Tilly's (NYSE:TLYS) Misses Q3 Sales Targets

Full Report / November 30, 2023

Young adult apparel retailer Tilly’s (NYSE:TLYS) fell short of analysts' expectations in Q3 FY2023, with revenue down 6.4% year on year to $166.5 million. On the other hand, next quarter's revenue guidance of $175 million came in slightly above analysts' estimates. It made a GAAP loss of $0.03 per share, down from its profit of $0.17 per share in the same quarter last year.

Tilly's (TLYS) Q3 FY2023 Highlights:

  • Revenue: $166.5 million vs analyst estimates of $168.2 million (1% miss)
  • Same-Store Sales were down 9% year on year (miss vs. expectations of down 6% year on year)
  • EPS: -$0.03 vs analyst estimates of -$0.09 ($0.06 beat)
  • Revenue Guidance for Q4 2023 is $175 million at the midpoint, above analyst estimates of $174.1 million (although EPS guidance of ($0.16) missed expectations of ($0.11))
  • Free Cash Flow was -$10.79 million compared to -$8.97 million in the same quarter last year
  • Gross Margin (GAAP): 29.3%, down from 42.7% in the same quarter last year

With an emphasis on skate and surf culture, Tilly’s (NYSE:TLYS) is a specialty retailer that sells clothing, footwear, and accessories geared towards fashion-forward teens and young adults.

Vans, Billabong, Hurley, and Volcom are some of the brands that can be commonly found for sale. The core Tilly’s customer is usually a teen or young adult steeped in skate and surf culture who has a desire to signal these interests through fashion.

On average, stores tend to be moderate in size, roughly 7,500 square feet. They are often located in suburban malls or shopping centers alongside other mass market retailers. Upon entering a Tilly’s store, a shopper will likely notice the vibrant and colorful displays and signage as well as music that fits with the prevailing skate and surf lifestyle. A store is usually divided into men’s, women’s and kid’s clothing. There may also be a limited selection of skate decks and other equipment, although this is not the primary focus.

Apparel Retailer

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Competitors that sell edgy or skate-inspired young adult clothing include Urban Outfitters (NASDAQ:URBN), Zumiez (NASDAQ:ZUMZ), and Genesco’s (NYSE:GCO) Journeys banner.

Sales Growth

Tilly's is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, the company's revenue was flat over the last four years (we compare to 2019 to normalize for COVID-19 impacts) as its store footprint remained relatively unchanged.

Tilly's Total Revenue

This quarter, Tilly's reported a rather uninspiring 6.4% year-on-year revenue decline, missing Wall Street's expectations. The company is guiding for revenue to rise 3.1% year on year to $175 million next quarter, improving from the 11.8% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts expect sales to grow 1.5% over the next 12 months.

Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Tilly's keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, Tilly's operated 249 total retail locations, in line with its store count a year ago.

Tilly's Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.

Tilly's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 10.4% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Tilly's Year On Year Same Store Sales Growth

In the latest quarter, Tilly's same-store sales fell 9% year on year. This decrease was a further deceleration from the 14.9% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Gross Margin & Pricing Power

Gross profit margins are an important measure of a retailer's pricing power, product differentiation, and negotiating leverage.

Tilly's has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it's averaged a healthy 40.6% gross margin over the last two years. This means the company makes $0.41 for every $1 in revenue before accounting for its operating expenses. Tilly's Gross Margin (GAAP)

Tilly's produced a 29.3% gross profit margin in Q3, marking a 13.5 percentage point decrease from 42.7% in the same quarter last year. Although the company could've performed better, we care more about its long-term trends rather than just one quarter. Additionally, a retailer's gross margin can often change due to factors outside its control, such as product discounting and dynamic input costs (think distribution and freight expenses to move goods). We'll keep a close eye on this.

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Tilly's generated an operating profit margin of negative 1.5%, down 5.1 percentage points year on year. This reduction was driven by weaker pricing power, as indicated by the company's larger drop in gross margin.

Tilly's Operating Margin (GAAP)

Unprofitable publicly traded companies are few and far between in the consumer retail sector, and over the last two years, Tilly's has been one of them. Its high expenses have contributed to an average operating margin of negative 0.2%. On top of that, Tilly's margin has declined, on average, by 8.3 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.


These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, Tilly's reported EPS at negative $0.03, down from $0.17 in the same quarter a year ago. This print beat Wall Street's estimates by 64.7%.

Tilly's EPS (GAAP)

Over the last year, Tilly's adjusted diluted EPS dropped 167%. We hope this changes. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 19% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Tilly's burned through $10.79 million of cash in Q3, representing a negative 6.5% free cash flow margin. The company reduced its cash burn by 20.3% year on year.

Tilly's Free Cash Flow Margin

Over the last two years, Tilly's capital-intensive business model and demanding reinvestment strategy have consumed many company resources. Its free cash flow margin has averaged negative 2.7%, weak for a consumer retail business. Furthermore, Tilly's margin has averaged year-on-year declines of 1.2 percentage points. Investors likely aren't thrilled about the company's margin trajectory and would hope to see a reversal soon.

Key Takeaways from Tilly's Q3 Results

With a market capitalization of $259.2 million, Tilly's is among smaller companies, but its more than $44.43 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

It was a tough quarter for Tilly's. Same-store sales missed, leading to a revenue miss. Looking ahead, while next quarter's revenue guidance was fine, EPS guidance came in below expectations, suggesting weaker margins. Finally, management called out a "difficult economic environment, particularly for our young customer demographic" as well as more promotional activity than historically, which tends to hurt gross margins. Overall, this quarter's results were weak. The stock is down 2.1% after reporting, trading at $8.09 per share.

Is Now The Time?

Tilly's may have had a rough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Tilly's, we'll be cheering from the sidelines. Its revenue growth has been weak over the last four years, but at least growth is expected to increase in the short term. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its brand caters to a niche market. On top of that, its declining EPS over the last one years hurt its performance.

While we've no doubt one can find things to like about Tilly's, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

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