On Friday, B.Riley adjusted Tilly’s (NYSE:) financial outlook, lowering the price target to $6 from $7 previously while maintaining a Neutral stance on the stock. The adjustment follows Tilly’s second-quarter earnings report, which was released after the market closed on Thursday, showing that gross margin (GM) and EBITDA beat consensus predictions.
The retailer saw sales rise 1.8%, with a slight uptick in both in-store and e-commerce revenue. Compared to the previous year, operating margin showed an improvement, recording -0.5% of sales compared to -1.7% in the second quarter of 2023.
The company’s selling, general and administrative (SG&A) expenses rose 180 basis points to 31.2%, driven primarily by higher costs in payroll, digital marketing and software-as-a-service (SaaS) investments. Despite this, gross margin increased 300 basis points to 30.7%, beating the consensus of 27.9%.
This was attributed to improved product margins and favorable purchasing and distribution (BDO) costs. Merchandise margin also saw an increase of 270 basis points due to better initial markdowns and margins (IMU), while BDO costs increased 30 basis points collectively due to increased sales.
As of August 31, comparable-store sales for the quarter to date increased 1.0% year-over-year, with trends showing improvement during the peak back-to-school season. However, seasonal fading is anticipated. The company’s private label delivered strong performance, although it faced inventory shortages in some top-selling categories.
Tilly provided third-quarter revenue and earnings per share (EPS) guidance that was below consensus, taking into account a revenue push of approximately $18 million to the second quarter due to a calendar shift related to week 53 included in the prior year.
Tilly’s is actively managing its leasing expenses, with approximately 80 leasing decisions to be made in fiscal year 2024, 60% of which have already been addressed.
The company is working to secure more favorable lease terms that better reflect the single-digit decline in customer traffic and conversion rates. While there is potential to improve rents, sales and merchandise margins need further recovery to make meaningful progress in leveraging occupancy.
The company is also focusing on inventory management and markdown optimization. Beyond the third quarter, comparisons are expected to be relatively easy and key metrics should show improvement. However, structural challenges such as inherently higher labor costs in stores and persistent macroeconomic headwinds are likely to slow the impact of recovery initiatives.
Tilly’s continues to refine its marketing strategies to establish a sustainable connection with its target demographic. The report concludes with an expectation of business growth and margin recovery for Tilly’s, contingent on a substantial improvement in sales trends and merchandise margins.
In other recent news, Tilly’s Inc. reported mixed results for its first quarter of 2024, with net sales and pre-tax operating results declining, despite an improvement in product margins. Both B.Riley and Roth/MKM adjusted their financial outlooks on Tilly’s, lowering the price target to $7.00 and $6.00 respectively, while maintaining a neutral stance on the stock.
These adjustments followed Tilly’s first-quarter performance, which beat consensus in gross margin and EBITDA, but also saw a decline in sales and operating margin.
The company’s performance so far this quarter showed that total comparable sales fell 8.4% year-on-year. However, there were signs of recovery following the resolution of issues with the recently implemented distribution software. Tilly’s private label offerings performed well and there are expectations of sequential improvements in key metrics.
Tilly’s is actively managing lease expenses and nearly 100 lease decisions are anticipated in fiscal 2024. The company aims to secure favorable lease terms to reflect the high single-digit declines in traffic and consumer conversion. B. Riley anticipates that advantageous lease arrangements could lead to long-term occupancy leverage given a more significant recovery in sales and merchandise margin.
Tilly’s is implementing new marketing strategies and operational tools to improve business performance. Positive signs in inventory, particularly in the children’s products section, support optimism for the second half of the year.
InvestingPro Insights
In light of B. Riley’s recent adjustment to Tilly’s financial outlook, InvestingPro’s current data provides additional context. Tilly’s operates with a significant debt load and analysts have recently revised down their earnings expectations for the coming period, reflecting the challenges facing the retailer. Despite the company’s efforts to manage expenses and optimize inventory, Tilly’s is not expected to be profitable this year, as indicated by a negative price-to-earnings ratio of -3.43. Furthermore, with a 6-month total price return of -35.98%, the stock has experienced significant volatility, which is a trend investors should keep a close eye on.
InvestingPro’s tips highlight that Tilly’s is burning through cash quickly and is not paying dividends to shareholders, which could be a concern for income-focused investors. Additionally, the company’s valuation implies a low free cash flow yield, suggesting that its current share price may not fully reflect the company’s underlying financial health. For those interested in deeper analysis, additional InvestingPro tips are available for Tilly’s at https://www.investing.com/pro/TLYS, which provide a deeper analysis of the company’s performance and potential investment risks.
InvestingPro data highlights challenges in revenue growth, with a slight decline of -3.67% over the trailing twelve months to Q2 2025. However, gross profit margin remains relatively strong at 41.65%, indicating that Tilly’s is still able to maintain a level of profitability on the cost of goods sold. The market capitalization of $142.89 million suggests that Tilly’s is a smaller player in the retail sector, which may contribute to the high price volatility seen in its stock. With these insights, investors can better assess Tilly’s position within the competitive landscape and the potential risks and opportunities associated with the company’s stock.
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