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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________
FORM 10-Q
__________________________________________________
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 1, 2020
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-35535
__________________________________________________
TILLY’S, INC.
(Exact name of Registrant as specified in its charter)
__________________________________________________
|
| | |
Delaware | | 45-2164791 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
10 Whatney
Irvine, CA 92618
(Address of principal executive offices)
(949) 609-5599
(Registrant’s telephone number, including area code)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | TLYS | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer | | ¨
| | Accelerated Filer | | x
|
| | | |
Non-accelerated filer | | ¨ | | Smaller reporting company | | ☒ |
| | | | | | |
Emerging growth company | | ☐ | | | |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No x
As of September 3, 2020, the registrant had the following shares of common stock outstanding:
|
| | |
Class A common stock $0.001 par value | 22,413,589 |
|
Class B common stock $0.001 par value | 7,366,108 |
|
TILLY’S, INC.
FORM 10-Q
For the Quarterly Period Ended August 1, 2020
Index
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 6. | | |
| | |
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EXPLANATORY NOTE
As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there continue to be many uncertainties regarding the current novel coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic, and the extent of local and worldwide economic, social, and political disruption it may continue to cause. To date, and as described throughout this Report, the COVID-19 pandemic has had far-reaching adverse impacts on many aspects of the business of Tilly’s, Inc. (the “Company, “we,” “our” or “us”), both directly and indirectly, including on our operations generally, consumer behavior, store traffic, demands on our information technology and e-commerce capabilities, inventory and expense management, production capabilities, timing of deliveries, managing our workforce, our store configurations and operations upon reopening, and the market generally. The scope and nature of these impacts continue to evolve each day. The COVID-19 pandemic has resulted in, and may continue to result in, regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, material adverse impacts on our business, financial condition and results of operations. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In light of these uncertainties, for purposes of this Report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto. In addition, the disclosures contained in this Report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. For further information, please see “Risk Factors” within our most recently filed Annual Report on Form 10-K and “Forward-Looking Statements” below.
For a detailed summary of recent and anticipated impacts of the COVID-19 pandemic on our business and our actions taken in response thereto, please see "Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Known and Anticipated Trends".
Forward-Looking Statements
This Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this Report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, comparable store sales, operating income, earnings per share, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
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• | the impacts of the COVID-19 pandemic generally, and on our operations, or our future financial or operational results, including with respect to our ability to reopen and keep stores open, e-commerce operations, cash and liquidity, payroll and inventory management, and our ability to realize any cost savings and manage expected capital expenditures; |
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• | our ability to successfully open new stores and profitably operate our existing stores; |
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• | our ability to attract customers to our e-commerce website; |
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• | our ability to efficiently utilize our e-commerce fulfillment center; |
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• | effectively adapting to new challenges associated with our expansion into new geographic markets; |
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• | our ability to establish, maintain and enhance a strong brand image; |
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• | generating adequate cash from our stores to support our growth; |
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• | identifying and responding to new and changing customer fashion preferences and fashion-related trends; |
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• | competing effectively in an environment of intense competition both in stores and online; |
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• | containing the increase in the cost of mailing catalogs, paper and printing; |
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• | the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located; |
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• | our ability to attract customers in the various retail venues and geographies in which our stores are located; |
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• | our ability to adapt to downward trends in traffic for our stores and changes in our customers' purchasing patterns; |
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• | adapting to declines in consumer confidence and decreases in consumer spending; |
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• | our ability to adapt to significant changes in sales due to the seasonality of our business; |
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• | our ability to compete in social media marketing platforms; |
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• | price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold; |
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• | natural disasters, unusually adverse weather conditions, boycotts and unanticipated events; |
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• | changes in the competitive environment in our industry and the markets we serve, including increased competition from other retailers; |
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• | our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices; |
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• | increases in costs of energy, transportation or utility costs and in the costs of labor and employment; |
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• | our ability to balance proprietary branded merchandise with the third-party branded merchandise we sell; |
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• | most of our merchandise is made in foreign countries, making price and availability of our merchandise susceptible to international trade conditions; |
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• | failure of our vendors and their manufacturing sources to use acceptable labor or other practices; |
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• | our dependence upon key executive management or our inability to hire or retain the talent required for our business; |
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• | our ability to effectively adapt to our rapid expansion in recent years and our planned expansion; |
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• | failure of our information technology systems to support our current and growing business; |
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• | disruptions in our supply chain and distribution center; |
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• | our indebtedness and lease obligations, including restrictions on our operations contained therein; |
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• | our reliance upon independent third-party transportation providers for certain of our product shipments; |
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• | our ability to increase comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile; |
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• | disruptions to our information systems in the ordinary course or as a result of systems upgrades; |
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• | our inability to protect our trademarks or other intellectual property rights; |
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• | epidemics, pandemics, acts of war, terrorism or civil unrest; |
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• | the impact of governmental laws and regulations and the outcomes of legal proceedings; |
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• | our ability to secure the personal financial information of our customers and comply with the security standards for the credit card industry; |
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• | our failure to maintain adequate internal controls over our financial and management systems; and |
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• | continuing costs incurred as a result of being a public company. |
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
See “Risk Factors” within our most recent Annual Report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this Report and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the disclosures and forward-looking statements included in this Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
TILLY’S, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
|
| | | | | | | | | | | |
| August 1, 2020 | | February 1, 2020 | | August 3, 2019 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 132,955 |
| | $ | 70,137 |
| | $ | 62,388 |
|
Marketable securities | 15,939 |
| | 69,780 |
| | 62,413 |
|
Receivables | 13,287 |
| | 7,485 |
| | 11,758 |
|
Merchandise inventories | 68,067 |
| | 56,901 |
| | 72,635 |
|
Prepaid expenses and other current assets | 3,956 |
| | 4,561 |
| | 4,845 |
|
Total current assets | 234,204 |
| | 208,864 |
| | 214,039 |
|
Operating lease assets | 244,040 |
| | 263,649 |
| | 256,048 |
|
Property and equipment, net | 56,805 |
| | 66,176 |
| | 68,010 |
|
Other assets | 8,458 |
| | 7,951 |
| | 2,194 |
|
Total assets | $ | 543,507 |
| | $ | 546,640 |
| | $ | 540,291 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 48,710 |
| | $ | 20,562 |
| | $ | 39,475 |
|
Accrued expenses | 19,416 |
| | 20,755 |
| | 23,112 |
|
Line of credit | 23,675 |
| | — |
| | — |
|
Deferred revenue | 9,443 |
| | 11,761 |
| | 8,330 |
|
Accrued compensation and benefits | 6,891 |
| | 7,190 |
| | 6,132 |
|
Dividends payable | — |
| | 29,677 |
| | — |
|
Current portion of operating lease liabilities | 64,470 |
| | 55,321 |
| | 53,744 |
|
Total current liabilities | 172,605 |
| | 145,266 |
| | 130,793 |
|
Noncurrent operating lease liabilities | 222,015 |
| | 240,755 |
| | 233,876 |
|
Other | 319 |
| | 718 |
| | 1,182 |
|
Total liabilities | 394,939 |
| | 386,739 |
| | 365,851 |
|
Commitments and contingencies (Notes 2 and 5) |
| |
| |
|
Stockholders’ equity: | | | | | |
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,414, 22,323 and 21,980 shares issued and outstanding, respectively | 22 |
| | 22 |
| | 22 |
|
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,366, 7,406 and 7,586 shares issued and outstanding, respectively | 8 |
| | 8 |
| | 8 |
|
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding | — |
| | — |
| | — |
|
Additional paid-in capital | 154,386 |
| | 153,377 |
| | 150,877 |
|
(Accumulated deficit) Retained earnings | (5,849 | ) | | 6,280 |
| | 23,296 |
|
Accumulated other comprehensive income | 1 |
| | 214 |
| | 237 |
|
Total stockholders’ equity | 148,568 |
| | 159,901 |
| | 174,440 |
|
Total liabilities and stockholders’ equity | $ | 543,507 |
| | $ | 546,640 |
| | $ | 540,291 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Net sales | $ | 135,845 |
| | $ | 161,738 |
| | $ | 213,134 |
| | $ | 292,041 |
|
Cost of goods sold (includes buying, distribution, and occupancy costs) | 94,171 |
| | 110,019 |
| | 169,866 |
| | 204,638 |
|
Gross profit | 41,674 |
| | 51,719 |
| | 43,268 |
| | 87,403 |
|
Selling, general and administrative expenses | 33,965 |
| | 39,609 |
| | 63,960 |
| | 75,147 |
|
Operating income (loss) | 7,709 |
| | 12,110 |
| | (20,692 | ) | | 12,256 |
|
Other income, net | 311 |
| | 572 |
| | 720 |
| | 1,401 |
|
Income (loss) before income taxes | 8,020 |
| | 12,682 |
| | (19,972 | ) | | 13,657 |
|
Income tax expense (benefit) | 2,754 |
| | 3,398 |
| | (7,843 | ) | | 3,696 |
|
Net income (loss) | $ | 5,266 |
| | $ | 9,284 |
| | $ | (12,129 | ) | | $ | 9,961 |
|
Basic income (loss) per share of Class A and Class B common stock | $ | 0.18 |
| | $ | 0.31 |
| | $ | (0.41 | ) | | $ | 0.34 |
|
Diluted income (loss) per share of Class A and Class B common stock | $ | 0.18 |
| | $ | 0.31 |
| | $ | (0.41 | ) | | $ | 0.33 |
|
Weighted average basic shares outstanding | 29,694 |
| | 29,505 |
| | 29,686 |
| | 29,487 |
|
Weighted average diluted shares outstanding | 29,700 |
| | 29,678 |
| | 29,686 |
| | 29,739 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Net income (loss) | $ | 5,266 |
| | $ | 9,284 |
| | $ | (12,129 | ) | | $ | 9,961 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | |
Net change in unrealized (loss) gain on available-for-sale securities, net of tax | (200 | ) | | 80 |
| | (213 | ) | | 11 |
|
Other comprehensive (loss) income, net of tax | (200 | ) | | 80 |
| | (213 | ) | | 11 |
|
Comprehensive income (loss) | $ | 5,066 |
| | $ | 9,364 |
| | $ | (12,342 | ) | | $ | 9,972 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | | | | | | | | | |
| Common Stock (Class A) | | Common Stock (Class B) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
Balance at May 2, 2020 | 22,363 |
| | 7,366 |
| | $ | 30 |
| | $ | 153,878 |
| | $ | (11,115 | ) | | $ | 201 |
| | $ | 142,994 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 5,266 |
| | — |
| | 5,266 |
|
Restricted stock | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 508 |
| | — |
| | — |
| | 508 |
|
Net change in unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | (200 | ) | | (200 | ) |
Balance at August 1, 2020 | 22,414 |
| | 7,366 |
| | $ | 30 |
| | $ | 154,386 |
| | $ | (5,849 | ) | | $ | 1 |
| | $ | 148,568 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | | | | | | | | | |
| Common Stock (Class A) | | Common Stock (Class B) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
Balance at May 4, 2019 | 21,816 |
| | 7,706 |
| | $ | 30 |
| | $ | 150,331 |
| | $ | 14,012 |
| | $ | 157 |
| | $ | 164,530 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 9,284 |
| | — |
| | 9,284 |
|
Restricted stock | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Class B common stock converted to Class A common stock | 120 |
| | (120 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | — |
| | 546 |
| | — |
| | — |
| | 546 |
|
Net change in unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | 80 |
| | 80 |
|
Balance at August 3, 2019 | 21,980 |
| | 7,586 |
| | $ | 30 |
| | $ | 150,877 |
| | $ | 23,296 |
| | $ | 237 |
| | $ | 174,440 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (continued)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | | | | | | | | | |
| Common Stock (Class A) | | Common Stock (Class B) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
Balance at February 1, 2020 | 22,323 |
| | 7,406 |
| | $ | 30 |
| | $ | 153,377 |
| | $ | 6,280 |
| | $ | 214 |
| | $ | 159,901 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (12,129 | ) | | — |
| | (12,129 | ) |
Restricted stock | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Class B common stock converted to Class A common stock | 40 |
| | (40 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 1,009 |
| | — |
| | — |
| | 1,009 |
|
Net change in unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | (213 | ) | | (213 | ) |
Balance at August 1, 2020 | 22,414 |
| | 7,366 |
| | $ | 30 |
| | $ | 154,386 |
| | $ | (5,849 | ) | | $ | 1 |
| | $ | 148,568 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | | | | | | | | | |
| Common Stock (Class A) | | Common Stock (Class B) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
Balance at February 2, 2019 | 21,642 |
| | 7,844 |
| | $ | 29 |
| | $ | 149,737 |
| | $ | 13,335 |
| | $ | 226 |
| | $ | 163,327 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 9,961 |
| | — |
| | 9,961 |
|
Restricted stock | 70 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Taxes paid in lieu of shares issued for stock-based compensation | (8 | ) | | — |
| | — |
| | (85 | ) | | — |
| | — |
| | (85 | ) |
Class B common stock converted to Class A common stock
| 258 |
| | (258 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | — |
| | 1,075 |
| | — |
| | — |
| | 1,075 |
|
Exercises of stock options | 18 |
| | — |
| | 1 |
| | 150 |
| | — |
| | — |
| | 151 |
|
Net change in unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Balance at August 3, 2019 | 21,980 |
| | 7,586 |
| | $ | 30 |
| | $ | 150,877 |
| | $ | 23,296 |
| | $ | 237 |
| | $ | 174,440 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 |
Cash flows from operating activities | | | |
Net (loss) income | $ | (12,129 | ) | | $ | 9,961 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation and amortization | 9,987 |
| | 10,286 |
|
Share-based compensation expense | 1,009 |
| | 1,075 |
|
Impairment of assets | 903 |
| | — |
|
Loss on disposal of assets | 64 |
| | 145 |
|
Gain on sales and maturities of marketable securities | (677 | ) | | (848 | ) |
Deferred income taxes | (490 | ) | | (218 | ) |
Changes in operating assets and liabilities: | | | |
Receivables | (5,802 | ) | | (3,605 | ) |
Merchandise inventories | (11,166 | ) | | (16,826 | ) |
Prepaid expenses and other current assets | 2,107 |
| | 717 |
|
Accounts payable | 28,376 |
| | 15,055 |
|
Accrued expenses | 701 |
| | 4,243 |
|
Deferred revenue | (2,318 | ) | | (2,043 | ) |
Accrued compensation and benefits | (299 | ) | | (2,798 | ) |
Operating lease liabilities | 8,577 |
| | (1,059 | ) |
Net cash provided by operating activities | 18,843 |
| | 14,085 |
|
Cash flows from investing activities | | | |
Purchases of property and equipment | (4,250 | ) | | (4,848 | ) |
Purchases of marketable securities | (15,968 | ) | | (62,079 | ) |
Maturities of marketable securities | 70,195 |
| | 76,457 |
|
Net cash provided by investing activities | 49,977 |
| | 9,530 |
|
Cash flows from financing activities | | | |
Line of credit | 23,675 |
| | — |
|
Dividends paid | (29,677 | ) | | (29,453 | ) |
Proceeds from exercise of stock options | — |
| | 151 |
|
Taxes paid in lieu of shares issued for share-based compensation | — |
| | (85 | ) |
Net cash used in financing activities | (6,002 | ) | | (29,387 | ) |
Change in cash and cash equivalents | 62,818 |
| | (5,772 | ) |
Cash and cash equivalents, beginning of period | 70,137 |
| | 68,160 |
|
Cash and cash equivalents, end of period | $ | 132,955 |
| | $ | 62,388 |
|
Supplemental disclosures of cash flow information | | | |
Interest paid | $ | 128 |
| | $ | — |
|
Income taxes paid | $ | 828 |
| | $ | 4,647 |
|
Supplemental disclosure of non-cash activities | | | |
Unpaid purchases of property and equipment | $ | 1,845 |
| | $ | 2,012 |
|
Leased assets obtained in exchange for new operating lease liabilities | $ | 7,168 |
| | $ | 313,602 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TILLY’S, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Description of the Company and Basis of Presentation
Tillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 238 stores, including one RSQ-branded pop-up store, in 33 states (of which 33 stores in California were temporarily closed due to government response to the COVID-19 pandemic) as of August 1, 2020. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.
The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.
As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World of Jeans and Tops", "WOJT", "we", "our", "us" and "Tillys" refer to WOJT before our initial public offering, and to Tilly's, Inc. and its subsidiary after our initial public offering.
We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the thirteen and twenty-six week periods ended August 1, 2020 are not necessarily indicative of results to be expected for the full fiscal year, especially in light of the uncertainties surrounding the impacts of the COVID-19 pandemic. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 ("fiscal 2019").
Fiscal Periods
Our fiscal year ends on the Saturday closest to January 31. References to fiscal 2020 refer to the fiscal year ending January 30, 2021. References to the fiscal quarters or first halves ended August 1, 2020 and August 3, 2019 refer to the thirteen and twenty-six week periods ended as of those dates, respectively.
Note 2: Summary of Significant Accounting Policies
Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
Revenue Recognition
Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income (Loss).
The following table summarizes net sales from our retail stores and e-commerce (in thousands):
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Retail stores | $ | 83,858 |
| | $ | 138,918 |
| | $ | 130,811 |
| | $ | 249,554 |
|
E-commerce | 51,987 |
| | 22,820 |
| | 82,323 |
| | 42,487 |
|
Total net sales | $ | 135,845 |
| | $ | 161,738 |
| | $ | 213,134 |
| | $ | 292,041 |
|
The following table summarizes the percentage of net sales by department:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Mens | 35 | % | | 33 | % | | 35 | % | | 33 | % |
Womens | 27 | % | | 25 | % | | 27 | % | | 26 | % |
Accessories | 16 | % | | 19 | % | | 16 | % | | 18 | % |
Footwear | 13 | % | | 12 | % | | 13 | % | | 13 | % |
Boys | 5 | % | | 6 | % | | 5 | % | | 5 | % |
Girls | 4 | % | | 5 | % | | 4 | % | | 5 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % | | 100 | % |
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
|
| | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Third-party | 77 | % | | 74 | % | | 77 | % | | 74 | % |
Proprietary | 23 | % | | 26 | % | | 23 | % | | 26 | % |
Total net sales | 100 | % | | 100 | % | | 100 | % | | 100 | % |
We accrue for estimated sales returns by customers based on historical sales return results. As of August 1, 2020, February 1, 2020 and August 3, 2019, our reserve for sales returns was $2.1 million, $1.4 million and $3.3 million, respectively.
We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was $7.7 million, $9.3 million and $6.6 million as of August 1, 2020, February 1, 2020 and August 3, 2019, respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Revenue recognized from gift cards was $2.7 million and $5.4 million for the thirteen and twenty-six week periods ended August 1, 2020, respectively and $3.8 million and $8.0 million for the thirteen and twenty-six week periods ended August 3, 2019, respectively.
We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns awards that may be redeemed for merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. Our loyalty program includes the ability for customers to redeem their awards instantly rather than build up to an award over time. We currently expire unredeemed awards and accumulated partial points 365 days after the last purchase activity. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was $1.8 million, $2.4 million and $1.8 million as of August 1, 2020, February 1, 2020 and August 3, 2019, respectively. Revenue recognized from our loyalty program was $1.5 million and $2.4 million for the thirteen and twenty-six week periods ended August 1, 2020, respectively, and $1.4 million and $1.7 million for the thirteen and twenty-six week periods ended August 3, 2019, respectively.
Leases
We conduct all of our retail sales and corporate operations in leased facilities. Lease terms for our stores are generally for ten years (subject to elective extensions) and provide for escalations in base rents. Many of our store leases contain one or more options to renew the lease at our sole discretion. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised.
Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.
In response to stores being closed to the public as a result of the COVID-19 pandemic, we have elected to withhold payment of our contractual lease obligations with respect to certain stores for the periods we were and are unable to operate such stores. As of August 1, 2020, withheld contractual lease payments totaled $13.9 million in the aggregate. We are currently in the process of negotiating COVID-19-related lease concessions for these stores. With respect to all of our stores, we continue to have ongoing conversations with our landlords generally regarding what we believe to be commercially reasonable lease concessions given the current environment. We have reached agreements in principle with respect to lease concessions covering approximately 70% of our total stores at this time. These agreements have generally resulted in a combination of rent abatements and/or rent deferrals. We have considered the Financial Accounting Standards Board's (“FASB”) recent guidance regarding COVID-19 lease concessions and have elected to account for the lease concessions that have been granted as lease modifications.
We lease approximately 172,000 square feet of office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. The lease expires on December 31, 2027. During the thirteen and twenty-six week periods ended August 1, 2020, we incurred rent expense of $0.6 million and $1.1 million, respectively, related to this lease. During the thirteen and twenty-six week periods ended August 3, 2019, we incurred rent expense of $0.5 million and $1.1 million, respectively, related to this lease.
We lease approximately 26,000 square feet of office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. During each of the thirteen and twenty-six week periods ended August 1, 2020, and August 3, 2019, we incurred rent expense of $0.1 million and $0.2 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease expires on June 30, 2022.
We lease approximately 81,000 square feet of office and warehouse space (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce distribution center. During the thirteen and twenty-six week periods ended August 1, 2020, we incurred rent expense of $0.3 million and $0.5 million, respectively, related to this lease. During the thirteen and twenty-six week periods ended August 3, 2019, we incurred rent expense of $0.2 million and $0.4 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease expires on October 31, 2021.
The maturity of operating lease liabilities as of August 1, 2020 were as follows (in thousands):
|
| | | |
Fiscal Year | |
2020 | $ | 43,239 |
|
2021 | 62,782 |
|
2022 | 56,447 |
|
2023 | 47,159 |
|
2024 | 36,199 |
|
Thereafter | 77,534 |
|
Total minimum lease payments | 323,360 |
|
Less: Amount representing interest | 36,875 |
|
Present value of operating lease liabilities | $ | 286,485 |
|
As of August 1, 2020, additional operating lease contracts that have not yet commenced are approximately $14 million.
Lease expense for the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended August 1, 2020 | | Thirteen Weeks Ended August 3, 2019 |
| | Cost of goods sold | | SG&A | | Total | | Cost of goods sold | | SG&A | | Total |
Fixed operating lease expense | | $ | 14,886 |
| | $ | 402 |
| | $ | 15,288 |
| | $ | 15,482 |
| | $ | 381 |
| | $ | 15,863 |
|
Variable lease expense | | 4,425 |
| | 28 |
| | 4,453 |
| | 4,080 |
| | (2 | ) | | 4,078 |
|
Total lease expense | | $ | 19,311 |
| | $ | 430 |
| | $ | 19,741 |
| | $ | 19,562 |
| | $ | 379 |
| | $ | 19,941 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Twenty-Six Weeks Ended August 1, 2020 | | Twenty-Six Weeks Ended August 3, 2019 |
| | Cost of goods sold | | SG&A | | Total | | Cost of goods sold | | SG&A | | Total |
Fixed operating lease expense | | $ | 30,400 |
| | $ | 803 |
| | $ | 31,203 |
| | $ | 30,941 |
| | $ | 766 |
| | $ | 31,707 |
|
Variable lease expense | | 8,244 |
| | 50 |
| | 8,294 |
| | 7,945 |
| | 41 |
| | 7,986 |
|
Total lease expense | | $ | 38,644 |
| | $ | 853 |
| | $ | 39,497 |
| | $ | 38,886 |
| | $ | 807 |
| | $ | 39,693 |
|
For the thirteen and twenty-six weeks ended August 3, 2019, we corrected an immaterial error of $3.1 million and $6.3 million, respectively, which consisted solely of an understatement of amounts disclosed for fixed operating lease expense and an overstatement of amounts disclosed for variable lease expense with no changes in reported total lease expense.
Supplemental lease information for the thirteen weeks ended August 1, 2020 was as follows:
|
| |
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) | $20,446 |
Weighted average remaining lease term (in years) | 5.9 years |
Weighted average interest rate (1) | 4.26% |
(1) Since our leases do not provide an implicit rate, we used our incremental borrowing rate on date of adoption or at lease inception in determining the present value of future minimum payments.
Income Taxes
Our income tax benefit was $(7.8) million, or 39.3% of loss before taxes, compared to $3.7 million, or 27.1% of income before taxes for the twenty-six weeks ended August 1, 2020 and August 3, 2019, respectively. The increase in the effective income tax rate is primarily due to the anticipated benefit from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted on March 27, 2020, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates than the current year. As a result of the operating losses being carried back, an income tax receivable of $2.3 million is included in receivables on the accompanying Consolidated Balance Sheet as of August 1, 2020.
New Accounting Standards Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2016-13 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new rules reduce complexity by removing specific exceptions to general income tax accounting methodology including an exception for interim periods showing operating losses in excess of anticipated operating losses for the year. The new rules will be effective for us in the first quarter of 2021. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.
Note 3: Marketable Securities
Marketable securities as of August 1, 2020 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.
The following table summarizes our investments in marketable securities at August 1, 2020, February 1, 2020 and August 3, 2019 (in thousands):
|
| | | | | | | | | | | |
| August 1, 2020 |
| Cost or Amortized Cost | | Gross Unrealized Holding Gains | | Estimated Fair Value |
Commercial paper | $ | 9,973 |
| | $ | 1 |
| | $ | 9,974 |
|
Fixed income securities | 5,965 |
| | — |
| | 5,965 |
|
| $ | 15,938 |
| | $ | 1 |
| | $ | 15,939 |
|
| | | | | |
| February 1, 2020 |
| Cost or Amortized Cost | | Gross Unrealized Holding Gains | | Estimated Fair Value |
Commercial paper | $ | 54,463 |
| | $ | 293 |
| | $ | 54,756 |
|
Fixed income securities | 15,024 |
| | — |
| | 15,024 |
|
| $ | 69,487 |
| | $ | 293 |
| | $ | 69,780 |
|
| | | | | |
| August 3, 2019 |
| Cost or Amortized Cost | | Gross Unrealized Holding Gains | | Estimated Fair Value |
Commercial paper | $ | 49,411 |
| | $ | 325 |
| | $ | 49,736 |
|
Fixed income securities | 12,677 |
| | — |
| | 12,677 |
|
| $ | 62,088 |
| | $ | 325 |
| | $ | 62,413 |
|
We recognized gains on investments for commercial paper that matured during the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019. Upon recognition of the gains, we reclassified these amounts out of Accumulated Other Comprehensive Income and into “Other income, net” on the Consolidated Statements of Income (Loss).
The following table summarizes our gains on investments for commercial paper (in thousands):
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Gains on investments | $ | 302 |
| | $ | 211 |
| | $ | 554 |
| | $ | 598 |
|
Note 4: Line of Credit
Our amended and restated credit agreement with Wells Fargo Bank, N.A. (the "Bank") provides for a $25.0 million revolving line of credit with a maturity date of January 31, 2023. The interest rate charged on borrowings is selected at our discretion at the time of draw between the London Interbank Offered Rate ("LIBOR"), plus 0.75%, or at the Bank’s prime rate. The agreement allows for the declaration and payment of dividends or distributions to stockholders, subject to certain limitations. On February 12, 2020 and February 27, 2019, we paid a special cash dividend of $1.00 per share to all holders of record of issued and outstanding shares of both our Class A and Class B common stock. The line of credit is secured by substantially all of our assets. As a sub-feature under the credit agreement, the Bank may also issue stand-by and/or commercial letters of credit up to $15.0 million.
In March 2020, we borrowed $23.7 million under our revolving credit facility, which represented the maximum borrowings permitted thereunder. At August 1, 2020, the variable interest rate on these borrowings was based on LIBOR plus 75 basis points, or 0.9% per annum. On August 27, 2020, the interest rate remained at 0.9% per annum based on our choice of available LIBOR rates at that time. The line of credit is recorded as a current liability.
We are required to maintain certain financial and non-financial covenants in accordance with the line of credit. The financial covenants require certain levels of profitability, leverage and assets, such as: (i) income before income taxes not less than $1.0 million, calculated at the end of each fiscal quarter on a trailing 12-month basis; (ii) a maximum "Funded Debt to EBITDAR" ratio of 4.00 to 1.0, calculated at the end of each fiscal quarter on a trailing 12-month basis, defined as the sum of total debt, capital leases and annual rent expense multiplied by six divided by the sum of net income, interest expense, taxes, depreciation, amortization and annual rent expense; (iii) a minimum "Fixed Charge Coverage Ratio" not less than 1.25 to 1.0, calculated at the end of each fiscal quarter on a trailing 12-month basis, with the ratio defined as (a) EBITDAR minus cash taxes, dividends, distributions, redemptions and repurchases of equity interest, divided by (b) the aggregate of the current maturity of long-term debt, capitalized lease payments, interest expense and rent expense; (iv) minimum eligible inventory, cash, cash equivalents and marketable securities totaling $50.0 million as of the end of each quarter; and (v) not more than $50.0 million in allowable investments in fixed assets in any fiscal year. In addition, pursuant to the terms of our revolving credit facility, we are required to pay any and all indebtedness, obligations, assessments and taxes when due, subject to certain limitations.
As of August 1, 2020, we were not in compliance with all of our covenants under our credit agreement, with respect to (i) the financial covenants related to our Fixed Coverage Ratio, Funded Debt to EBITDAR Ratio and minimum profitability, and (ii) the covenant that we pay any and all contractual store lease obligations when due on the basis of our non-payment of certain of our contractual rental obligations pursuant to our store leases during the COVID-19 pandemic, including for those stores closed to the public during June and July 2020. As of August 1, 2020, our Fixed Coverage Ratio was 0.8 to 1.0, our Funded Debt to EBITDAR Ratio was 4.9 and income before income taxes on a trailing 12-month basis was $(2.3) million. The Bank has provided a limited waiver with respect to all of the violations noted above.
In August 2019, we increased the standby letter of credit from $1.1 million to $1.3 million. The standby letter of credit was established for security against insurance claims as required by our workers' compensation insurance policy. There has been no activity or borrowings under this letter of credit since its inception.
Note 5: Commitments and Contingencies
From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. Although the case did not settle at the mediation, the parties have agreed to continue their settlement discussions with the assistance of the mediator. The court has not yet issued a trial date. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify Tilly's for all of Tilly's losses and expenses incurred in connection with this matter. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.
Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against us and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In February 2019, the Court of Appeal issued an opinion overturning the trial court’s decision, holding that the plaintiff’s allegations stated a claim. In March 2019, we filed a petition for review with the California Supreme Court seeking its discretionary review of the Court of Appeal’s decision. The California Supreme Court declined to review the Court of Appeal’s decision. Since the case was remanded back to the trial court, the parties have been engaged in discovery. In March 2020, the plaintiff filed a motion for class certification. In July 2020, we filed our opposition to the motion for class certification. The plaintiff’s reply brief in support of the motion for class certification is due in September 2020. The court has not yet scheduled a hearing of the motion for class certification. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.
Note 6: Fair Value Measurements
We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:
•Level 1 – Quoted prices in active markets for identical assets and liabilities.
•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 – Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as either available-for-sale or held-to-maturity securities, and certain cash equivalents, specifically money market securities, commercial paper and bonds. The money market accounts are valued based on quoted market prices in active markets. The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party entities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairment using Company specific assumptions which would fall within Level 3 of the fair value hierarchy.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the thirteen and twenty-six week periods ended August 1, 2020 and August 3, 2019, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of August 1, 2020, February 1, 2020 and August 3, 2019, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Financial Assets
We have categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| August 1, 2020 | | February 1, 2020 | | August 3, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents (1): | | | | | | | | | | | | | | | | | |
Money market securities | $ | 128,036 |
| | $ | — |
| | $ | — |
| | $ | 58,614 |
| | $ | — |
| | $ | — |
| | $ | 51,677 |
| | $ | — |
| | $ | — |
|
Commercial paper | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Marketable securities: | | | | | | | | | | | | | | | | | |
Commercial paper | $ | — |
| | $ | 9,974 |
| | $ | — |
| | $ | — |
| | $ | 54,756 |
| | $ | — |
| | $ | — |
| | $ | 49,736 |
| | $ | — |
|
Fixed income securities | — |
| | 5,965 |
| | — |
| | — |
| | 15,024 |
| | — |
| | — |
| | 12,677 |
| | — |
|
(1) Excluding cash.
Impairment of Long-Lived Assets
An impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts for such asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets, a decision to relocate or permanently close a store, or significant changes in our business strategies.
An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures, computer hardware and software, and operating lease assets, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.
On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the twenty-six weeks ended August 1, 2020, based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that ten of our stores would not be able to generate sufficient cash flows over the remaining term of the related lease to recover our investment in the respective store. As a result, we recorded impairment charges of approximately $0.9 million to write-down the carrying value of certain long-lived store assets to their estimated fair values.
|
| | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
| ($ in thousands) |
Carrying value of assets with impairment | $570 | | * | | $903 | | * |
Fair value of assets impaired | $— | | * | | $— | | * |
Number of stores tested for impairment | 37 | | 3 | | 40 | | 4 |
Number of stores with impairment | 7 | | — | | 10 | | — |
* Not applicable
Note 7: Share-Based Compensation
The Tilly's, Inc. 2012 Second Amended and Restated Equity and Incentive Plan, as amended in June 2020 (the "2012 Plan"), authorizes up to 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of August 1, 2020, there were 2,641,877 shares available for future issuance under the 2012 Plan.
Stock Options
We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The nonqualified options vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten years from the date of grant.
The following table summarizes the stock option activity for the twenty-six weeks ended August 1, 2020 (aggregate intrinsic value in thousands):