin to see any SG&A leverage.

Okay. That helps and good luck with the rest of the year.

Thank you.

We'll take our next question from Jeff Van Sinderen with B. Riley.

Good afternoon. Let me add my congratulations. You sound upbeat on inventory, just wondering if there is any impact from the ports. And then also should we expect merchandise margin to continue to improve on the positive comp and maybe you can just give us more on what's baked into your guidance for merchandise margins and discounting, and then finally any color you can share on your footwear business?

Okay.

Okay. Thanks, Jeff. Regarding the port situation, it did have an impact on us. It’s just the impact was not meaningful enough for us to call out.

On merchandise margins we are very pleased with the increase in product margins in the fourth quarter. We believe we have a little bit of room to increase slightly product margins in the first quarter and that’s baked into our guidance. Our margins have always remained in a very healthy bandwidth and that is what you’re seeing in terms of increase is really a function of improved regular price selling as it compares to the year prior. Discounting remains a very low percentage of our business. It always has been and remains a very low percent. So while we’ve strategic promotional plans that we continue to execute on, there is no real story there; it’s a very low percentage of our total. And we didn’t call out footwear, it’s simply because -- not because it’s a problem, just because it’s a -- wasn’t a key driver. We really highlighted the big drivers of the performance. The men's footwear business remains -- still remains very, very strong we’ve called that out now for several quarters and that remains the case.

This sounds healthy and best of luck for the rest of the quarter.

Okay. Thank you, sir.

Thank you.

We'll take our next question from Pamela Quintiliano with SunTrust.

Great. Congratulations guys and thanks so much for taking my question. I actually had a few for you. First off you had mentioned in your prepared commentary, slight improvement in the retail environment late 4Q. But then you also commented on lower traffic I believe and just if you could help align those two for me and how we should think about the improved retail environment if it’s that -- yes, just how to think about that with the traffic? And then, the second question was just when you talked about the exclusives, what percent do you have that are exclusives and how does that compare to the past? Are you finding that you're getting more opportunities there? And lastly, just any loyalty program stuff would be appreciated. Thanks so much.

Okay, sure. The improvement basically we have seen and have invested ahead of the -- kind of the downturn -- in the downturn we continue to do the things that are right for this business for the long-term. When we look across all of the metrics in the business, we are seeing some consumer trends that indicate a slight improvement. Traffic remains challenging. We're certainly not out of the woods, but we have to certainly feel it's necessary to call out when we see it across conversion rates and average transaction values and response to our marketing efforts and things like that. So that -- we don't want to overstate it, but it's certainly is a slight improvement from what we were talking about say maybe a year-ago. With regards to exclusives, we have a large percentage of our offering is exclusive or unique. It varies all the time. We haven’t disclosed that number, given the focus on differentiating and increasing the innovation in our product. You can be sure that it has increased from the year prior and we see good response to that. I think it's really important to continue to differentiate our offering, so you will see us focusing on that going forward. And the loyalty program, well over a million members. We are going to begin harvesting -- this is just a very beginning stage, this is only -- we’re now one year anniversary of the very first sign-ups. So we got a long way to go before we can really harvest a lot of the information, but we can begin using this. We are very pleased with the response, with the engagement, with the continued rate of sign-ups. So we are pleased with this as an important component of our kind of digital strategy.

Just one quick follow-up. On weather, it’s just a few been seeing any impact others have touched upon it, particularly, in February?

Well, stores we certainly had stores that were affected by weather. We haven’t -- we don't have a large concentration of stores that are in those markets, but those stores that were affected were affected like everybody else, so there certainly was some impact.

Okay. Thanks so much and best of luck.

Thank you.

Thank you.

Go next to Richard Jaffe with Stifel.

Thanks very much and well done guys. Dan, could you talk a little bit more about the, I guess, what was an e-commerce initiative that is now really much more than that a digital initiative. How loyalty fits into that? And how it’s playing of the stores driving traffic to the stores and in turn driving the kids from the -- from stores back online to their mobile devices? And how you see those synergies working and playing out by each channel?

Sure. So channel is becoming less and less important to our customers. They want -- what they want, when they want it, they want to see it or learn about it wherever that needs to be. Social media plays a role in that. The loyalty program gives us our first view of being able to watch the customer behavior across channels and be able to see recency and frequency to the degree that we’d like to in order to be able to then begin customizing and tailoring and being more effective with the various marketing efforts that we have both online and off-line. It's all very connected and I think the view that we have is that the future is a seamless experience for channel and for brand and for product and that we have to be there and be relevant in all of those various channels.

So it’s really all channels all the time, sort of the future?

Exactly. Yes, exactly.

Got it. Thanks.

Our next question will come from Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon. Just a few quick questions. I guess on the -- I think, Dan, on the prepared remarks you said low double-digit square footage growth remains kind of the goal on an annual basis. That’s clearly not happening in 2015? So can you talk about when you'd expect that to reaccelerate, and then maybe an update on kind of East Coast versus West Coast performance?

Well, yes. So our long-term targets we certainly feel that does long-term targets are appropriate. We have said we’re going to be very judicious about the stores that we open and only open stores that make absolute sense and that are great fields in great centers with great location. So that number may ebb and flow as a percent. We don't manage to anyone number, but we still feel those long-term targets are very achievable whether we happen to hit them at anyone point or not. So we just feel those to the numbers that we’re signing up for 2015, but no indication of backing off with a long-term growth potential for the Company in the future. And in terms of East versus West, we’ve seen some strength in our heritage markets. It's good to see we did have some of our Eastern stores that were affected by weather like some of others, but all of its kind of incorporated into our guidance and our view that the things that we continue to focus on, the decisions that we are making that we believe are right for this brand and for this business for the long-term of the right things to do and overall we’re pleased with the way that the whole chain is performing.

Great. Thank you.

Thank you.

[Operator Instructions] We go next to Liz Pierce with Brean Capital.

Thanks. I will add my congratulations. So just, Dan, circling back on the real estate, is it fair to say that maybe that the stumbling or the roadblocks for this year to hit those targets is you can’t find the right real estate or is it just a matter of making the right deal for the right real estate?

Yes, it's a matter of making the right deal. We have ample opportunities and what we won't do is hasten a negotiation in order to hit some number. So we’d rather walk away and let a deal take whatever natural course it is and that process is fluid and dynamic and we’re looking at stores that are still opportunities for this year as well as once that may be for two years from now, you're slicing in a particular window of time and that happens to get us the result for the numbers that we think we are going to deliver for this year. That's all it is. It’s us being very critical about the stores that we are going to open and it happens to be the count this year.

Okay. Are any of those outlets for this year?

Yes, there are a few. Yes.

And any commentary on how the traditional outlets are performing or have had performed?

Yes. So there nothing specifically about outlet other than we’re continuing to open them going forward and recognize that they’re a vibrant component of our total store mix and all of the performance that we’ve shared. The outlet numbers are included in our commentary around new stores, which are achieving our economic and more stringent economic model and site selection process.

Okay. And then just lastly on the catalog that just dropped, was that -- is the timing consistent with last year and what is just the plan this year for the catalog?

So let's see. I think this book drop one week earlier because it’s the one week earlier Easter …

Okay.

… two weeks earlier Easter rather -- two week and it really we think it up based on spring breaks, we enter the peak spring break time period and that moves each seasons. So we try to time the second book with that. So it's really just shifted, I believe just one week. And our view is that the response to our marketing in total has been improving and we call that out and -- so I think we are -- we remain very pleased with the catalog and with the other marketing efforts that we are executing on.

Great. Catalog looks adorable. All right. Best of luck, guys. Thank you.

Thanks.

We'll go next to Dave King with ROTH Capital. Please go ahead.

Yes, thanks for taking my follow-up. Just a quick one on the cash balance. Obviously, you’ve been mindful of the lease obligations you have, but I guess, what are the updated thoughts there in terms of continue to grow, I think you did -- I mean, I don’t -- I haven’t checked the number exactly, but it hit $35 million in cash flow from operations in 2014 give or take and CapEx plans for ’15 I think you said $25 million-ish. So you’re still generating cash there kind of what are the thoughts on buyback at these levels and just plans for cash in general? Thanks.

Yes. We continue to look at uses of cash. We believe that they were -- the best use remains in investing in the future of this business and brand and executing the business. If there was anything to share in that regard, we certainly would let you know and we will do that if something comes up.

All right. Fair enough. Thank you.

Thank you.

And there are no further questions at this time. I’d like to turn the conference back over to your presenters for any additional and/or concluding remarks. End of Q&A

Okay. Thanks again for joining us and we look forward to discussing our first quarter results with you all in May. Have a good evening.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation.