Greetings and welcome to the Tilly's, Inc. Third Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode.[Operator Instructions] 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 2019 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 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, December 4, 2019, 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 any forward-looking statements, please see the disclaimer regarding forward looking statements that is included in our fiscal 2019 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. We are very encouraged by our results during the third quarter as well as during Thanksgiving weekend and Cyber Monday. Our 14th consecutive quarter of flat-to-positive comp sales in the third quarter included positive comps in each month of the quarter both from stores and e-comm and from each of our merchandising departments. Our graphic tees business was particularly strong across all apparel departments. In women's, we introduced a new young contemporary proprietary brand West of Melrose in a few targeted stores during the back-to-school season that will soon be introduced to most of our stores based on the positive initial customer response to this collection both branded and proprietary product. West of Melrose is aimed at capturing the older teen and college age young woman, which we believe will help extend the reach of our women's business. Speaking of merchandising, I'd like to publicly welcome Tricia Smith to our company. Tricia joined us at the end of September as our new Executive Vice President, Chief Merchandising Officer. She enjoyed a successful 25-year career at Nordstrom most recently as Executive Vice President, General Merchandise Manager of women's, young contemporary designer and specialized apparel before deciding to join us. We're very excited to have someone of Tricia's experience and background leading our merchandising efforts. We have been very impressed with Tricia's contributions thus far. And she is already beginning to identify opportunities for improvement. Under Tricia's leadership, we expect to see a more targeted and carefully edited assortment over time that will tell clearer product stories for our customers to better understand what Tilly's stands for in its merchandizing offerings. Turning to real estate, we remain encouraged by the performance of our new store openings and continue to believe we have a meaningful number of opportunities to open profitable new stores in the future. We opened four new full-size Tilly's stores during the third quarter and we have -- we have opened -- just opened seven more stores during the fourth quarter prior to Thanksgiving. We also plan to open a new Tilly’s store at Universal City Walk before Christmas, bringing our total new store openings for fiscal 2019 to 14. As planned, we closed our rescue pop-up store in King of Prussia upon opening of our full-size store there during the third quarter. In fiscal 2020, our preliminary expectations are to open up to 15 new stores, assuming appropriate economics can be obtained. We will continue to prioritize expanding our presence in existing markets, wherein we believe we can achieve greater market penetration and brand awareness. We do not have any confirmed store closures in fiscal 2020 at this time. Yet some may likely occur as we work our way through our continuous lease renewal negotiations. In closing, I'd like to thank our entire team for continuing to drive positive comps and improvements in our business. Despite a slow start to the fourth quarter as a result of a later Thanksgiving this year, Black Friday weekend met our expectations, leaving us optimistic about our opportunity to deliver positive comps in the fourth quarter. Mike will now discuss the details of our third quarter operating performance and introduce our fourth quarter earnings outlook. Mike?

Thanks, Ed. Our fiscal 2019 third quarter operating results compared to last year's third quarter were as follows. Total net sales of $154.8 million increased by $8 million or 5.4% from $146.8 million last year. Total comparable store net sales including e-commerce were up 3.1% on top of last year's 4.3% increase. Comp sales in physical stores were up 2.4% on top of last year's 1.3% increase. Stores represented approximately 85.3% of our total net sales for the quarter compared to approximately 85.5% last year. E-comm net sales increased 7.4% on top of last year's 26.7% increase and represented approximately 14.7% of our total net sales this year compared to approximately 14.5% of our total net sales last year. We ended the quarter with 232 total stores, including one rescue pop-up shop compared to 227 total stores last year, which included four rescue pop-up shops. Gross profit including buying, distribution and occupancy expenses was $47.2 million or 30.5% of net sales compared to $43.7 million or 29.7% of net sales last year. Product margins improved by 80 basis points compared to last year. Total buying, distribution and occupancy costs deleveraged by less than 10 basis points as a percentage of net sales, primarily due to severance and other transition costs associated with our change in merchandising leadership during the quarter of approximately $0.7 million, partially offset by improved leverage of distribution costs. Total SG&A expenses were $39.5 million or 25.5% of net sales compared to $36.9 million or 25.1% of net sales last year. Primary SG&A variances to last year include approximately $1 million of increased marketing and fulfillment expenses, primarily relating to e-comm, a 0.5% -- $0.5 million asset write-off charge relating to mobile app development, approximately $0.5 million of increased store payroll for minimum wage and store count growth and approximately $0.5 million of increased temporary labor costs. Despite the increase in store payroll dollars we're able to improve operating leverage of store payroll costs by 30 basis points on higher total sales. Last year's SG&A includes approximately $0.7 million of secondary offering costs that were not repeated this year. Operating income improved to $7.7 million or 5.0% of net sales compared to $6.7 million or 4.6% of net sales last year due to net sales growth. Income tax expense was $2.2 million or 25.9% of pre-tax income compared to $2 million or 26.9% of pre-tax income last year. Net income was $6.4 million or $0.21 per diluted share compared to $5.4 million or $0.18 per diluted share last year. Weighted average diluted shares for the quarter were 29.8 million compared to 30.1 million last year. All the results just discussed are reported on a GAAP-basis. In our earnings press release issued today, interested parties will also find certain non-GAAP tables comparing third quarter and year-to-date performance to last year excluding certain infrequently occurring items that are not typically part of our day-to-day operations, namely the severance and other transition costs relating to merchandising leadership from this year's third quarter, secondary offering costs from last year's third quarter and legal matter credit from last year's year-to-date results. Turning to our balance sheet. We ended the quarter with cash and marketable securities totaling $130.1 million and no debt compared to $120.5 million and no debt last year. We ended the quarter with inventories per square foot down 3.8% and more current in terms of aging compared to last year at this time. Total year-to-date capital expenditures through the third quarter were $10.6 million compared to $10.4 million last year. We anticipate total capital expenditures for fiscal 2019 to be approximately $19 million. For fiscal 2020, we preliminarily anticipate total CapEx to be approximately $20 million based on opening 15 new stores and continuing to enhance omni-channel and other customer-facing capabilities. Now turning to our outlook for the fourth quarter of fiscal 2019. Based on current and historical trends, particularly with respect to years with a later Thanksgiving and shorter time frame until Christmas, we expect total net sales to range from approximately $179 million to approximately $184 million based on a comparable store net sales increase of 2% to 5% for the quarter. We expect operating income to range from approximately $11 million to approximately $12.5 million and earnings per diluted share to range from $0.29 to $0.32. This outlook assumes no asset impairment charges and effective income tax rate of approximately 27% and weighted average diluted shares of approximately 29.9 million. We expect inventories per square foot to remain consistent with our comp sales performance. Operator, we will now go to our Q&A session. [11:50]

Thank you. [Operator Instructions] Our first question comes from the line of Mitch Kummetz of Pivotal Research. Please proceed with your questions.

Thanks. Thanks for taking my questions and congrats on the quarter. I guess I've got a handful. Ed, could you be a little more specific on your Q4 comp performance. I recognize that Thanksgiving was late, but I was hoping you kind of tell us how you're trending for the quarter. And then also can you talk about -- you mentioned, you highlighted the strong Thanksgiving weekend and Cyber Monday performance, maybe you can give us some numbers on that as well.

Well, all I can tell you Mitch is that the performance was a little bit better than we expected on both channels, both stores and e-comm. And so we saw pretty good momentum and the thing that -- the thing that I want to call out is unlike a lot of our competitors we did not give the store away. We didn't promote percentage off the whole store. We did -- we had planned promotions, but it was done at a really good merchandise margins.

Okay. And then in the press release and also in your comments you referenced kind of historical trends given prior year as of late Thanksgiving, I think 2013 was maybe the last time we saw this shift from like the 22nd to the 28th. Could you kind of refresh our memory what happened back then that is instructive in terms of what you might expect this year?

Yes. Mitch, this is Mike. That 2013 year what we saw is very much what's happened so far. And so we'd like to think that the similar pattern will exist. Obviously, the third week of November was very highly negative because it's going up against last year's Thanksgiving weekend and Black Friday than week four was very highly positive going back in the other direction. So you have just a flip of timing within the quarter. But then following Thanksgiving weekend and Cyber Monday, we saw a consistent level of positive business through the month of December and on into January and that's history means anything. Similar pattern would send us into positive territory in the manner that we've suggested in our guidance.

Can you remind us what you're going up against in December in terms of your comp performance last year?

Sure. So December total comps were up 5.5% and January they were up 10%.

Okay. But how do you think about that…

This quarter as a whole -- the quarter as a whole was up 6.4%.

Got it. How do you think about that tough December compare?

Well, the momentum of our business that we just saw coming out of the back-to-school quarter in Q3 and the very strong Thanksgiving weekend and Cyber Monday that we just saw, tells me that our merchandize is right. And we're expecting to have continuing positive results in the fourth quarter. We've had 14 quarters in a row of flat-to-positive comps and obviously we're guiding to a 15th quarter. So prior-year compares are just one data point. Sometimes they mean sometimes they don't. It's all about if our product is trend right and close enough to trend with some hot brands as ours is. And so we're expecting to have a successful fourth quarter.

Yes, just to add to that, Mitch, one of the things I am really pleased with is that we ended the quarter with every merchandise department being up. Major merchandising department being up, so there's no one category that's driving the business. It's pretty much across-the-board.

Okay. And then last question just on product margins. So, Mike, you mentioned 80 bps increase in the quarter. Can you just maybe elaborate on that a little bit. Was that like IMU or was that just fewer markdowns.

We did have fewer markdowns in the quarter than we had in the year-ago period as you'd …

[Indiscernible]?

No, I mean as you know our -- historically our product margins do not tend to swing wildly from period-to-period. They tend to stay neutral to last year to plus or minus a 100 basis points either way. They usually don't move a whole heck of lot and third quarter was similar. It moved less than one full percentage point. And it was mostly fewer markdowns.

And then what are your thoughts on merch margin in Q4? I know your product margin was up a little bit last year in Q4. Ed, you spoke to kind of the promotional sort of levels over the mall. I know you guys are marketing like everybody else is, but how do you sort of just view the overall environment for markdowns and your ability to maybe capture some product margin in Q4?

Yes, Mitch, we're expecting -- just as we mentioned, historically our product margins don't tend to move around a lot. So long as we keep our strong disciplined management of inventory and addressing things that need addressing in a very timely manner and move through those kinds of things, we'd expect fourth quarter product margins to be very similar to what they were last year give or take a bit either way depending on exactly what happens. We're going to be responsive to what we see we need to do to manage our own inventory level. We are expecting it to be a healthy product margin. We just went through Black Friday weekend with healthy product margins and expecting that to continue through the fourth quarter.

All right. Great. Thanks, guys. Good luck.

Thank you.

Our next question comes from the line of Dave King of ROTH Capital Partners. Please proceed with your questions.

Hi. Afternoon guys. Maybe a follow-up to the prior line of questioning. On the quarter-to-date trends, what can you share over Black Friday weekend on traffic. Was that still kind of down or that started to turn positive now? And then how is conversion order values things like that. Thank you.

I don't have all of those stats just for Black Friday weekend. Our traffic for third quarter was right about flat. Average transaction was up low-single-digits, conversion was up low-single-digits, those are all third quarter numbers. Traffic through -- stores through Black Friday weekend was just down slightly. I do have that. So although traffic was down slightly our comps were up quite nicely in both channels. So we're feeling pretty good about things.

Okay. That helps. And then in terms of the EPS guidance for Q4, you touched on product margins, but how should we think about the leverage on rents, payroll -- excuse me, on occupancy, payroll etcetera. What are some of the puts and takes?

Sure. So if we're at the higher end of our comp guidance, we'd expect to have leverage on both buying and the distribution portion of costs because of the new store openings, the raw occupancy dollars will be higher for fourth quarter. So if we're on the higher end of the range, occupancy we may still get a little bit of leverage because of various negotiations that we've been doing for the last 2, 3 years. If we're on the lower end of our guidance, we might not get a little bit of leverage out of occupancy in particular. But in terms of total gross margin, I'd expect it to be pretty consistent with last year to up a little bit as you move from the bottom end of the range to the higher end of the range.

Okay. That's great color. And then lastly for me, capital management. Ed, what would cause you to maybe take up the special dividend to above a buck a share assuming you were to pay it of course. Is the goal there to more than cover it with free cash flow, or what are some of the factors that go into the decision process?

We take a lot of things into account we make that decision and there's no one specific area. So right now we will do what we usually do is the Board discusses this pretty regularly and we'll make a determination of what the amount is or whether we do it or not over the next couple of months.

Okay. Perfect and thanks and good luck with the rest of the holiday.

Thank you.

Thank you.

Our next question comes from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.

Let me add my congratulations on your solid results. Given the slow start to Q4, did that change your promotional plans at all for Black Friday weekend, or did you stick to original plan? And then given the compressed time period this year, can you touch on how your marketing plans might be a little bit different this year and maybe a quick update on your enhanced mobile app.

Yes. Jeff, I'll take the margin question first. So we pretty much stayed to the plan that we intended. So we expected the early part of fourth quarter to be slow because of the later timing of Thanksgiving and the shifts in the weeks pretty much played out exactly as we anticipated them playing out. And as Ed mentioned earlier, actually pleasantly surprised with how good business was through Black Friday weekend and Cyber Monday. So we went in with a particular plan and we executed to that plan. We didn't change that plan as we went through that weekend and then if you want to take the market.

I mean in terms of marketing plan, we really didn't change anything from what we originally planned. We didn't need to. So including the majority of the promotions that we had planned. So we pretty much stuck to the plan that worked. And as we expected and -- then the second -- I think the other question you had was mobile. So we did not -- we have not put in our new mobile app at this point and I think it's certainly going to be delayed until the first half of next year. But it really didn't impact us negatively. Mobile app is fine. As it works now what we were going to do is put it in a much improved shopping experience with the new mobile app and you will see that the first part of next year.

Okay. Well it would seem that if that’s successful that could be a little driver for your next year.

Yes, for sure. And one other thing, Jeff, we also had planned to put in pay-as-you-go after pay. So we’re in the final stages of testing that and we elected to not go live with it until after the holiday. So that's another opportunity for us going forward.

Okay. Well, yes, maybe good to do. That seems like you're smart to maybe not do these things during holiday, because sometimes that doesn't go well.

That's for sure.

So let me ask you this. Latest thoughts on where we are in the branded cycle? Any major shifts you're seeing? And then if you could touch on Rescue how that's performing and then any more you can say about West of Melrose and what Tricia is most focused on in her early days. I know you mentioned sort of focusing and editing the assortment.

Sure. As far as the top brands go, they really haven't changed. The only brand that's emerged really in the top ten that's new from last year. And for the third quarter it's the only big brand as Champion, which we saw starting to trend last year and it's gotten big and the rest of the brands are pretty consistent. They may have noticed that were down as well, but pretty consistent with what we saw last year third quarter. As far as rescue, it's a really solid brand for us. It's very good. They continues to be good. And quite frankly I think our results could have been better. I think I've mentioned this before. I'm turning back-to-school. I thought we were too light in inventory in denim and period. But particularly the rescue brand and that's an opportunity for us going forward. And that's part of what Tricia is working on in addition to a lot of other things in terms of editing the assortments. And I also would expect she's going to bring in some new brands that we haven't carried before. More color on that on the spring. She is working on strategy for next year as we speak and we'll have more color in that zone.

Okay. And so will we see some of those brands for spring summer or what's the timeframe around that?

I think you'll see some of them for spring, for sure.

Okay, great.

The overall …

Yes.

One other thing, Jeff, the majority of the merchandise mix is not going to change drastically from what we've historically has done because most of it works. So this is really more fine-tuning. And like we said, editing the assortments we feel there's a big opportunity there and there might be merchandise margin opportunity as a result of doing that.

Okay, good. Thanks for taking my questions and continued success. All right. Thank you

Next question comes from the line of Janet Kloppenburg of JJK Research. Please proceed with your question.

Hi, everybody and congrats on a good quarter and a good Black Friday. Question on Black Friday. Ed, do you think perhaps your business was slower at the beginning of the quarter because so many retailers got it there promos early and maybe you didn't. Do you think that put some pressure on your top line and then what do you think was the catalyst for this switch that made the business churn like that, because you weren't as promotional as many, many of the team competitors. So I just wondered what your view was there? And I think Mike said traffic was down. So like what was the trigger? And then I have a couple of more questions. Thank you.

Okay. Janet, there was no real thing that I can put my finger on and say okay it switch from A to B. The topic was down very, very slightly. And so I think really what built the businesses to add traffic started to increase. It was not driven again by anything that we did promotionally. We weren't close of them it was just that we felt traffic and the assortment was right. The timing, I think we did a better job of getting the assortment right in certain geographic regions and types of things like that that helped our business as we moved further into the quarter.

Okay. Was there any sort of key items that will better execute it this year than last. I know you said all categories were good, but were there any stand-outs year-over-year that attributed to the performance. There really wasn't, Janet, honestly there really wasn’t any one category or anyone particular brand that drove that business. It was across the board.

Okay.

Which actually I was fairly pleased with. Because to see it come -- not come from any one particular thing. It certainly bodes well for us in the future.

And what about the branded footwear businesses. That's still being led by the two big brands Nike and Vans.

Vans is definitely the best brand for us.

In footwear or in footwear, and apparel.

In footwear.

And Nike?

Nike starting to emerge now. So it's I think Nike is starting to begin to turn. So you'll see -- we don't have -- we down play our assortment and Nike over the last several months. But now you'll see it start to build. And I think you'll see that the business build there. And just and just lastly on the new lines that Tricia's thinking about that she have a pricing strategy involved. Is she introducing opening price points as she went to elevate their pricing architecture, like what's the philosophy there?

I don't think you'll see any change strategically in terms of how we price.

Right.

I think it's just a matter of adding some brands that maybe we might have carried in the past bringing some of those brands back -- adding some -- bringing some new brands into the mix that's really what we're thinking. And I think our biggest opportunity in terms of category is even though we were positive in Q3 with women's, I think our biggest opportunity is probably in the women's business out of all the other categories we carry and you will probably see some newness there.

Okay, great. Thank you. Good bye.

Thanks, Janet.

What about cadence on comp in the third quarter? Was August the best and September tough. I miss them. Hello?

Yes, we are there. Sorry, I’m trying to flip to that.

Okay. Sorry. I didn’t [indiscernible].

So August and September were very consistent with each other. October was actually the lightest comp month that comp quarter, but they were all positive.

Thank you.

Okay. Thanks, Janet.

Our next question comes from the line of Sharon Zackfia of William Blair. Please proceed with your question.

Hi. Good afternoon.

Hello.

I also had some questions. I guess on the opening schedule for next year, I know you were really back-end weighted. In 2019 is that a similar kind of cadence of store openings for 2020?

I think they're going to be spread more evenly throughout the year.

Yes. I think there would be more in the Q2 timeframe than a year-ago. They will probably be -- probably a few more in Q3. It was really backend weighted this year. I would expect it to be more in the middle part of the year than it was this year and not so heavily back-weighted.

Okay. That's helpful. And then I …

Yes, we want -- ideally we'd want to open as many stores as possible before back-to-school.

Okay. And then on tariffs, I don't think that came up at all on today's call. Have you had to make any changes to the assortment based on what's happened, or are you seeing anything going on with vendor pricing associated with the tariffs that went into effect?

Not anything material so far quite honestly. Still kind of waiting to see how this all shapes out and how much of a balance goes between the three parties, right the manufacturer, us as the retailer and how much is passed onto the consumer have not noticed a material amount of change across the assortment. I think it's more in accessories than anywhere else where we've seen some of it and then also kind of on fixture items in stores that are sourced from overseas. We've definitely seen 10% to 15% cost increases there. But haven't seen anything material happen in apparel yet.

Okay. And my last question was really on SG&A and the opportunity for leverage there on an ongoing basis. Can you kind of help us think about how you view the rate of SG&A dollar growth versus revenue. And if that's a place where we should see more consistent leverage past 2019?

SG&A leverage is going to have a lot to do with how sales are balanced between stores and e-comm. So if you look at recent quarters compared to the quarter we just finished, you've heard me talk about roughly about a $1 million of cost pressure from e-comm shipping and e-comm fulfillment in those quarters where e-com was up 30% or 50% when stores were negative. What you see in the third quarter is a different. Dynamic, when stores are positive and e-comm's positive stores are still 85% of our business. So when they can be in a positive comp territory that absolutely helps us leverage, Call them relatively fixed costs a heck of a lot better than when e-comm is the sole driver of comps. So it's incumbent upon us to continue to drive improvement from both of those channels not just one or the other. Because as you've seen in recent quarters when it's only e-comm those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along with the e-comm business. So we had a better balance of that in the third quarter. We're expecting a better balance of that in the fourth quarter. Overall, generally speaking, it should remain at about a total comp to meet [ph] to leverage SG&A, give or take a bit. And again depending on the balance of sales being driven in stores versus e-conn. But at a high level, roughly about a 3 to 11 leverage SG&A as we look at 2020.There will be another year of minimum wage increase in California, at a minimum and other dollar is coming January one. So that certainly impacts a little over 40% of our store base as well as our distribution centers. But we're working awful hard to manage that as we have done each at last two years where we've had -- you've not seen a meaningful amount of deleverage coming from store payroll because we were really, really hard on that with our store ops team and our field leadership, they've done a really good job of responding to the challenges that we've worked together on. So hope that helps to some extent.

Yes. Thank you so much.

We have reached the end of the question-and-answer session. I will now turn the call back over to Ed Thomas, President and CEO for any closing remarks.

Thanks again for joining us. We look forward to discussing our fourth quarter results, with you in mid-March. Have a good evening everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.