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Tilly’s Second Quarter Relatively in Line

Tilly’s met consensus expectations with their second-quarter EPS of $0.05 and their middle guidance of $0.03 to $0.07, while same-store sales decreased 7.1% against a -0.5% comparison. From May to June/July, comps improved and included lower transactions and conversion offset by increased ticket averages. Men’s and accessories were lacking, while junior’s, kids’ and footwear were all strong. As predicted, low clearance activity penalized same-store sales by a few hundred basis points this quarter.
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Declining 260 basis points, gross margins fell to 28.2% on fixed-cost deleveraging, while product margin dove 40 basis points. Increasing 140 basis points to 26.3% on unimpressive sales, SG&A expense caused operating margin to decline 400 basis points to 1.9%. With their quarter-end inventory remaining flat on a per-square-foot basis, Tilly’s management expects inventory to be flat to slightly up per square foot in the third quarter.

Same-store trends have kept improving so far in the third quarter with strength in regular-priced sales. Comps are expected to fall, against a -2.4% comparison, while the EPS guidance of $0.09 to $0.13 has dropped below consensus estimates of $0.19. This reflects marketing spending planned for the quarter. From a year ago, product margins should improve slightly.

Third quarter EPS guidance being lower than expected in the third quarter is reflected in the 2014 EPS estimate, as well as a muted profit outlook for the fourth quarter. In 2015, the estimate has risen to $0.48, which is a gain of 34% year-to-year, though well below consensus of $0.64. Investors may be disappointed by Tilly’s third quarter outlook and could prefer to wait out an improvement in sales trends. Tilly’s opportunity to grow the store base from 200 to 500 locations over time keeps the long-term outlook more positive.

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