Tilly's (TLYS) Q2 2025 Earnings Call Transcript

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Date

Wednesday, Sept. 3, 2025, at 4:30 p.m. ET

Call participants

• Co-Founder and Executive Chairman — Hezy Shaked
• President and Chief Executive Officer — Nate Smith
• Executive Vice President and Chief Financial Officer — Michael Henry

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Takeaways

• Total net sales-- $151.3 million for fiscal Q2 2025 (period ended Aug. 3, 2025), representing a 7.1% decrease compared to the same quarter last year, reflecting store count reduction.
• Comparable net sales-- Decreased 4.5% for fiscal Q2, marking a second consecutive quarter of sequential improvement in the sales trend.
• Physical store net sales-- Declined 7.3% for fiscal Q2 and accounted for 81.1% of total net sales, compared with 81.3% the previous year.
• E-commerce net sales-- Decreased 6.6% for fiscal Q2 to represent 18.9% of total net sales, up slightly from 18.7% in the same quarter last year.
• Gross margin-- Improved by 180 basis points to 32.5% of net sales for fiscal Q2, driven by a 210 basis point enhancement in product margins primarily from higher initial markups and reduced markdowns.
• Inventory-- Total inventory was 14.5% lower than at the end of the same quarter last year, with store count down 6.1% to 232 units, and aging mix improved versus the end of last year's second quarter.
• SG&A expenses-- $46.4 million total SG&A expenses for fiscal Q2, a $4.4 million reduction compared to the same quarter last year, with key drivers including $1.9 million lower store payroll, $700,000 decrease in non-cash asset write-offs, $500,000 reduction in e-commerce fulfillment labor, and $400,000 lower corporate payroll and benefits.
• Earnings per share-- $0.10 GAAP diluted earnings per share for fiscal Q2, marking the company's first profitable quarter since 2022, nearly three years ago.
• Pretax income-- $3.1 million (2.1% of net sales) for fiscal Q2, compared to a pre-tax loss of $73,000 (breakeven margin) in the same quarter last year.
• Total liquidity-- $114 million and no debt at the end of the quarter, consisting of $51 million in cash and $63 million of unused borrowing capacity.
• August comparable sales-- Up 0.9% for comparable net sales in fiscal August 2025, with in-store comparable sales increasing 4.5% and e-commerce sales declining 12.1% during fiscal August, attributed to the loss of $1.8 million in net sales from a third-party brand’s distribution decision.
• Fiscal Q3 2025 guidance-- Management projects net sales between $134 million and $140 million for fiscal Q3 2025 (period ending Nov. 2, 2025), comparable sales ranging from -2% to +2%, SG&A around $47 million for the third quarter, projected net loss between $10.5 million and $6.9 million for the third quarter, and ending store count at 230 stores.
• Tariff exposure-- Estimated net impact on fiscal 2025 product margins is limited to $500,000; fiscal 2026 impact uncertain given market volatility and ongoing mitigation efforts.
• Social media engagement-- TikTok following quadrupled to 169,000 since the start of the same quarter last year, including the recent launch of TikTok Shop.

Summary

Tilly's (NYSE:TLYS) management underscored a return to quarterly profitability after nearly three years in fiscal Q2 2025, with cost controls, improved margins, and reduced inventory contributing to bottom-line improvement. The call featured explicit commentary on positive apparel sales trends in fiscal August 2025, reversing earlier seasonal declines and supported by sequential sales momentum across the year. Management directly stated plans for further inventory discipline, continued store-level cost savings, and measured expansion of marketing and digital channels. Guidance for the next quarter projects a narrowed net loss range and stable liquidity, emphasizing a cautionary stance toward risk factors such as tariff volatility and seasonal sales normalization. The transition to new CEO Nate Smith was highlighted as a strategic evolution, though no major operational shifts were announced in the call.

• Hezy Shaked stated, "We believe we are just beginning to see the impact of those effective efforts, and it is encouraging to see," signaling management's confidence in ongoing turnaround actions.
• The fiscal Q2 2025 tax benefit resulted from refunds on credit carryforwards and state tax carrybacks, reflecting a non-recurring dynamic in reported net income.
• Michael Henry cited that, "All of our apparel departments moved positively in August," indicating broad-based recovery within core product areas.
• Guidance for fiscal Q3 2025 assumes a potential repeat of historical September-October sales slowdowns despite improved inventory positions, signaling conservatism in outlook.
• Management reiterated its expectation to end fiscal Q3 2025 with a debt-free balance sheet and liquidity between $83 million and $86 million, despite negative net income projections.

Industry glossary

• Comparable net sales: Sales metric measuring the year-over-year change in net sales from stores and digital channels that were open both periods, excluding new or closed locations.
• Gross margin: Ratio of gross profit (revenue minus cost of goods sold, including buying, distribution, and occupancy expenses) to total net sales, expressed as a percentage.
• SG&A expenses: Selling, general, and administrative expenses include payroll, marketing, administrative costs, fulfillment labor, and store operating expenses, exclusive of cost of goods sold.
• Asset-backed credit facility: Loan facility secured by company assets (typically inventory and receivables), providing access to liquidity through borrowing up to a set limit.

Full Conference Call Transcript

Hezy Shaked, Co-Founder and Executive Chairman, Nate Smith, President and Chief Executive Officer, and Michael Henry, Executive Vice President and Chief Financial Officer, will provide some prepared remarks, then host a Q&A session. A copy of Tilly's earnings press release is available on the Investor Relations section of the company's website, tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recording of this call for the next thirty days. Certain forward-looking statements will be made during this call that reflect Tilly's, Inc.'s judgment and analysis only as of today, September 3, 2025, and actual results may differ materially from current expectations based on various factors affecting Tilly's, Inc.'s business.

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 2025 second 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. I now turn the call over to Hezy.

Hezy Shaked: Thanks, Gar, and to all who are joining us today. First, I'd like to start by thanking the entire team for all their hard work since I reassumed the CEO position in 2024. We believe we are just beginning to see the impact of those effective efforts, and it is encouraging to see. Next, I'm excited to welcome Nate Smith as our new President and CEO. He brings extensive apparel and consumer product industry experience to Tilly's, and I'm excited for this next chapter of the Tilly's, Inc. story under his leadership. I remain highly engaged with the company, assisting Nate as he transitions into our company and thereafter.

Would you like to say a few words to introduce yourself?

Nate Smith: Thanks, Hezy. Yes, I'm excited to be here at Tilly's, Inc., and I'm excited about the prospects I believe this business has. I just arrived two weeks ago, and I'm getting settled in, getting to know the team and our operations here. I look forward to leveraging my industry experience to continue to improve and build upon the progress being made. I'll have more to say during our next earnings call once I've had a chance to get more familiar with things, but I'm excited to be here and work with the team as we aim to drive further improvements over time.

I'll now turn the call over to Mike to share the details about our second quarter results and third quarter outlook.

Michael Henry: Thanks, Nate. We're excited that you're here with us, and we look forward to working with you. Now on to the details of our call today. We believe our second quarter results and start to the third quarter demonstrate that we are continuing to build incremental forward momentum as stabilization of our business continues. Our second quarter comparable net sales decrease of 4.5% was within our outlook range and represented a second consecutive quarter of sequential trend improvement from 2024. We had some significant achievements during the quarter, including meaningfully improved product margins, significantly reduced inventory levels, improved inventory aging, and reduced SG&A expenses compared to last year's second quarter.

Our earnings per share of $0.10 beat our earnings outlook range for the quarter and represented our first profitable quarter since 2022, nearly three years ago. We believe these facts indicate that we are making progress toward improving our business, but there remains much more to do to return to profitability consistently over longer periods of time. On the marketing front, we continue to seek fun ways to build customer awareness and consideration for Tilly's, Inc., something that we were doing pretty well prior to COVID. We mentioned Travis Barker's in-store appearance at Irvine Spectrum in late May, in partnership with Hurley during our last earnings call.

In late July, we collaborated with the Mike Tyson Foundation, the Passion Project, and Tilly's Life Center to provide underprivileged kids with some life skill education and an opportunity to meet Mike in our Cerritos store along with some of our loyalty members and other customers. 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.

Moving on to the impact of tariffs, which remain volatile, we continue to expect a relatively modest impact on our product costs for the remainder of fiscal 2025 at this time. Our merchandising team has worked closely with all of our proprietary and branded partners to attempt to mitigate as much tariff impact on us as is reasonably possible. 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. Turning to our operating results for 2025 compared to last year's second quarter, total net sales were $151.3 million, a decrease of 7.1%. We ended the second quarter with 232 total stores, a net decrease of 15 stores or 6.1% compared to a year ago. Total comparable net sales, including both physical stores and e-commerce, decreased by 4.5%. Net sales from physical stores decreased by 7.3% and represented 81.1% of total net sales compared to 81.3% last year, while e-commerce net sales decreased by 6.6% and represented 18.9% of total net sales compared to 18.7% last year.

Gross margin, including buying, distribution, and occupancy expenses, improved by 180 basis points to 32.5% of net sales compared to 30.7% last year. 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. With 15 fewer stores than a year ago, occupancy costs decreased by $1.7 million. Distribution costs decreased by $600,000, primarily due to reduced temporary labor expenses.

Total SG&A expenses were $46.4 million, a decrease of $4.4 million and 50 basis points as a percentage of net sales compared to last year's second quarter. Primary expense reductions were attributable to reduced store payroll and related of $1.9 million, lower non-cash asset write-off charges of $700,000, reduced e-commerce fulfillment labor of $500,000, and lower corporate payroll and related benefits of $400,000, among other smaller items. Pretax income was $3.1 million or 2.1% of net sales compared to a pre-tax loss of $73,000 or breakeven as a percentage of net sales last year. Income tax benefit was $41,000 or 1.3% of pretax income compared to $4,000 or 6.2% of pretax loss last year.

Both year's income tax results include the continuing impact of a full non-cash deferred tax asset valuation allowance. This year's income tax benefit includes the refund of certain income tax credit carryforwards and state income tax carryback claims. Net income was $3.2 million or $0.10 per diluted share compared to a net loss of $69,000 or breakeven on a per-share basis last year. On our debt-free balance sheet, we ended the second quarter with total liquidity of $114 million and no borrowings at any time, comprised of cash of $51 million and undrawn borrowing capacity of $63 million under our asset-backed credit facility. Total balance sheet inventory was 14.5% lower than at the end of last year's second quarter.

Additionally, our unit inventory aging was more current than at the end of last year's second quarter. Looking at our start to 2025, total comparable net sales for fiscal August ended August 30, 2025, increased by 0.9% compared to last year, continuing our sequential improvement in sales trend from quarter to quarter that we have seen in fiscal 2025 so far. Comparable net sales from stores increased by 4.5%, while e-commerce net sales decreased by 12.1%. The decrease in e-commerce net sales during fiscal August was primarily attributable to a distribution decision by one of our third-party brands that removed what was $1.8 million in net sales for us during August.

Absent this issue, our e-commerce net sales were otherwise just shy of flat for fiscal August. Based on current and historical trends, we estimate the following ranges for 2025: net sales of approximately $134 million to $140 million, translating to a comparable net sales range of a decrease of 2% to an increase of 2%, respectively.

SG&A of approximately $47 million, excluding any potential non-cash asset impairment charges, a near-zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets, net loss of approximately $10.5 million to $6.9 million, respectively, and per-share results of a net loss of $0.35 to $0.23, respectively, an improvement compared to last year's loss per share of $0.43. We expect to end the third quarter with 230 total stores after closing four stores and opening two new stores during the quarter. This compares to 246 total stores at the end of last year's third quarter. At this time, we expect to close two additional stores in the fourth quarter.

We have 45 lease decisions remaining to be made by the end of the fiscal year, which may result in a few additional store closures, which are not yet confirmed. We expect to end the third quarter with a debt-free balance sheet and total liquidity of approximately $83 million to $86 million, comprised of cash and investments of approximately $20 million to $25 million and available undrawn borrowing capacity of approximately $61 million to $63 million under our credit facility, reflecting the natural ebb and flow of our liquidity following the back-to-school season and the buildup of inventory in advance of the holiday season, which is consistent with historical patterns. We expect to remain a debt-free company throughout fiscal 2025.

In closing, we believe our product assortment remains on trend, and we're building forward momentum toward improved business performance. We believe we are stabilizing our business, and with Nate's leadership just beginning, we're cautiously optimistic that a continuation of improved performance remains ahead. Operator, we'll now go to our Q&A session.

Operator: Thank you. If you wish to ask a question, please press star and then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Matt Koranda with Roth Capital. Please go ahead.

Matt Koranda: Hey, guys. Thanks for taking the questions. Maybe just to start with Nate. Congrats and wanted to see if maybe you'd be willing to discuss sort of the broader opportunity that you see at Tilly's, Inc., you know, sort of primary early priorities after joining?

Nate Smith: Yeah. Thanks, Matt. So I just started really, week two here and had a great first week and dove in quickly as Hezy mentioned and met the team, spent a lot of time with the executive team. I think my initial impressions are, you know, the team has made great strides. When Hezy came back, and with Michael Henry and the executive team, they've made great strides. And so initially, you know, the emphasis should be on doubling down on those things that are working well. And then, of course, find those areas that we think we can make some course corrections. But, you know, again, it's pretty early.

But, I look forward to working with the team and over the course of the next few months, setting a path.

Matt Koranda: Okay. Great. Maybe just turning to the results and the outlook questions that I had. Maybe just, first of all, really encouraging to see the sequential improvement in comp and the positive comp in August. Just wanted to see, Mike, if you could talk about the progression during the second quarter of the comps that you saw and into August? Did things improve each month? And then just anything to call out in terms of the drivers of the August positive comp between traffic and ticket? I know you already mentioned a little bit of a dynamic going on in the e-commerce channel. Any more clarity you can provide also on that in terms of product category that was in?

Michael Henry: Alright. Pardon me. I'm writing notes as you're asking all those various questions, so I hopefully remember to address all of them. Let me know if I miss anything in particular. The Q2 cadence, you know, we did our last earnings call. We mentioned that fiscal May was a minus two. June actually slowed down to a minus 7.6, and then July bounced back to about a minus three to finish off the quarter. And then as we transitioned into August, we were just below flat in the first week, flat in the second week, and then we've been positive for each of the last two weeks to finish off the month at slightly positive overall.

All of our apparel departments moved positively in August. That's what's really leading our business, the apparel side of things, and all elements of apparel being positive.

Matt Koranda: Got it. And then, just on the callout, you've mentioned in terms of the e-commerce vendor, category that was in as well.

Michael Henry: Yeah. So not gonna name names there, given the relationships that are involved. But it was something that was peculiar to the e-commerce business and the distribution decision made by a vendor of ours that essentially took a little bit of business away from us. And gave the metrics there of the impact of that.

Matt Koranda: Okay. Let me answer the second. That it's not only us. It's everybody else too. Only our business is very, very large.

Michael Henry: Got it. Okay. So this is a broader system-wide sort of change made by the vendor, not necessarily something individual for Tilly's, Inc. Okay. Alright. Understood. Very good point, and it was not just Tilly's, Inc.

Matt Koranda: Alright. Alright. Great. The outlook, I guess, for the third quarter, it looks like it's factoring in kind of a flattish comp despite the growth you saw in August. Maybe can we talk a little bit about sort of why we're embedding the assumption of a little bit of sequential erosion? Is it just some conservatism given the consumer, or, you know, what are we seeing in guess? Or how do we expect the rest of the quarter to play out? And maybe it's just a consolidation kind of back-to-school shopping that we've seen. But, just wanted to see if you could unpack the dynamic there.

Michael Henry: Sure, Matt. So for each of the last three years, August fiscal August has been our best performance of each of those years. And then we have seen a significant slowdown once you get past what I'll refer to as the need-based period of back-to-school, we've seen a slowdown in our business during September and October relative to August, in each of the last three years. So the bottom end of our range is really contemplating if a similar sort of pattern occurs again for a fourth year in a row and is more aligned with what our year-to-date comp of about minus five, that's how you'd get to the bottom end of minus two.

We do believe our product assortment is definitely better and more current than it was at this time a year ago. We're operating with a lower level of inventory overall and a more current inventory than we were at this time last year. So we're cautiously optimistic that maybe we wouldn't see quite the size of fall off in September and October as we have seen in prior years, but want to be conscious that behavior has definitely been there. And we better contemplate that in terms of how we look at things going forward.

Matt Koranda: Yeah. Okay. Makes sense. Wanted to see if you guys could talk a little bit about the gross margin and the product margin improvement that you saw in the quarter, it sounds like a fair bit of that is just being cleaner on inventory. We got higher IMU. Lower markdowns. But maybe if you could just talk about the health of the current inventory and assortment, where it stands now, it looks like efficiency is looking better down, inventories down on a per store as well as being down on a gross dollar basis. But wanted to see if you could talk about the health of inventory there.

Michael Henry: Right. So the inventory definitely is healthier, and you just noted all the headlines about it. We purposely planned this year. As I said, I might have said two quarters ago that we were gonna run through this year with significantly reduced inventories, year-long. That was a purposeful plan. We all put our minds together and believe that we had just been buying too much to say it as plainly as I can across all product areas. And took a really hard look at our past behaviors and tried to be a lot sharper in terms of our commitments for this year.

And try to push ourselves more into a chase mode on things that are working really well and not to be so overbought in things that are turning very slowly. So we think we're seeing the benefits of that. When you see inventory down 14.5%, that's with a store count that's down 6%. So as you noted, it is lower on an overall store-by-store basis, and yet we're still able to produce a positive comp in August. Meaningfully improved product margins in the second quarter. We'd expect a similar type of behavior in terms of basis point movement in product margins in the third quarter.

So pleased to see the fruits of that labor to try to be more efficient in our inventory management this year.

Matt Koranda: Okay. Maybe just one other one on gross margins, if I could. With respect to tariffs and any vendor pricing or pressure that we've seen, maybe could you guys talk about, are you seeing any sort of pricing changes from vendors in response to tariffs? If so, kind of what is that looking like, and what is that sort of start to filter through the P&L?

Michael Henry: Well, everything is filtered into the Outlook that we gave based on what we currently know. And, you know, all we can really tell you is what we're seeing in our go-forward purchase orders and the net differences in costs as well as retail prices. There are some instances where third-party brands are moving price to consumer as well as cost to us. Then the net difference doesn't end up being much at all. That's why you might be surprised at how low we're seeing that net impact of half a million dollars that I mentioned and it not being something higher, it's because there's a whole bunch of things going on. Certain brands adjust price while they adjust cost.

We've changed sources for certain programs with sharper costs than what we might have had a year ago. So there's a lot of different moving pieces to this. It's not a simple answer.

Matt Koranda: Yeah. Okay. Alright. Fair enough. And then just last one, I guess, on SG&A. Good cost containment there. And it looks like, I guess, the bulk of the savings on a year-over-year basis were from store labor. Is there more to come there? I guess I've always gotten the sense that's a hard line item to move, but you guys moved it successfully. Maybe just talk a little bit about where you see opportunity for further cost containment there.

Michael Henry: Sure. We'll continue to see some store labor savings, we believe, in both Q3 and Q4. We should see a similar dollar movement in SG&A below LY in the third quarter. Again, you've been around us for a number of years. You've heard us talk about this over the years. With all the constant increases in minimum wage, particularly here in California, where almost half of our stores reside and all our distribution operations reside. Those minimum wage impacts have an outsized impact on us relative to others that maybe aren't so heavily penetrated in California. So it has forced us to take a really hard look at our payroll matrix each and every year.

I'll never claim that we're perfect at it or can't continue to refine it, and believe me, there's a lot of scrutiny on this. And we believe there still will be opportunity for us to improve upon that. And you'll continue to see lower store payroll dollars and some other expense savings in each quarter as we go forward for the rest of the year.

Matt Koranda: Okay. Great. I'll leave it there, guys. I appreciate all the answers.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Michael Henry for any closing remarks. Please go ahead, sir.

Michael Henry: Thank you, everyone, for joining us today. We look forward to sharing our third quarter results with you in early December. Have a good evening.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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