Tillys Returns to Profit in Q2 2025

Tilly's(NYSE:TLYS) reported its fiscal Q2 2025 results on July 28, 2025, delivering its first profitable quarter since 2022, with earnings per share of $0.10 and a 4.5% year-over-year decrease in comparable net sales. Despite ongoing store closures and a decline in total net sales to $151.3 million, the company improved its gross margin by 180 basis points and continued to reduce inventory and SG&A costs compared to last year's second quarter. The following insights highlight critical factors affecting long-term investors, including improved operational efficiency, evolving digital engagement, and strategic risks related to vendor dependence and tariffs. The fiscal Q2 2025 period ended on August 3, 2025.

Gross margin expansion signals improved operational discipline at Tilly's

Gross margin rose to 32.5% of net sales, up 180 basis points year-over-year, with product margins specifically up 210 basis points, reflecting a sharp inventory reduction of 14.5% and better management of markdowns. Store count fell by 15 locations (down 6.1% year-over-year), emphasizing a disciplined approach to footprint rationalization paired with sharper inventory planning.

"Product margins improved by 210 basis points compared to last year, primarily due to the combination of higher initial markups and lower markdowns as a result of operating with reduced, more current inventory. Buying, distribution, and occupancy costs deleveraged by 30 basis points despite being $2.4 million below last year in the aggregate, due to carrying these costs against lower total net sales."
-- Michael Henry, Executive Vice President and Chief Financial Officer

This margin expansion demonstrates management’s effective execution in inventory discipline and cost rationalization during a period of ongoing sales contraction.

Social media and digital initiatives drive customer engagement momentum

Tilly's quadrupled its TikTok following to 169,000 since the start of the second quarter of last year and launched a TikTok shop, and leveraged high-profile collaborations with celebrities like Travis Barker and Mike Tyson. Marketing investment placed particular emphasis on digital reach amid declining physical store and e-commerce net sales (down 7.3% and 6.6% year-over-year, respectively).

"We've quadrupled our TikTok following to 169,000 followers since the start of the second quarter last year. Our content creation efforts have evolved and improved, aided by the launch of our TikTok shop just a few months ago. As we improve our product assortment, our social, digital, and in-store marketing and engagement efforts are just as important to drive interest and consideration among our customer demographic, and we continue to prioritize resources here."
-- Michael Henry, Executive Vice President and Chief Financial Officer

As product assortment improves, social, digital, and in-store marketing and engagement efforts remain equally important to drive interest and consideration among the customer demographic.

Vendor and tariff exposure creates specific downside risk

In August fiscal 2025, a third-party vendor altered distribution strategies, removing $1.8 million from Tilly's e-commerce net sales, exemplifying vulnerability to external partner decisions; while the tariff impact on fiscal 2025 product costs is forecast to be modest ($500,000), though fiscal 2026 risks remain indeterminate. Management has actively worked with key suppliers to mitigate these evolving tariff and vendor-related exposures.

"Currently, net impacts on our product margins for 2025 are limited to just $500,000. The impact on fiscal 2026 is likely to be larger but is not clearly determinable due to the frequent change in tariff declarations and both our and our partners' continuous mitigation efforts. The impact of tariffs remains a fluid situation that can change at any moment, but this is what we know as of today."
-- Michael Henry, Executive Vice President and Chief Financial Officer

This external risk underscores the company’s dependence on supplier relationships and regulatory environments, introducing volatility to future margin forecasts and requiring ongoing mitigation strategies.

Looking Ahead

Management guided fiscal Q3 2025 net sales to a range of $134 million to $140 million. Full-year net loss (GAAP) is projected between $6.9 million and $10.5 million, with continued SG&A reductions and a debt-free balance sheet maintained. Store count is expected to drop to 230 by the end of fiscal Q3 2025, and the company will close additional locations as lease decisions are finalized, with no explicit quantitative guidance given for e-commerce recovery or tariff headwinds in 2026.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.