Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tilly's, Inc. (NYSE:TLYS)

Q4 2012 Earnings Conference Call

March 20, 2013 5:30 p.m. ET

Executives

Anne Rakunas – IR, ICR

Daniel Griesemer – President and CEO

Bill Langsdorf – SVP, CFO

Analysts

Betty Chen – Wedbush

Lorraine Hutchinson – Bank of America-Merrill Lynch

Dave King – ROTH Capital

Jeff Van Sinderen – B. Riley & Co.

Steph Wissink – Piper Jaffray

Lindsay Drucker Mann – Goldman Sachs

Richard Jaffe – Stifel Nicolaus

Sharon Zackfia – William Blair & Co.

Operator

Good day and welcome to the Tilly's Incorporated Fourth Quarter Fiscal 2012 Results Conference Call. Today's conference is being recoded.

At this time, I would like to turn the conference over to Anne Rakunas of ICR. You may begin.

Anne Rakunas

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly's fourth quarter and fiscal 2012 earnings results. On today's call are Daniel Griesemer, President and CEO, and Bill Langsdorf, Senior Vice President and CFO.

A copy of today's press release is available in the Investor Relations of Tilly's website at tillys.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's website.

I'd like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis as of only today. The actual results may differ materially from current expectations based on a number of factors affecting Tilly'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 the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter 2012 earnings release which is furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We also note that this call contains non-GAAP financial information. We're providing that information as a supplement to information prepared in accordance with generally-accepted accounting principles, and you can find the reconciliation of these metrics to our recorded GAAP results in the reconciliation table provided in today's earnings release.

Also for today's call we have a limit of one hour, so when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed.

And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Daniel Griesemer

Thank you, Anne, and good afternoon, everyone. Thanks for joining us today. On our call I'll be providing you with an overview of our fourth quarter and full year performance and the key factors that drove our results. Bill will then review our financial results in more detail and provide our outlook for the first quarter and full year 2013. I'll provide a few closing comments. And then we'll open up the call for your questions.

I'm proud of what we accomplished in fiscal 2012. In line with our long-term goals, we achieved double-digit growth in net sales, leveraged SG&A expenses, increased our operating margin, and grew net income by 19% during the year. As we previously announced, we achieved strong comparable store sales results during the fourth quarter in the peak weekend of Black Friday, Cyber Monday, as well as in late December, early January, with soft traffic and sales in between.

Despite this variability in sales trend, we maintained our brand integrity through strong pricing discipline, and achieved product margins with a comparable rate to the fourth quarter of last year, exiting the quarter with inventory that was clean, current and well-positioned for the spring season. I'd like to highlight our accomplishments for the year as they relate to our key growth initiatives, and provide some color on our initiatives for 2013.

Our strong financial position coupled with the cash flow generation from our business allowed us to capitalize on a full pipeline of real estate opportunities during the year. We opened 29 new stores in fiscal 2012, increasing our square footage by just over 20%, ahead of our long-term target of mid-teens growth. To drive future growth by expanding the Tilly's brand, we opened stores in 20 new markets and 14 states that we entered for the first time this year. I am pleased with the performance of these new stores that as a group performed relatively better than our established stores, providing further evidence of the demand for the Tilly's concept that offers are broader and deeper selection of brands, styles, colors, sizes and price points than our competition.

Turning to our comparative store sales, we grew same-store sales by 2.2% during 2012, reflecting the variability in sales trends we experienced from the second half of the year. We saw strong comp store growth during peak Back to School and holiday periods. And similar to other retailers, much more muted traffic on either side of these major selling periods.

We were pleased with our e-commerce sales which grew 21% in fiscal 2012 to 11.3% of total net sales. We used our website to drive both online and in-store sales as we engaged our target customer with an even more dominant assortment of merchandise and a rich shopping experience. And finally, we achieved a 10-basis-point increase in our adjusted operating margin on a 2.2 comp in 2012, which demonstrates our ability to tightly manage our costs even as we continue to invest in our business.

Looking ahead to the current year, we have complete confidence in the fundamentals of our business and our ability to deliver on the opportunities we see to expand the Tilly's brand for sustainable long-term quality growth. Consistent with that, with what we have heard from a number of other retailers, we are faced with an uncertain economic environment that is having an adverse impact on the consumer. However, we remain keenly focused on controlling those elements of our business that we are able to and executing to our long-term objectives of expanding our store base, driving comparable store sales increases, growing our e-commerce business, and increasing our operating margins.

In 2013 we plan to open at least 25 new stores, primarily in new markets, and we continue to identify attractive real estate opportunities that fit our stringent criteria. We ended 2012 with a total of 168 stores, and we still have considerable room to expand in order to reach our long-term goal of at least 500 stores across the country. The growth isn't just about adding square footage, it's about building sales and promoting the Tilly's concept to new customers, and importantly, choosing the best locations where our customers shop which are right for the long term.

We remain focused on driving comp store sales by providing continued newness to our customers and increasing brand awareness in new markets. Our large store format and daily delivery of fresh products to our stores allows us to quickly capitalize on emerging fashion trends, as well as introduce new and emerging third-party brands and businesses that resonate with our actions sports inspired customer. Staying vigilant to and engaged in the dynamic world in which our target customer lives is vital to our success, and I'm excited about the new programs and initiatives we have planned for this year that will keep us connected to our customer and ultimately drive sales and profitability.

E-commerce remains a critical driver of future sales growth. In recognition of this increasing importance of this business and in keeping with our long history of investing ahead of growth, we now plan to open our new e-commerce DC with even greater initial capacity. Establishing a world-class fulfillment capability will allow us to optimize our e-commerce operations and put it on par with our current ability to support our brick-and-mortar business. And as always, we will maintain a tight control on our expenses in order to exploit all opportunities to further leverage our cost structure.

And now I'd like to turn the call over to Bill Langsdorf.

Bill Langsdorf

Thank you, Dan. Good afternoon, everyone. I'll begin by reviewing the details of our fourth quarter results and then provide our outlook for the first quarter and full year 2013.

As a reminder, in fiscal year 2012, the company's retail calendar included a 53rd week compared to a 52-week year in fiscal year 2011. The 53rd week contributed pretax income of approximately $600,000 which is included in our fourth quarter and fiscal 2012 results. For comparative purposes, the 53rd week is not included in our same-store sales percentage.

For the fourth quarter, net sales increased 14.5% to $140.8 million, driven by 29 new stores opened since the fourth quarter of 2011. Comparable store sales declined by 0.9% with a single-digit increase in men's apparel comps and single-digit decreases in comps for other categories. Our e-commerce sales, which are included in our comparable store sales, grew 20%.

In line with business trends in the previous quarter, comps in the fourth quarter reflected an increase in the average transaction value, offset by a decline in the number of transactions. As we mentioned on our third quarter call, the sales and profit impact to the fourth quarter from Hurricane Sandy at the beginning of the quarter was minimal, with the comp sales impact in the quarter for the chain as a whole being less than 1%.

Gross profit increased 13.2% to $46.8 million or 33.3% of net sales, compared to 33.6% of net sales last year, reflecting product margins equal to last year and a little over 30 basis points of deleverage in buying distribution and occupancy costs.

On a GAAP basis, selling, general and administrative expenses totaled $32 million or 22.7% of net sales, which compared to $27.3 million or 22.2% of net sales in the 2011 fourth quarter. The higher SG&A rate in the 2012 fourth quarter reflects the $677,000 non-cash stock-based compensation charge in the 2012 fourth quarter that was not incurred in 2011. On an adjusted basis, assuming a similar non-cash stock-based compensation charge in the fourth quarter of 2011, our SG&A rate in Q4 2012 was similar to the rate in Q4 2011, even as we opened seven stores during the quarter.

Our operating margin was 10.5% compared to an adjusted operating margin of 10.9% in the fourth quarter of 2011. On a GAAP basis, our income tax expense was $4.9 million and reflects an effective tax rate of about 33.4% for the quarter and 23.7% for the fiscal year. This compares to an expense of $153,000 in the fourth quarter of 2011 with an income tax rate of about 1.1% in both Q4 and full year 2011 when we filed as an S corporation.

Our GAAP net income for the fourth quarter was $9.8 million or $0.35 per diluted share based on a weighted average diluted share count of 28 million shares. This compares to GAAP net income in the fourth quarter of 2011 of $13.9 million or $0.67 per diluted share based on the weighted average diluted share count of 20.5 million shares.

On an adjusted basis, net income for the quarter increased 10.8% to $8.9 million or $0.32 per weighted average diluted share. This compared to an adjusted net income of $8 million or $0.39 per weighted average diluted share in the fourth quarter of 2011. The adjusted results assume an expected long-term effective tax rate of 40% for both 2012 and 2011 periods and add-back charge for ongoing non-cash compensation expense for stock options of $677,000 before tax to the fourth quarter of 2011, which equals the charge for ongoing non-cash compensation expense in the fourth quarter of 2012.

Turning to the balance sheet, we maintained our strong financial position, ending the quarter with cash and marketable securities of $57 million, no borrowings, and no debt outstanding under our revolving credit facility. Cash used for capital expenditures during the quarter totaled $7.7 million compared to $6 million in the fourth quarter of 2011, and were primarily related to new stores opened during the quarter and new stores under construction during the quarter that were scheduled to open in the first quarter of 2013.

Compared to the end of fiscal 2011, inventory increased 27.5% to $46.6 million and reflects an increase in retail store count from 140 stores at January 28, 2012 to 168 stores at February 2, 2013. Compared to the same week 52 weeks ago, inventory increased 15% in total but declined 4% on a per square foot basis. We began the first quarter of 2013 with both the level and composition of inventory well-positioned for the spring season.

Now I'd like to turn to our outlook for the first quarter and the full year 2013. While we typically do not comment on current quarter trends, we felt it was important to give you some color this quarter given our comp outlook. Traffic and sales were very soft in the first weeks of the quarter compared to last year, but we've experienced solid improvement in March. Given the continued variability in sales trends, we remain cautious regarding the outlook for the first quarter, expecting comparable store sales to decline in the low to mid single digit range, compared to a comparable store sales increase of 4.3% in the first quarter of 2012. SG&A in the first quarter will include an ongoing non-cash stock-based compensation expense of about $800,000 before tax, as well as estimated ongoing public company costs of between $300,000 and $400,000, neither of which were in the first quarter of last year.

Net income in the first quarter is expected to be in the range of $1.1 million to $2 million or $0.04 to $0.07 per diluted share, which assumes a 40% tax rate and a diluted share count of 28.2 million shares compared to 20.5 million diluted shares in the first quarter of last year. This compares to adjusted net income of $3.2 million or $0.15 per diluted share in the first quarter of 2012 after including ongoing stock-based compensation expenses and a 40% effective tax rate to make that quarter operating as an S corporation comparable to operating in 2013 as a C corporation. On a GAAP basis, net income in the first quarter of 2012 was $5.9 million or $0.29 per diluted share.

Moving on to the full year, with the backdrop of continued economic uncertainty, we expect comparable store sales growth in the low single digit range for fiscal 2013 on a 52-week versus 52-week basis. This reflects the forecast for Q1 and gradually improving trends as the year progresses, and as we cycle easier comparisons in the second half of the year.

Using an anticipated full-year effective tax rate of 40%, net income for fiscal year 2013 is expected to be in the range of $21.5 million to $23 million or $0.75 to $0.81 per diluted share, and assumes a weighted average diluted share count of 28.4 million shares compared to 26.1 million weighted average diluted shares for the full year of 2012. This compares to adjusted net income of $22.9 million or $0.88 per diluted share for fiscal year 2012 which included adjustments to have four quarters of ongoing stock-based compensation expense totaling $2.7 million and a 40% effective tax rate for the entire year. Adjusted 2012 net income excludes a one-time charge $7.6 million to recognize life-to-date stock-based compensation that was recorded in the second quarter of 2012 and a one-time tax benefit of $3 million resulting from the conversion of deferred tax assets to the higher C corporation value of those assets which was recorded in the second quarter of 2012. On a GAAP basis, net income for fiscal 2012 was $23.9 million or $0.92 per diluted share.

Regarding net sales in the second and third quarters of fiscal 2013, the fiscal calendar shift will have a second quarter and one week later than last year, which will cause the first peak week of our Back to School season to fall in the end of the second quarter this year compared to being in the first week of the third quarter last year. Last year, all peak weeks of the Back to School season fell in our third quarter. This shift will push an estimated $8 million to $9 million in sales from the third quarter into the second quarter compared to last year's fiscal calendar. We do not anticipate the calendar shift to have any meaningful impact to other key selling periods in fiscal 2013 other than this shift between the second and the third quarter.

We expect capital expenditures for fiscal year 2013 to be in the range of $40 million to $45 million with the majority, approximately $23 million, related to the opening of our new stores as well as for remodels of existing stores. This estimate also includes approximately $14 million for the completion of our new e-commerce DC, higher than the $7 million originally anticipated due to an increase in the scope of the project, as Dan mentioned. This greater initial build-out coupled with what has been a long time consuming local government approval process leads us to expect the go-live date of the new DC to be in the fourth quarter fiscal 2013. Depending upon timing of government permits and so as not to disrupt e-commerce operations in the peak shipping period, the actual date we transfer our e-commerce business over to the new DC may wait until after the peak holiday season.

These changes have pushed spending that was expected in late 2012 into early 2013, with no significant spending having occurred in 2012. The balance of our expected capital spending in 2013 is related to expenditures on IT and other infrastructure improvements.

In summary, we continue to diligently control our costs while investing appropriately for future growth. Our business is strong and generating significant cash flows, providing us with the resources to progress towards our growth objectives.

Now I'd like to turn the call back to Dan for some closing remarks. Dan?

Daniel Griesemer

Thanks, Bill. I'm pleased with what we accomplished during the year. As sales trends became more variable in the second half of the year, we maintained our pricing discipline and brand integrity, while slightly strengthening our margins and increasing our adjusted net income by 19% on a full-year basis. Our business generated approximately $42 million in operating cash flow, allowing us to invest approximately $33 million in future growth. Our balance sheet is strong and debt-free.

While the general economic environment leads us to be cautious in our short-term outlook, we are completely confident that we have the right business model and the right leadership in place to achieve our objectives over the longer term. We will continue to adhere to the business philosophy that has guided our success for more than 30 years, to offer our customer a dominant, relevant assortment of merchandise in a compelling shopping environment, while diligently managing our costs.

We believe the performance of our new stores opened in the past 12 to 18 months continues to validate the relevance of the Tilly's concept on a national basis. As we continue to execute our initiatives, we are keenly focused on operating our business to achieve quality, long-term sustainable growth at healthy margins, and believe we're well-positioned to accomplish this.

I'd now like to open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

We will take our first question from Betty Chen of Wedbush.

Betty Chen – Wedbush

Thank you. Good afternoon, everyone, and congrats on managing in a difficult environment. I was wondering if you can talk a little bit about the gross margin opportunity this year. It sounds like in terms of comps, we're expecting gradual improvement as we progress to 2013. How should we think about gross margin? Is it going to also be maybe slightly pressured in Q1 but then have an opportunity to see some occupancy leverage as comps improve?

And then my second question, if I could, is regarding the new market downslide, the [lease] are very encouraging, some of these new markets. How should we think about the maturity or the ramp-up that you're seeing in those stores versus what you’ve seen historically? Thanks.

Daniel Griesemer

Yeah, okay. I'll take the first part of that and maybe, Bill, you can take the -- I'll take the second part and you take the first part.

You know, what we're experiencing right now is something we believe is in the short term that is just kind of a lowering of the rivers. All other aspects of the business and of the model, all the things we've talked about since prior to going public are all in place and all performing exactly as they have been. It's just kind of maybe a lower tide kind of look.

So our view of the future remains every bit as confident and bullish as it has always been in that our ability to deliver the kind of process that we're able to deliver in the fourth quarter and position and invest in the growth and position ourselves well for future seasons is really a testament to the kind of the strength and uniqueness of this dynamic business model that Tilly's has operated under for over, you know, for more than 30 years. So our view is that this is a kind of a short-term thing and all fundamentals and relationships at new stores and markets and new markets to existing and established business relationships between various departments in the business is all intact and positioned well for the long term is just kind of a short-term thing that we see is more externally influenced than internally.

And then maybe, Bill, you want to --

Bill Langsdorf

Yeah. Betty, you were talking a -- asking about the gross margin opportunity. Yes, we continue to believe on product margin that there continues to be a steady opportunity for gross margin improvement over the longer term. But indeed, when you look at gross margin, which includes buying, distribution and occupancy costs, we expect pressure on the gross margin in the first quarter with our comp sales forecast. So it would be more because of that than it is the underlying product margin pressure.

Betty Chen – Wedbush

That's really helpful. And could you talk a little bit about whether we certainly heard from many retailers how there may be a, you know, pretty obvious difference between some other warmer climate stores versus the cooler climate regions? Are you [sort of looking at] that in your stores as well, and would you be willing to quantify that?

Daniel Griesemer

Yes, we certainly do see. It's interesting, you can see it day to day, you know, cold versus warm, TY versus LY and by market. And we saw that certainly -- I mean we've seen that for years, frankly, but it's usually more obvious this time of the year that the transition period where the weather changes abruptly and isn't as consistent as it may be in the middle of summer, for instance.

So just as, you know, our weather for instance in the very early part of this quarter was generally much cooler, which is not as helpful to us in some of our major markets than it was same time last year. But conversely, we come up against late March and good part of April where last year the weather was cooler and weathery in our largest markets than typically is, and we have yet to cycle against that, but if we have more normal weather in those markets this year, then that would flip the other way for us than it did a year ago.

Betty Chen – Wedbush

Thank you so much for your help, and the stores look great.

Daniel Griesemer

Thanks, Betty.

Operator

And we will take our next question from Lorraine Hutchinson of Bank of America.

Lorraine Hutchinson – Bank of America-Merrill Lynch

Thank you. Good afternoon. As we think about SG&A, once you anniversaried the public company costs and some of the stock incentive comp, is there an opportunity to leverage given your low-single-digit comp guidance or would we need to see that accelerate?

Bill Langsdorf

For SG&A, I -- yes, there is. In fact, we saw even this past year and this past quarter where SG&A was leveraging nicely or holding its own certainly on an adjusted basis compared to the previous year, even though the comps were not at the 3% to 4% comp inflection point that we think we can start getting significant leverage. So even at a lower positive comp than the 3% to 4%, we got some nice leverage there. And I think that can continue certainly next year.

Where we'd be less likely to get leverage would be something where -- that's much more fixed in nature, buying, distribution occupancy costs or something than we are in the G&A cost where it's something that we can leverage a little more easily.

Lorraine Hutchinson – Bank of America-Merrill Lynch

Thank you.

Operator

We will take our next question from Dave King of ROTH Capital.

Dave King – ROTH Capital

Hi. Good afternoon, guys. I guess first, thanks, Bill, for all the color on February and March. And then can you remind us again on how much you're expecting for CapEx in the new DC and then how much of that is going to be pushing out into next year? If you said it already, I apologize.

Bill Langsdorf

No problem, Dave. We expect approximately $14 million, all of which will be this fiscal year 2013.

Dave King – ROTH Capital

Okay. So, not -- okay. I thought it was going to be there.

And then, Dan, more of a long-term strategic question, knowing that you maintain your pricing discipline in order to preserve the brand, fully appreciating that. Can you talk about how that stacks up with your current e-commerce strategy, particularly as your customer continue to move further and further toward being online and knowing that you use the channel a little bit as somewhat of a promotional area?

Daniel Griesemer

Yeah. Well, e-commerce does happen to sell clearance inventory pretty well, but other than that, it's no more promotional than the entire business. We take great effort in making sure that the product -- it all begins with the product being current and relevant, having the latest brands, the hottest styles from those brands, and pulled together in a curated way, be it in the store or online to really resonate with this action sports inspired customer. It's such an incredibly dynamic industry. Action sports is continuing to evolve their new brands and new business opportunities emerging all the time. So it all begins and we remain intently focused on that, coupled with making sure that the shopping experience, be it in our stores or online or in any other touch point that the customer chooses to access us, is as compelling and exciting and relevant as it can be.

And then I think thirdly, how do we speak to the customers in a way that is unique to this customer who is using social media and mobile and video and all the things that are going on in their lives to help make decisions and access brands. And so I think the combination of those three things is what we're going to remain intently focused on. You promote and you promote because of softness in the business and you've embedded into the business something you have to anniversary the next year. You've damaged your relationship with the customer, you've damaged your brand integrity and the relationship with our brands. So we take all that very, very seriously.

And we look at the, you know, the synergy. There's really a synergy between e-commerce and store experience and our mobile experience, all is just, you know, we call it internally omni-brand. It's far beyond omni-channel because it's really about, how does your brand manifest itself in all of these various places? And the customer is doing one thing on social and another on mobile, and another when they're sitting on their laptop on e-commerce and something totally different in the store, and making sure you have a consistent brand presence there.

So we look at it as an opportunity and competitive advantage, and we've put some capability in place over the last year or so and have been -- had internal goals around omni-brand experience for now over a year and a half. So we view it as a real opportunity.

Dave King – ROTH Capital

Impressive. Thank you very much.

Daniel Griesemer

Thank you.

Operator

And we will take our next question from Jeff Van Sinderen of B. Riley.

Jeff Van Sinderen – B. Riley & Co.

Hi, everyone. How much do you think, Dan, is weather versus the general macro headwinds out there? And then also just to clarify, it sounds like your plan is to try to keep your promotional on mark-down levels basically flat in Q1 versus Q1 last year. Is that correct? And then I have a follow-up question.

Daniel Griesemer

Yeah. On the promotions, yeah, we're not planning on being any more promotional. What we will continue to do is make sure that our inventory remains clean and current going into season. So we will make sure that if we have to take clearance mark-downs to keep the inventory, you know, our customer comes to us to find the most, you know, the freshest, most relevant stuff. If they don't want it, then we take them our stand as necessary and move on, we will continue to do that. But we will not be more promotional. We are not now, even in the face of what were some really challenging business in the early part of the quarter. And I, you know, looking at it, we can certainly point to some influence based on weather, but it is -- it's certainly bigger than that. It was across the board and it was across multiple retailers, multiple age brackets, and, you know, it was broad-based. So that points to me not a weather thing; that was more external macro environment.

Jeff Van Sinderen – B. Riley & Co.

Okay, that's helpful. And then maybe you can talk a little bit more about the performance of your newer stores in Q4, what you're seeing now versus more mature stores, maybe if you can differentiate mall versus off-mall. I'm just trying to get a sense of what did you learn about the real estate you added in 2012 and how we should think about the stores that you're adding in 2013 as far as the mix of mall, off-mall, and then also the level of performance you would expect from the stores in 2013 versus those out in 2011 -- 2012.

Daniel Griesemer

Okay. Well, that was a lot. I think I [inaudible].

Yes. So the simple is that we look at the stores that we opened in 2011, the stores that we opened in 2012, and come away -- and including the new stores that we'd begun to open in 2013, coming away with the exact same feeling, and that is we continue to validate on a national basis the relevance of the Tilly's concept. So, a way to think about what specifically, if you want to talk about fourth quarter and what new stores did in fourth quarter, it was all relative. I said it in my very first comments, at all relationships of stores, malls, to off-malls, existing versus new stores in established areas versus in brand-new markets, the entire business remained relatively the same as it has been now for quite sometime, just continuing to validate that this is more of a macro traffic kind of thing than anything. There's nothing fundamental -- no issues.

In fact, we just keep being pleased with where we see the opportunity and the response that customers have for the Tilly's brand in new markets and then how those markets continued to grow and track exactly as new stores or newer stores and new markets have performed over the last five years or so.

Jeff Van Sinderen – B. Riley & Co.

Okay. So we shouldn't really expect anything different in terms of the real estate that you've got lined up for 2013?

Daniel Griesemer

Just more of great opportunities and great locations where our customers want to be.

Jeff Van Sinderen – B. Riley & Co.

Okay, great to hear. Thanks very much and good luck for the rest of the quarter.

Daniel Griesemer

Thank you.

Bill Langsdorf

Thanks, Jeff.

Operator

And we will take our next question from Steph Wissink of Piper Jaffray.

Steph Wissink – Piper Jaffray

Good afternoon, everyone. Thanks for taking my questions. I have two, Bill and Dan. If I could, just get some perspective on the e-commerce percentage of total. I think it's running right around 10%. Is that changing the way you're thinking about the total store target or is the sales in the e-commerce business are truly integrated, how you're seeing those channels evolve together.

And then separately, Bill, maybe you can just shed a little light on this, but you're reaching a point of scale now, you're relatively close to $500 million in revenues. Are there any significant investments we should be watching for here over the next call it one to two years in order to drive the next layer of growth? Thank you.

Daniel Griesemer

I'll take the first part, and, Bill, you want to share the last?

Yes, Steph, thank you. Actually e-commerce finished at 11.3%, up slightly, and we're growing the store base in that mid-teens, and we did a little bit higher than that this year, so, continuing to outpace that overall growth in e-commerce. We watch what happens to e-commerce sales, we know where e-commerce sales come from and then what happens once we put a store in the market that didn't have a store, and we watch both the store that perform well as well as growth in the e-commerce business from that same area. So we're looking at this pretty carefully.

We've had a vibrant e-commerce business for quite sometime. It's been well ahead of many of our competitors in terms of contribution. So the ultimate store target of at least 500 was really developed with the knowledge that we have this vibrant e-commerce business, it's synergistic with the stores when we open in new markets. So we've taken that into consideration. That being said, we will continue to evaluate that. Our 500-plus store target is remembering only half mall and half off-mall. So that's only, you know, 250 or so malls over the long term. There's -- that's a long way from saturation and maturity and well below what most of our peers have in that same thing.

So we really like it. And I want to reinforce how we, you know, think of this as omni-brand and that the connection and synergy between all of the touch points that a customer can access the Tilly's brand and the incredible product and experience we provide.

Bill Langsdorf

And Stephanie, to answer your question on investments, certainly the largest single dollar investment will be for the e-com, outfitting the e-com facility to have a state-of-the-art material handling and processing capability up to the standards of what we have for our brick-and-mortar stores currently.

From a standpoint of thinking about the general resources we have, we have the key players already here to help drive this business, and so it's not a matter of missing key individuals or something. We continue to certainly work on system upgrades, and that's a part of our business every year to upgrade current systems. But we have all of the core systems. So the upgrades will be fine-tuning and enhancing, but it won't be a huge core new systems.

A lot of the efforts here are, Dan mentioned it before, omni-brand, and that's something that a lot of time but not necessarily the huge dollar impact there, but that's where a lot of time has been and will continue to be spent, and over time I think we'll start seeing some good things coming out of that as we get farther into it. So it's -- but just from a strict dollar standpoint, we -- our home office is here, our stores are similar in construction processes and things to what we've had in the past. We continue to upgrade the stores on a regular basis. As you may remember, just we continue to do the modest remodels all the time with the stores for parts of the stores to keep them fresh. And so it's really the biggest single thing, is the e-commerce distribution center.

Steph Wissink – Piper Jaffray

Okay, thank you. Best of luck.

Daniel Griesemer

Thank you.

Operator

And we will take our next question from Lindsay Drucker Mann of Goldman Sachs.

Lindsay Drucker Mann – Goldman Sachs

Thanks. Hi, everyone.

Daniel Griesemer

Hi, Lindsay.

Lindsay Drucker Mann – Goldman Sachs

I was hoping -- I just wanted to clarify. So on your guidance for next year, given your expectations for comps to be up some, are you looking for some decent deleverage in the business? And if so, can you just talk about the buckets where that is?

Bill Langsdorf

Sure, Lindsay. The likely areas of deleverage at a very modest comp increase would be more in the buying distribution and occupancy costs. SG&A costs is, as I think we mentioned before, we've -- this year we leveraged them with the two comp, and that kind of leverage probably can continue. So if there is any deleverage, it'd really be in the buying, distribution and occupancy and some mild leverage in SG&A.

Lindsay Drucker Mann – Goldman Sachs

So, why are you looking for, if you're expecting comp positively, why are you looking for such significantly deleverage in that line item?

Bill Langsdorf

In which line item?

Lindsay Drucker Mann – Goldman Sachs

Buying, in buying, occupancy and distribution.

Bill Langsdorf

Well, it continues to reflect that we are opening stores that are far-flung from here, so that certainly the shipping cost to those stores continues to incrementally to be substantial. It also reflects that we have a much greater proportion of stores after layers of immaturity here that we were adding that a much greater proportion then of immature stores with -- that are not all the way up to their five-year maturity cycle yet. So the occupancy costs are relatively higher in a greater proportion of the chain as a percentage of sales than they would otherwise be.

Lindsay Drucker Mann – Goldman Sachs

Okay. And then I recall, Bill, perhaps you had said that your increase in rent expense, the rent per new square foot, would be moderated going forward because of the types of new stores that you're opening versus what the run rate you've been. Is that still true?

Bill Langsdorf

Yeah, I think that was -- yes. That was related to near the end of the recession period, we were in the last couple of years, we had reduced the number of new stores we were opening in response to just the general economic environment. And those that we did were almost very predominantly mall-based stores. And so by shifting gradually to -- back to the more balanced mall versus non-mall type of portions of stores, we moderated that average rent per square foot and average rent per store. So that's continued to be the case both in 2012 and expected in 2013.

Lindsay Drucker Mann – Goldman Sachs

Okay. And then lastly, you talked about, so your -- you talked about managing the quarter up one, everything else down one. Could you give us some detail on what your women's business specifically did, and was that down one in the quarter and, you know, as you think about the first quarter, how is the women's business trending, specifically your private label products, how are those doing relative to the brand [piece] of your portfolio? Thanks.

Daniel Griesemer

Yeah. Okay, so a point of clarification, Lindsay, what we said was that men's was up in the low single digits -- up in the single digits and the rest of the businesses were down in the single digit. So think about this, of the fact that the first comment around the tide lowered and all relationships of businesses remained the same, we still continue to see relative strength out of our men's, our juniors' and our accessories businesses to slightly lesser degree footwear and then the kids' business. That's been the case. We've been saying this now for multiple quarters. That same relationship remained in place and has remained in place in the first quarter, generally, you know, those general relationships remained in place for the first quarter, with the one caveat that we had, as we talked about, meaningful softness in February that has transitioned to some strength that we're observing out of the March business. And so it's -- all those relationships are generally remaining the same, now just we're experiencing a little bit better business in March and our conservative view for the quarter is that we're saying we believe that it's prudent given the variability we've seen on the opposite sides of natural peak selling time periods, and we happen to be in one right now around spring break and Easter, that we think it's probably prudent to be just a little bit more conservative. But the relationship of branded to private label remains the same, that there's -- I'm very pleased and confident in how well we are positioned as the customer returns to shopping, how the stores look, where our investments are, the brands and businesses that we're carrying, that we're well-positioned to capitalize on it.

Lindsay Drucker Mann – Goldman Sachs

Okay. Thanks.

Daniel Griesemer

Thank you.

Operator

And we will take our next question from Richard Jaffe of Stifel Nicolaus.

Richard Jaffe – Stifel Nicolaus

Thanks very much. I guess, Dan, I understand your allusion to the rising tide, and I guess my concern is that, you know, the tide may not come back in for a while, that the environment has changed permanently. The success we've seen across our universe, the apparel universe is that the lower-priced retailers have fared pretty well, and as you move up the food chain, it's a real struggle until you get to the very top, the luxury players. I'm wondering if there's -- if you've given any thought that maybe the values getting offered should be enhanced, not become promotional necessarily, but become a lower average unit retail player [inaudible] better values to the consumer given what may be a more permanent change in the willingness of consumers to spend on apparel.

Daniel Griesemer

Interesting. Yeah, you know, our private label plays a really important role in addressing that opportunity. We are a house of brands. Our customer comes to us because they know we're a destination that they can count on to have the hottest brands and the latest products from those brands. And then we supplement it with some very well-priced, you know, basic or expansion of the key fashion trends at much lower prices than the branded product.

I don’t believe that what we're seeing is this, you know, kind of very large-scale fundamental shift where the middle is being squeezed out and it's only the top and the bottom. I am completely confident that the way we're approaching the business across the product, across the marketing, across the experience, and our prudent management of our investments in growth and management of expense is positioning us to win for the long term. Your view of kind of where and how people ought to be thinking about whatever shifts are going on is different depending on where you're looking from. And we're looking from a place with only 170 stores or so today and tremendous amount of white space and opportunity, vibrant e-commerce business and a really dynamic marketing capability in social media environment, and extraordinary relationships with our brands that I think positions us very well to just continue to deliver long term on our goals.

Richard Jaffe – Stifel Nicolaus

Okay. Just I guess a follow-on then, the branded versus private label, you see any distortion in the success of one versus the other? And any sense that maybe working with vendors to do a lower-cost version of some of their branded products?

Daniel Griesemer

Yeah, sure. I mean if you went into our store right now, you'd see a reflection of how important the brands are to our business, where they're supporting the needs of the Tilly's customer, and the opportunity to partner with us for long-term growth. So it's manifesting itself in the assortment right now. We are not growing our private label penetration. In fact it's well under control and we like it that, because, as I said, our customer comes to us for the brand. So we've got a lot of things reflected in the assortment and a lot of really exciting things that will unfold throughout the year too.

Richard Jaffe – Stifel Nicolaus

Okay. Thank you.

Daniel Griesemer

Thank you.

Operator

[Operator Instructions].

We will take our next question from Sharon Zackfia of William Blair.

Sharon Zackfia – William Blair & Co.

Hi, good afternoon. I guess a follow-up question on Lindsay's line of question earlier. The guidance does imply pretty material operating margin contraction and last year you held your margin at 2.6 comp. So, I guess, the e-commerce fulfillment center, if that's going to be pretty idle all year, how much is that weighing on gross margin? And then, Bill, maybe if you could give us kind of a better understanding of how the immaturity of the store base is kind of raising the comp breakeven level in '13 and whether that stabilizes going into '14?

Bill Langsdorf

Yeah. I mean there is some impact of the paying rent that's not having the operation be able to gain the human capital efficiency that we would have if the e-commerce location, once it opens. But that's tertiary I think to the -- I mean it has some effect, but it's not a big number driving all these numbers. The proportion of the new stores that are immature starts to level out after this year, assuming we continue to grow at the mid-teens growth rate because stores that we -- when started the ramp-up, a lot of those start getting closer to the maturity levels on the first year of the ramp-up. And so we start moderating the immaturity proportion, if you will, after 2013, assuming we stay on that kind of percentage growth per year.

Sharon Zackfia – William Blair & Co.

If I could ask a follow-up, I think -- I mean, is something happening with the new stores that pricing, because I think originally the expectation was for relatively flat gross margin in 2013 versus '12.

Bill Langsdorf

Relatively flat would be the case when you're talking about product margins. But when we're lowering our comp forecast, and obviously the rent for existing stores -- and it's not specific to new stores, but existing stores, you know, a dominant amount of the occupancy costs, those are not going down when the sales are going down. So that's where you're seeing the compression pressure really, is the entire store base. It's not specifically related to new stores.

Sharon Zackfia – William Blair & Co.

Okay. Thank you.

Bill Langsdorf

Sure.

Operator

And this does conclude today's Q&A session. I will now turn the call back to management for any closing remarks.

Daniel Griesemer

Okay, [Robert]. Thanks for joining us today, and we look forward to seeing many of you in the coming weeks in discussing our first quarter results in late May. Have a good evening.

Operator

And this does conclude today's conference call. Once again we would like to thank everyone for your participation, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tilly's' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts