“During the third quarter we achieved quality earnings that were at the high end of our expectations and I am pleased with how our team continues to execute in a challenging retail environment. We maintained healthy gross margins, controlled our costs and exited the quarter with inventory as planned and well positioned for the holiday season,” commented Daniel Griesemer, President and Chief Executive Officer. “While current trends dictate a cautious approach in the near term, we are confident in the strength of the Tilly’s brand and remain focused on initiatives to advance our long-term growth.”
Comparable store sales, which include e-commerce sales, decreased 2.4 percent compared to the first three quarters of 2012. TLYS attributed much the decline to a change in the retail calendar which shifted a peak weekend of back-to-school sales from the third to the second quarter when compared with 2012. E-commerce sales increased 3.0 percent.
Gross margin declined 260 basis points to 30.9 percent, while operating income fell 26.6 percent to $10.2 million. Operating margin slid 290 basis points to 8.2 percent as deleveraging of buying, distribution and occupancy costs more than offset slightly higher product margins. Net income before income taxes was $6.1 million compared with compared to net income in the third quarter of 2012 of $9.3 million.
Tilly’s ended the quarter with 189 stores, including seven opened during the quarter.
Fourth quarter 2013 outlook
We continue to experience weak traffic trends and a highly promotional environment in teen retail. If these trends continue, we would expect fourth quarter comparable store sales to decline in the mid to high single digits, and net income to be in the range of $4.2 million to $6.0 million, or $0.15 to $0.21 per diluted share. This assumes an anticipated effective tax rate of 40 percent and a weighted average diluted share count of 28.3 million shares, compared to 28.0 million weighted average diluted shares in the fourth quarter of last year.
Fourth quarter 2012 adjusted net income was $8.9 million, or $0.32 per diluted share, which includes a 40 percent effective tax rate to make that quarter comparable.
Fiscal year 2013 outlook
Factoring in our assumptions for the fourth quarter, we now expect comparable-store sales to decline in the low single digits for fiscal 2013 on a 52-week versus 52-week basis. Using these assumptions and an anticipated annual effective tax rate of 40 percent, net income for fiscal year 2013 is expected to be in the range of $16.9 million to $18.7 million, or $0.60 to $0.66 per diluted share, based on a weighted average diluted share count of 28.1 million shares compared to 26.1 million weighted average diluted shares for the full-year 2012.
Full year 2012 adjusted net income was $22.9 million, which includes four quarters of ongoing stock-based compensation expense totaling $2.7 million and a 40 percent effective tax rate for the entire year, and excludes the one-time SG&A charge and a one-time tax benefit resulting from the conversion to a “C“ corporation in the second quarter of 2012. (See reconciliation of non-GAAP results to GAAP results at the end of this release.)
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