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Summary of Significant Accounting Policies
 3 Months Ended
Apr. 30, 2022
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies 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 January 29, 2022.
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 Operations.
The following table summarizes net sales from our retail stores and e-commerce (in thousands):
Thirteen Weeks Ended
April 30,
2022		May 1,
2021
Retail stores$117,482 $127,675 
E-commerce28,293 35,482 
Total net sales$145,775 $163,157 
The following table summarizes the percentage of net sales by department:
Thirteen Weeks Ended
April 30,
2022		May 1,
2021
Mens35 %36 %
Womens29 %29 %
Accessories15 %14 %
Footwear12 %12 %
Boys4 %4 %
Girls4 %4 %
Hardgoods/Outdoor1 %1 %
Total net sales100 %100 %
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
Thirteen Weeks Ended
April 30,
2022		May 1,
2021
Third-party68 %71 %
Proprietary32 %29 %
Total net sales100 %100 %
We accrue for estimated sales returns by customers based on historical sales return results. As of April 30, 2022, January 29, 2022 and May 1, 2021, our reserve for sales returns was $2.1 million, $1.9 million and $2.2 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 cards, the balance of which was $9.8 million, $11.2 million and $8.4 million as of April 30, 2022, January 29, 2022 and May 1, 2021, 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. Total revenue recognized from gift cards was $4.0 million and $3.8 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively.
For the thirteen weeks ended April 30, 2022 and May 1, 2021, the opening gift card balance was $11.2 million and $9.6 million, respectively, of which $2.6 million and $2.3 million respectively, was recognized as revenue during the respective periods.
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 an award that may be used towards the purchase of 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 allows customers to redeem their awards instantly or build up to additional awards over time. During the thirteen weeks ended April 30, 2022, we modified our expiration policy related to unredeemed awards and accumulated partial points from expiration at 365 days after the customer's last purchase activity to expiration at 365 days after the customer's original purchase date. As a result of this modification in expiration policy, the estimated liability was reduced by $0.5 million during the thirteen weeks ended April 30, 2022. 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 $5.4 million, $5.9 million and $4.5 million as of April 30, 2022, January 29, 2022 and May 1, 2021, respectively. The value of points redeemed through our loyalty program was $2.1 million for each of the thirteen week periods ended April 30, 2022 and May 1, 2021. For the thirteen week periods ended April 30, 2022 and May 1, 2021, the opening loyalty program balance was $5.9 million and $3.9 million, respectively, of which $2.0 million and $0.9 million, respectively, was recognized as revenue during the respective periods.
Leases
We conduct all of our retail sales and corporate operations in leased facilities. Lease terms generally range up to ten years in duration (subject to elective extensions) and provide for escalations in base rents. 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 net sales in excess of specified levels, is recognized as rent expense when the achievement of those specified net sales is probable.
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. During each of the thirteen week periods ended April 30, 2022 and May 1, 2021, we incurred rent expense of $0.5 million related to this lease. Our lease began on January 1, 2003 and terminates on December 31, 2027.
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 week periods ended April 30, 2022 and May 1, 2021, we incurred rent expense of $0.1 million 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 began on June 29, 2012 and terminates on June 30, 2022. We expect to have a fully negotiated renewal completed in advance of this lease expiration.
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 week period ended April 30, 2022, we incurred rent expense of $0.4 million related to this lease. During the thirteen week period ended May 1, 2021, we incurred rent expense of $0.2 million 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 began on November 1, 2011 with a 10-year term ending on October 31, 2021. During October 2021, this lease was amended to, among other things, extend the term for an additional 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payment adjusts annually based upon the greater of 5% or the Consumer Price Index and now terminates on October 31, 2031.
We sublease a portion of our office space, approximately 5,887 square feet, in the 17 Pasteur Irvine, California facility to Tilly's Life Center, ("TLC"), a related party and a charitable organization. The lease term is for 5 years and terminates January 31, 2027. Sublease income is recognized on a straight-line basis over the sublease agreement and is recorded as an offset within the selling, general and administrative section in the Consolidated Statements of Operations.
The maturity of operating lease liabilities and sublease income as of April 30, 2022 were as follows (in thousands):
Fiscal YearRelated PartyOtherTotalSublease Income
2022$2,513 $49,271 $51,784 $65 
20233,416 56,231 59,647 90 
20243,543 45,717 49,260 95 
20253,676 36,402 40,078 99 
20263,814 25,000 28,814 104 
Thereafter9,768 54,681 64,449 — 
Total minimum lease payments26,730 267,302 294,032 453 
Less: Amount representing interest3,883 41,764 45,647 — 
Present value of operating lease liabilities$22,847 $225,538 $248,385 $453 

As of April 30, 2022, additional operating lease contracts that have not yet commenced are approximately $10.7 million. Further, additional operating lease contracts and modifications executed prior to the filing date of this Quarterly Report were immaterial.

Lease expense for the thirteen week period ended April 30, 2022 and May 1, 2021 was as follows (in thousands):
Thirteen Weeks Ended
April 30, 2022		Thirteen Weeks Ended
May 1, 2021
Cost of goods soldSG&ATotalCost of goods soldSG&ATotal
Fixed operating lease expense$15,275 $321 $15,596 $15,311 $316 $15,627 
Variable lease expense (benefit)3,786 14 $3,800 3,899 (11)3,888 
Total lease expense$19,061 $335 $19,397 $19,210 $305 $19,515 
For the thirteen weeks ended May 1, 2021, we corrected an immaterial error of $94 thousand, which consisted solely of a reclassification of fixed operating lease expense from SG&A to Cost of goods sold, on the table above.
Supplemental lease information for the thirteen weeks ended April 30, 2022 and May 1, 2021 was as follows:
Thirteen Weeks Ended
April 30, 2022		Thirteen Weeks Ended
May 1, 2021
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)$17,166$17,168
Weighted average remaining lease term (in years)5.7 years5.6 years
Weighted average interest rate (1)
6.08%6.49%
(1) Since our leases do not provide an implicit rate, we use our incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification in determining the present value of future minimum payments.

During the second quarter of fiscal 2021, we identified and corrected an immaterial error in our balance sheets whereby we previously presented our operating lease assets on a net basis rather than presenting any negative operating lease asset balances as a separate operating lease liability. As such, we have presented the corrected balances herein as of May 1, 2021, for which there was a $2.3 million gross-up of both operating lease assets and operating lease liabilities which is presented within other liabilities (current portion, in an amount of $0.8 million) and other liabilities (noncurrent portion, in an amount of $1.5 million). Further, we have presented the corrected Statement of Cash Flows for the thirteen weeks ended May 1, 2021 for which there was no net impact on net cash provided by operating activities.
Common Stock Share Repurchases
We may repurchase shares of our common stock from time to time pursuant to authorizations approved by our Board of Directors. As permitted under Delaware corporation law, shares repurchased are retired and, accordingly, are not presented separately as treasury stock in the consolidated financial statements. Instead, the value of repurchased shares is deducted from retained earnings.
Income Taxes
Our income tax expense was $0.3 million, or 26.9% of pre-tax income, compared to an income tax expense of $3.8 million, or 25.7% of pre-tax income, for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively.
Reclassifications of Prior Year Presentation
Certain prior year amounts on the Consolidated Balance Sheets, have been reclassified to conform with the current year presentation. These reclassifications had no effect on the reported results of operations. A reclassification has been made to last year's Consolidated Balance Sheet for the quarter ended May 1, 2021 to identify deferred tax assets of $11.7 million and the long-term portion of credit facility costs of $0.4 million. This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows.
New Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("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 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 London Interbank Offered Rate ("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.