Greetings, and welcome to Tilly's Inc. Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Gar Jackson, Investor Relations for Tilly's Inc. Thank you. You may begin.

Good afternoon, and welcome to the Tilly's Fiscal 2019 Fourth Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, CFO will discuss the company's results and then host the Q&A session. For a copy of Tilly's earnings release please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call you will also be able to find a recorded replay of this call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today March 12, 2020 and actual results may differ materially from current expectations based on a number of factors affecting Tilly's business, including the current coronavirus situation. 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 fourth 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. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. Now, I will turn the call over to Ed.

Thanks Gar. Good afternoon, everyone and thank you for joining us today. As we preannounced in mid-January our fiscal 2019 fourth quarter results were disappointing due to a deeper-than-expected drop in store traffic and comp sales during the second and third weeks of December, ultimately resulting in our first negative comp quarter in over three and half years. Given that several other retailers have since reported similar slowdowns in their businesses during the same period, we believe this drop was primarily due to a shift in consumer behavior in connection with the shorter window between Thanksgiving and Christmas for this past holiday season. Our e-comm business net sales decreased by 1.2% during the fourth quarter, which we believe was due in part to a narrowed online product offering compared to last year which has since been corrected. E-commerce sales have increased by a single-digit percentage thus far in the first quarter of fiscal 2020. By department in the fourth quarter girls and women's comp positive while footwear accessories boys and men's comp negative. We experienced a deceleration in sales from a couple of our top third-party brands. Going forward as we typically do, we are adjusting our assortments by bringing in specific new brands and selectively buying deeper in existing brands that we believe will continue to grow. Some of these new brands have already been introduced into our spring assortments and more will be forthcoming for the back-to-school season. Thus far in the first quarter of fiscal 2020, total comps are up low single digits with girls, women's and men's comping positive, while accessories, footwear in boys are comping negative. Our new young contemporary proprietary brand West of Melrose is now in 100 of our total stores as well as online and continues to receive a positive response. As a reminder, West of Melrose and the brands connected with it are aimed at women's fashion, which we believe will help incrementally extend the age reach of our women's business over time. For those of you, who visit our stores you will see the West of Melrose in its own featured section along with a targeted selection of certain third-party brands to form a collection. We anticipate the West of Melrose collection will be available in all stores for the back-to-school season. In terms of merchandising priorities for fiscal 2020, our new Chief Merchandising Officer, Tricia Smith has identified several opportunities that we believe will improve our business over time, notwithstanding current concerns regarding the potential near-term effects of the coronavirus situation, which I will address directly a bit later. Number one is applying a digital-first mentality, planning assortments that are specifically targeted to drive online business then editing those assortments down for our stores. With our customer demographic, we believe it is critical to always have the best of our assortment online and to adjust our buys into the styles and items that drive e-comm sales. We expect that greater newness more frequently should help increase regular price selling online and e-comm profitability over time. Number two is a focus on increasing our investment in denim not only in the amount we carry, but also in the available size ranges. We believe that carrying additional denim inventory will provide us with a much more meaningful year-round denim presentation to attract more customers. Number three is to further develop our proprietary RSQ brand. With very little direct marketing RSQ was number two overall brand for fiscal 2019 with $60 million in annual net sales, making it our strongest denim brand. By focusing resources on this proprietary brand expanding our denim presentation and with the creation of the RSQ concept store now scheduled to open at the end of June in the Irvine spectrum, we believe that RSQ has meaningful growth opportunities ahead. Number four is to further capitalize on our boys and girls businesses which we believe are key differentiators for us versus the competitors. Without significant marketing efforts behind them our boys and girls businesses combined to account for nearly $70 million in total net sales between apparel and footwear in fiscal 2019. We have recently started creating kid-specific marketing materials to generate greater awareness of this part of our business. We believe it can grow further with better communication and marketing behind it, particularly in new markets. And number five, as mentioned earlier, we believe we can expand our women's business with improved assortment. The West of Melrose collection is just the beginning of an effort to expand the age range of our women's business beyond the early high school years. Given, we carry both young adult and kids clothing, we often see young families shopping in our stores and believe we have an opportunity to offer assortments that can retain our young women customers longer than we have in the past. Although some of these merchandising strategies are already underway, we expect the impact of many of them to begin in earnest with the back-to-school season. In the meantime, Tricia has very quickly procured several new brands for Tilly's and we are excited about the prospects to drive additional business over time. Turning to real estate. We continue to believe that we have a meaningful number of opportunities to open profitable accretive new stores in the future, again notwithstanding the potential near-term effects of the coronavirus situation. We opened 12 new full-sized stores during fiscal 2018 that in total produced full-wide profitability that's very consistent with our existing store portfolio in their first full year of operation. We opened 14 additional full-size stores in 2019. We plan to continue our store expansion by opening up to 15 new full-size stores during the fiscal 2020. As has been our practice, we will only open stores if we believe they will be supported by appropriate economics that are reflective of the circumstances involved with each individual leasing decision in the broader retail environment. We will continue to prioritize expanding our presence in existing markets wherein we believe we can achieve greater market penetration and brand awareness. We closed one store in early February as a result of the landlord wanting a rent increase, but we do not have any additional confirmed store closures in fiscal 2020 at this time. More may yet occur as we work our way through our fiscal 2020 lease decisions of which there are at nearly 60. In terms of customer-facing investments, we just launched Afterpay our new deferred payment program online at the beginning of March and the early results -- reads have been very encouraging with significant average order increases. We intend to launch Afterpay for all stores within the next couple of months pending certain programming enhancements we need for our in-store point-of-sale vendor. We are excited about the opportunities to drive more business through this alternative payment method that allows customers to defer payments on current purchases. We also continue to believe that there are meaningful growth opportunities for our e-comm business generally having just finished fiscal 2019 at 16% of net total sales penetration compared to certain of our competitors who have a much higher online sales penetration than we do. We will continue to enhance our omnichannel capabilities in fiscal 2020 to improve our customer convenience. In closing, despite our fourth quarter miss, I am proud of the fact that we produced no worse than flat comps in industry contrarian -- store traffic results during the prior 14 consecutive quarters leading up to this fourth quarter. As we begin fiscal 2020, we are obviously facing an unprecedented environment as a result of the effects of coronavirus. We are very closely monitoring events and working with our third-party brands and proprietary suppliers to gather information determine alternative action plans and adapt to any foreseeable business impacts. Currently, we have been informed that some of the new product receipts will be delayed in the March-through-June period. We cannot predict in greater detail what the potential impacts of coronavirus may be on our business as any potential changes in the number of cases and severity of the situation and its potential impacts on consumer behavior, store traffic, production capabilities, timing of deliveries our people weather market generally are unknowable. Further, we may be required to take extraordinary measures to ensure the safety of our employees and business partners. Our sales and operating results could materially negatively impacted at the time as the coronavirus situation evolves. As a result, we are unable to provide specific earnings guidance for fiscal 2020 at this time. We will continue to carefully monitor this coronavirus situation and continue to execute our business plans to the best of our ability. Despite the near-term concerns about coronavirus as well as other near-term headwinds from minimum wage and shipping cost increases, we remain confident that our long-term growth opportunities continue to exist for our business and we look forward to sharing our progress with you. Mike will now discuss the details of our fiscal 2019 fourth quarter operating performance. Mike?

Thanks, Ed. Details of our fiscal 2019 fourth quarter operating performance compared to fiscal 2018's fourth quarter were as follows: total net sales of $172.5 million increased by $1.9 million or 1.1% from $170.6 million last year. Total comparable store net sales including e-commerce declined 2.0% versus last year's increase of 6.4%. Comp sales in physical stores declined 2.2% versus last year's 0.9% decrease. Stores represented approximately 80.7% of our total net sales for the quarter, compared to 80.3% last year. E-comm net sales declined 1.2%, compared to last year's 49.6% increase. E-comm represented approximately 19.3% of our total net sales, compared to approximately 19.7% of our total net sales last year. We ended the quarter with 240 total stores including one RSQ pop-up shop, compared to 229 total stores last year, which included four RSQ pop-up shops. Gross profit including buying distribution and occupancy expenses was $52.1 million, or 30.2% of net sales, compared to $52.2 million, or 30.6% of net sales last year. Product margins declined approximately 20 basis points compared to last year due to increased markdowns. Occupancy costs deleveraged approximately 70 basis points as a percentage of net sales, primarily due to opening 11 net new stores compared to last year and the negative sales. Distribution expenses improved by approximately 50 basis points primarily due to lower e-comm shipping charges compared to last year. Total SG&A expenses were $43.6 million, or 25.3% of net sales, compared to $41.2 million, or 24.2% of net sales last year. Primary SG&A variances to last year include approximately $1.5 million of increased store payroll from store count and minimum wage growth, approximately $0.8 million of increased workers' compensation claim reserves and approximately $0.4 million of increased marketing expenses primarily relating to e-comm, partially offset by a $1.2 million reduction in corporate bonus expense. Also, last year's SG&A included approximately $0.9 million of non-recurring expense reductions from negotiated resolutions of certain vendor disputes. Operating income of $8.5 million, or 4.9% of net sales decreased by $2.4 million, compared to $10.9 million, or 6.4% of net sales last year, primarily due to the SG&A and occupancy increases noted above, which were not offset by enough net sales growth. Income tax expense was $2.8 million, or 30.9% of pre-tax income, compared to $3.1 million, or 26.4% of pre-tax income last year. Fiscal 2019 income tax expense includes approximately $0.5 million of discrete tax items relating to the acceleration and expiration of certain stock options. Net income was $6.3 million, or $0.21 per diluted share, compared to $8.7 million, or $0.29 per diluted share last year. Weighted average diluted shares for the quarter were $29.9 million, compared to $29.8 million last year. Turning to our balance sheet. We ended the fiscal year with $139.9 million in cash and marketable securities and no debt compared to $144.1 million and no debt last year. As announced in late January, our Board of Directors authorized a special cash dividend of $1 per share, or $29.7 million in the aggregate, which was paid on February 26. This was the fourth consecutive year that the company has paid a special dividend to shareholders. We ended the fiscal year with inventory per square foot down 2.2% and with a slightly improved inventory aging compared to last year. Total capital expenditures for fiscal 2019 were $14.3 million, compared to $14.9 million for fiscal 2018. Now turning briefly to the first quarter of fiscal 2020. Through March 10, total comparable store net sales including e-commerce have increased by a low single-digit percentage with comp sales in stores slightly negative and e-commerce net sales up high single digits on a percentage basis. As Ed noted earlier, given the unpredictability of the effects of the coronavirus on among other things, consumer behavior, store traffic, production capabilities, timing of deliveries, our people, economic activity and the market generally in the coming weeks and months we are unable to provide specific earnings guidance for fiscal 2020 at this time. We plan to report our first quarter results in late May following Memorial Day. Operator, we'll now go to our Q&A session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

Hello. This is Richard Magnusen in for Jeff Van Sinderen. First off, can you speak more about inventory and supply chain and what you're experiencing so far in terms of timing of receipts and what you expect for Q2 given the manufacturing place in China? And to what extent you might expect Q3 to be normalized in this regard?

Yes. So as we noted in our prepared remarks, we have been notified of a relatively modest percentage of our total receipts being delayed in the March through June time period. And when I say relatively modest, less than 10% in this current month, maybe a little more than 10% in some of those other months, but not expecting that that's going to result in any direct correlation with sales activity. Our teams are working very hard with our brand partners to identify alternative actions and figure out as best we can the timing of deliveries. We're not expecting any major business disruptions solely from the timing of the deliveries themselves. And really it's only through June that we've gotten any specific information of new receipts being delayed. We've been receiving reports that production capacity in China seems to have gotten back to anywhere from 70%, 80%, 85% based on whose report you read. So hopefully, this situation will start moderating at some point and we can get back to some sense of normalcy, but for now we're doing everything we can to stay as informed as we can.

Thank you. And then can you speak about planned promotional levels currently and what you will do to if traffic falls off hard due to the COVID-19 or coronavirus?

Well, we're not really going to -- we're not planning on doing anything that we don't normally do even if we see softness in sales. We've been aggressively managing our inventory as we have done for the past few years, just to adjust inventory levels to what we think the sales levels will fall out to be. So, from a promotional standpoint, I'm not expecting anything unusual from our standpoint.

Okay. And then, one last question is, it's understood that you're not providing guidance, but what is your thinking about generating positive cash flow for this year?

Well, that all depends on exactly how things shake out. As long as comps are anywhere better than minus 20, we should be able to have a positive cash flow for the year. So, it would take a minus 20 and maybe worse for us to get in at any position where we would be dropping cash net-net year-over-year. So -- and we've got a strong balance sheet, so it's going to help us weather this storm depending on what happens. And looking at the environment just these last several days, we have seen store traffic drop off in all markets by at least double digits, so that certainly has given us pause. And then even just today within the past hour the amount of news coming out about sports leagues canceling, their seasons and even Disneyland here closing, those are some pretty shocking and remarkable events that just makes it impossible for us to predict with any certainty what's going to happen. But thankfully, we're a very healthy company from a balance sheet standpoint and should be able to ride this out.

All right. Thank you, very much.

Thank you.

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

Thanks for taking my questions. I guess, first, just to follow-up Mike, you're talking about store traffic dropped off double digits in all markets or at least double digits in some markets. Have you seen any uptick in the e-comm business as the store traffic is falling off? Or is it just that nobody is interested in buying anything?

We've seen -- this is Ed. We've seen a slight improvement in our e-comm business for sure, so we're hoping that that's consistent going forward which we have no reason to believe it won't be consistent. So it's been decent.

And then Ed, you talked about in the quarter, I think you're referencing the quarter that you saw some deceleration in some top third-party brands. Can you maybe elaborate on that? Is this part of a bigger trend shift away from like the whole kind of retro thing? Or is this specific to just a couple of brands that maybe have just sort of run their course? And then, you also talked about maybe shifting to some new brands or buying deeper into some of the ones that are working just kind of fill in those pieces.

Yes. I mean, it's not a shift away from retro that we're seeing. Some of the brands that have been strong during that trend continue to be strong. There's a couple of brands that have tailed off, but really they started to tail off at parts last year and we have adjusted accordingly. And then as we always do, we're always bringing in new brands. And a couple of the most recent new brand we brought in which is not a new brand but new for us is Obey and we're pleased with the initial results of that. We brought back three people as part of the West of Melrose collection. So that's the type of thing that when you carry as many brands as we do, luckily we're not dependent on any one brand and I'm not concerned about any kind of shift in trend at all because we're always dealing with something like that and the team does a great job of managing through that.

And I guess lastly on footwear, I know it was a negative comp in the quarter. I think if I heard correctly it was a negative comp Q1 to date. I know there were some -- maybe some allocation issues in the fourth quarter. Can you sort of speak to the broader trend that you're seeing in footwear? I know you're fairly concentrated in one brand in that category.

Yes. Well honestly we just couldn't get enough of certain styles of a certain brand. And have we had enough inventory in those. Our results would have been quite a bit better.

Is that -- it doesn't sound like that's corrected so far through the first quarter. Are you still in the process of trying to correct that? Or...

It's still -- I would say it's still a work in progress, but we've made pretty substantial progress with it.

Okay. All right. Thanks guys, Good luck.

All right. Thank you.

There are no other questions in queue. I'd like to hand the call back to Mr. Thomas for closing remarks.

Thank you for joining us today and have a good evening everyone.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.