Over the past six months, Tilly’s stock price fell to $1.46. Shareholders have lost 13.1% of their capital, which is disappointing considering the S&P 500 has climbed by 10.2%. This may have investors wondering how to approach the situation.
Is now the time to buy Tilly's, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Tilly's Will Underperform?
Even with the cheaper entry price, we're swiping left on Tilly's for now. Here are three reasons there are better opportunities than TLYS and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Tilly’s demand has been shrinking over the last two years as its same-store sales have averaged 5.2% annual declines.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Tilly’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.1%, meaning it lit $5.07 of cash on fire for every $100 in revenue.
3. Restricted Access to Capital Increases Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Tilly's posted negative $23.32 million of EBITDA over the last 12 months, and its $211 million of debt exceeds the $39.04 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Tilly's if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Tilly's can improve its profitability and remain cautious until then.
Final Judgment
Tilly's falls short of our quality standards. After the recent drawdown, the stock trades at $1.46 per share (or a forward price-to-sales ratio of 0.1×). The market typically values companies like Tilly's based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Tilly's
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