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Tilly’s, Inc. (NYSE:TLYS)

Q2 2013 Results Earnings Call

August 28, 2013 4:30 PM ET

Executives

Anne Rakunas - ICR, IR

Daniel Griesemer - President and CEO

Bill Langsdorf - Senior Vice President and Outgoing CFO

Jennifer Ehrhardt - Incoming CFO

Analysts

Alex Pham - Wedbush Securities

Paul Alexander - Bank of America Merrill Lynch

Lindsay Drucker Mann - Goldman Sachs

Dave King - ROTH Capital Partners

Richard Jaffe - Stifel

Pamela Quintiliano - SunTrust

Steph Wissink - Piper Jaffray

Sharon Zackfia - William Blair

Jeff Van Sinderen - B. Riley & Co.

Operator

Please standby. Well, good day, ladies and gentlemen. And welcome to the Tilly’s Incorporated Second Quarter Fiscal 2013 Results Conference Call. Today’s conference is being recoded.

And now, I will turn the conference over to Ms. Anne Rakunas of ICR. Please go ahead, Anne.

Anne Rakunas

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly’s second quarter fiscal 2013 earnings results. On today’s call are Daniel Griesemer, President and CEO; Bill Langsdorf, Senior Vice President and Outgoing CFO; and Jennifer Ehrhardt, the company’s Incoming CFO.

A copy of today’s press release is available in the Investor Relation section 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 only as of today and 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’s included in our second quarter 2013 earnings release which was 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 the accounting principles generally accepted in the United States or GAAP, and you can find a reconciliation of these metrics to our reported GAAP results and 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 address.

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. Thank you for joining us today. On our call I’ll be providing you with an overview of our second quarter 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 third quarter and outlook for the full year 2013. I’ll provide a few closing comments and then we’ll open up the call for your questions.

Before I begin, however, I want to welcome Jennifer Ehrhardt, who will soon be our new Chief Financial Officer. Jennifer will officially become CFO on September 14, 2013. Jennifer brings to her new role the right talents and great experience in both teen retail apparel and public company finance and accounting. Since joining us this spring, Jennifer has become an important member of our senior team and as I said in our release today, it’s been a great fit for Tilly’s.

We also say good bye to Bill Langsdorf, who will be leaving the company for well-earned retirement and we wish him all the best. Among Bill’s many contributions, his talents and dedication were instrumental to our growth and our successful transition to a public company. Bill established a solid financial foundation for Tilly’s future with the capable finance and accounting team, and strong financial controls and systems. Thank you, Bill.

Turning now to our results for the second quarter. We exceeded our earnings expectations for the quarter even as we faced variable traffic trends as a result of an inconsistent retail environment that has clearly affected teen retailers.

We achieved record second quarter sales, expanded our gross margin rate and increase net income compared to the prior year quarter. We also achieved diluted earnings per share above our expectations at $0.15. These results are testament to the relevance of our merchandise offering, strength of our business model and the focus execution of our team.

We achieved strong growth in our e-commerce sales which were up 30% on year-over-year basis as we engaged our customer within even more dominant assortment of merchandise and a reach shopping experience, resulting in a strong increase in sales online of both the price and clearance merchandise. E-commerce is a critical driver of growth for us and I’m pleased with the success we are having in this channel.

Well our comparable store sales did not meet our expectations. We maintained our historic pricing discipline and brand integrity, while at the same time taking appropriate steps to ensure that our inventory was properly positioned for the upcoming back-to-school period.

As a result, we are pleased that we ended the quarter with both higher gross margins and with inventory that was 3.9% less on per square foot basis compared to the same date last year.

Equally important, we lowered our SG&A rate by 30 basis points, further demonstrating the efficiency of our operations and the ability to tightly manage our cost as we open new stores and continue to invest in the long-term growth of our business.

The depth and relevance of our action sports inspired brands and merchandise are driving a positive response to date by our customers during back-to-school selling period. The breath of merchandise selection we offer allows us to quickly identify emerging fashion trends and the frequency with which we flow new items into our stores ensures that our customers seek constant newness.

Our store environment is full of energy and activity, staffed with associate that are able to relate to and engage with our customer. These unique elements have made Tilly’s the destination for back-to-school and other key selling periods for more than 30 years and proved the continued relevance of the Tilly’s concept.

During the second quarter we opened seven new stores, bringing our store total count to 182. We introduced Tilly’s brand into six new markets and one new state. We are pleased with the high-caliber real estate opportunities were being presented with, as well as our pipeline of new stores. We continue to be on track to open at least 25 new stores in fiscal 2013 and expand the Tilly’s concept to both new and existing markets.

I’d now like to turn the call over to Bill for more detail on our financial performance in the quarter. Bill?

Bill Langsdorf

Thank you, Dan, and good afternoon, everyone. Before I begin, I would also like to welcome Jennifer to the team. I’ve been following Jennifer successful career over the years keeping in the back of my mind that she will be a great fit for Tilly’s. Her financial acumen, clear strategic thinking and approachable manner make her a valuable asset to our company.

We have been working closely together for the last several months and I will work to support Jennifer as she transitions to a new role as CFO. I will really miss a very capable and hard-working team here, and I am confident that Jennifer will provide great leadership for the team in the years ahead. The company has a bright future and I wish Jennifer and the rest of the Tilly’s team much success.

So now I’ll begin reviewing the details of our second quarter results and then provide our outlook for the third quarter and full year 2013. For the second quarter, net sales increased 17.1% to $223 million, driven by 27 net new stores opened since the second quarter of 2012.

Comparable store sales decreased by 0.5% with flattish comps in apparel for men, juniors and kids, and an accessories, and a slightly negative comps in footwear. Our e-commerce sales which are included in our comparable store sales grew 30%.

Our second quarter comps reflect lower traffic, largely offset by an increase in both convergent and the average transaction value. Gross profit increased 22.5% to $38.2 million, or 31% of net sales, which is 140 basis point increase over the second quarter of 2012.

Due to the fiscal calendar shift about $8 million in sales shifted from the third quarter into the second quarter as expected. Even after removing the benefit to margin rate of that sales shift end of the quarter, we achieved a 70 basis point increase in product margins compared to the second quarter of last year.

Selling, general and administrative expenses were well-controlled as they totaled $31 million or 25.2% of net sales. This is a 30 basis point improvement over SG&A rate of 25.5% of net sales in the same quarter last year after adjusting last year to remove a one-time charge.

As a reminder, the second quarter fiscal 2012 included a one-time non-cash SG&A charge of $7.6 million before tax related to stock-based compensation expense triggered by the company’s initial public offering.

Our operating margin was 5.8% compared to an adjusted operating margin of 4.1% in the second quarter of 2012, reflecting the higher product margin and leverage on buying, distribution and occupancy costs. When adjusting for the extra week of back-to-school sales that fell in the second quarter of this year, operating margins were similar to the prior year quarter.

Net income was $4.3 million or 15% -- $0.15 per diluted share, based on a weighted average diluted share count of 28.1 million shares. This compared to a GAAP net loss in the second quarter of 2012 of $1.2 million, or $0.04 per share and adjusted second quarter 2012 net income of $2.6 million or $0.09 per diluted share excluding last year’s non-cash SG&A charge after applying a pro forma of 40% “C” corporation tax rate.

Turning to the balance sheet, we entered the quarter with cash and marketable securities -- we ended the quarter with cash and marketable securities of about $50.8 million with no borrowings and no debt outstanding under our revolving credit facility.

Cash used for capital expenditures during the quarter totaled $12.4 million, compared to $8.9 million in the second quarter of 2012 were primarily related to new stores opened during the quarter, new stores under construction during the quarter that are scheduled to open in the third quarter of 2013, as well as our new e-commerce distribution center.

Inventory totaled $63.4 million at the end of the quarter and as Dan mentioned, compared to the same week 52 weeks ago, inventory declined 3.9% on a per square foot basis.

Now I’d like to turn to our outlook for the third quarter and full year 2013. For the third quarter 2013, we expect comparable store sales to be flat to last year, compared to 1.9% comparable store sales increase in the third quarter of 2012.

Net income in the third quarter is expected to be in the range of $5.4 million to $6.3 million, or $0.19 to $0.22 per diluted share, which assumes a 40% tax rate and a weighted average diluted share count of 28.3 million shares, compared to 28.1 million weighted average diluted shares in the third quarter of last year.

This expectation reflects the unfavorable impact to the third quarter as a result of this year’s retail calendar shift benefited the second quarter. This compares to net income in the third quarter of 2012 of $9.3 million or $0.33 per share and adjusted net income in the quarter of 2012 of $8.3 million or $0.30 per diluted share, which includes a 40% effective tax rate to make that quarter comparable.

Now looking ahead to Q3 inventory expectations. In the second half of the year, we remained focused on delivering healthy product margins at or above last year and keeping inventory fresh in current.

This year we will be cycling against an inventory build that occurred last year as sales flowed after back-to-school. Therefore, we have strategically planned third quarter ending inventory per square foot to be down by low to mid teens on a shifted calendar basis and believe this positions us well with the right level and composition of inventory for the fourth quarter.

Now moving onto the full year, we continue to expect comparable store sales growth in the low-single digit range for fiscal 2013 on a 52-week versus 52-week basis. As discussed on our first quarter call, this reflects gradually improving trends in the third and fourth quarter as we cycle easier comparisons in the second half of the year.

Using an anticipated annual effective tax rate of 40%, net income for fiscal year 2013 is expected to be in the range of $21.5 million to $23.3 million or $0.76 to $0.82 per diluted share, and assumes a weighted average diluted share count of 28.2 million shares compared to 26.1 million weighted average diluted shares for the full year 2012.

This projection for fiscal 2013 compares to net income for fiscal 2012 of $23.9 million or $0.92 per diluted share and adjusted net income for fiscal 2012 of $22.9 million or $0.88 per diluted share. Adjusted 2012 net income included 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 excluded the one-time charge of $7.6 million to recognize life-to-date stock-based compensation and the one-time tax benefit of $3 million, both of those recorded in the second quarter of 2012.

We continue to 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 the remodels and refreshes of our existing stores. Our projection also includes approximately $14 million for the completion of our new e-commerce distribution center.

The balance of our expected capital spending in 2013 is related to expenditures on IT and other infrastructure improvements. In keeping with our fiscal discipline, we remained focused on tightly controlling our expenses to capitalize on margin expansion opportunities.

Now, I would like to turn the call back over to Dan for some closing remarks. Dan?

Daniel Griesemer

Thanks Bill. I’m pleased with the profitability we achieved during the second quarter, given the traffic and sales variability in the continuation of a very promotional teen retail environment. Our positive back-to-school results to-date continue to validate that our merchandise is relevant to our target customer.

We have had a good start to the quarter but remained cautious for the month ahead given the pattern in recent quarters of consumers focusing their shopping into compressed peak periods and pulling back during non-peak periods. Despite these consumer behavior patterns been over the last four quarters, we have complete confidence in our ability to deliver on our long-term growth potential.

We remain focused in many ways on the controllable elements of our business in order to achieve our objectives of long-term sustainable growth. We are building upon the strengths of our brand partnership to ensure that we deliver a broad and deep assortment of actions sports and inspired merchandise from both established and emerging third-party brands that embody our customer’s lifestyles and attitudes.

We are adhering to our pricing and inventory strategies to ensure that our merchandise is current and maintains the integrity of the brands we carry. We are supporting our new and existing stores with targeted and effective marketing and envisioning new and dynamic ways to engage our customer. And we are prudently managing our cost to maximize profitability while we expand our store base into new and existing markets.

Tilly’s is a great brand with a strong connection to our customer. We have season teens throughout our organization and a compelling business model that we believe will drive growth for years to come.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll hear first from Alex Pham with Wedbush Securities.

Alex Pham - Wedbush Securities

Hi. It’s Alex on for Betty Chen. I guess -- welcome Jennifer and congratulations Bill. I guess, my question is how you guys dealing the current competitive landscape, what you’re seeing given that a lot of the other teen retailers are definitely seeing weakness so far. And then can you guys provide any additional color on guidance. It almost seems like you guys are assuming a slow down in current trends but have mentioned that back-to-school off to a great start? Thanks.

Daniel Griesemer

Yeah. So our view of the competition, Alex, remains fairly consistent. We recognize that the breadth of the demographic that we target the broad dominant assortment, the combination of pure action sports brands and lifestyle brands have us relevant to a pretty broad-based customer. And so therefore, we know we take share from a lot of different places as we’re growing.

There’s clearly something going on in the teen space. It’s also obvious beyond the teen space and the general retail sector. And our view is that we’re going to remain focused on the things that are right for the Tilly’s customer and the Tilly’s brand and the Tilly’s shareholder for the long term. And competitors will do what they need to do and we’re going to remain focused on what’s right for us and for the long-term.

So it’s clear that lot of people are having some challenges. We’re pleased with the results that we were able to deliver and we’re pleased with the response to date of our -- the customer during the back-to-school season. It’s really our concern about this pattern that we’ve seen in a non-need to buy time periods that has us been kind of a little bit more conservative about what might happen post back-to-school. But we remain as bullish about full year as we have been now for several quarters.

So it’s -- we kind of haven’t change the full year. It’s more of a shuffle between second and third quarter that you’re seeing. But we think it’s prudent to be cautious given what we’re seeing at lot of different places about what might go on in September, October and early November.

Alex Pham - Wedbush Securities

Got it. Thanks.

Daniel Griesemer

Thank you.

Operator

Moving on, Lorraine Hutchinson with Bank of America Merrill Lynch.

Paul Alexander - Bank of America Merrill Lynch

Hi. It’s Paul Alexander for Lorraine. Dan, could you just talk a little bit more about that deceleration that you’re expecting or maybe preparing contingency plans for after peak back-to-school. What kind of magnitude of a slowdown are you expecting? How much worse are you expecting that that slowdown after peak to be than last year? And does that mean that you’re letting inventory get a little lean right now in anticipated -- in anticipation of that slowdown. And if you don’t see that slowdown, what can you do to chase product? Thanks.

Daniel Griesemer

Yeah. There was a lot in there. So let me try to take that. We don’t have a crystal ball here to know what’s actually going to happen, what kind of reading and beauty of the Tilly’s business model is that we’re able to react very quickly. We have a very dynamic merchandise model that that allows us to keep our inventory, both in challenging times and in strong times, current and relevant and appropriate to the level of sales.

The inventory that we’re talking about at the end of the third quarter is a moral reflection of the comparison to LY’s inventory, which we recognize had a little bit more carryover from September and October, than we had hoped or had planned for. And we’re now just not buying to that. So you will find the Tilly’s stores filled with compelling and relevant merchandise vibrant breath and newness flowing constantly, nothing’s changed about our model there.

We’re just thinking that given what we’re seeing in our own trends of concentrated sales during peak time period and kind of what a lot of people are talking about some concerns out there and cautious numbers. We think it’s prudent to just be nimble and be reflective of -- we’re reading the business very near term. We can react very quickly and the customer will not notice the inventory decrease that we’re talking about at the end of Q3 because it’s really taking out what we believe was residual inventory last year.

Paul Alexander - Bank of America Merrill Lynch

That’s great. If I know ask one follow-up, how would you contrast what happened in first quarter and second quarter. It seems like in both periods, traffic was weaker than you expected. But in first quarter you were forced to be more promotional whereas in second quarter you were able to maintain this pricing discipline. How did those pan out differently? Thank you.

Daniel Griesemer

Yeah. Well, again, it’s a testament to the great job that the team does herein managing the inventory across the board inventory. Inventory is more reflective of the environment right now. We remain committed to keeping our inventory clean and current and solving problems in season, not carrying them into future season because of how critical newness and freshness is to our customers.

So that’s kind of marching beacon that we have here in the business and it’s -- we the promotional activity you saw in Q1 was really -- and we talked about this clearing things that we did not want to carry into Q2. And so we began Q2 clean and current and we began Q3 clean and current and will do the same thing for Q4.

Paul Alexander - Bank of America Merrill Lynch

All right. Thank you very much.

Daniel Griesemer

Okay. Thanks.

Operator

Our next question will come from Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

Hi. Good afternoon, everyone.

Daniel Griesemer

Hi.

Lindsay Drucker Mann - Goldman Sachs

I was hoping actually, Dan, if you could be more specific about what your quarter-to-date comp trend is?

Daniel Griesemer

Yeah. We haven’t made a habit of doing that and we will continue that practice. What I can say is that we are encouraged by the positive response to date. It is positive and it is more positive than the numbers we just delivered. But in terms of any other specifics, we’re going to just stick with our flattish which is a real testament to the concern we have about what we’re seeing in the space and in the overall environment, not a reflection of how we feel about potential for Tilly’s or the relevance to the concept. So we’ll leave it at that.

Lindsay Drucker Mann - Goldman Sachs

Okay. Thanks. And Bill or maybe, Jennifer, hi, I was hoping your guidance seems to embed a decent amount of margin pressure, incremental spending in the back half of the year, at least back of the envelope based on your comp guidance of how we understood it. So -- and I’m assuming that’s mostly on the SG&A line given your approach to and what you commented on as far as product margins are concerned. Can you just talk in a little more detail about what your expectations are as far as SG&A is concerned?

Bill Langsdorf

Yeah, Lindsay. It’s -- the third quarter, it will also be more pressure on the gross profit line, not on the product margin part of it but on the deleverage on the buying distribution and occupancy cost. As you remember, we mentioned about $8 million and the sales shifted between third quarter and second quarter and it’s the buying distribution and occupancy cost of course didn’t shift further.

We still have 13 weeks in the third quarter of that. And so they will deleverage more all other things being equal than they would have otherwise. So in the third quarter, it’s gross profit pressure as well but not product margin pressure. And when you look at SG&A, it will be -- there will be mild deleverage in the third quarter for that same reason because of the sales shift. When you look at the fourth quarter, it will be little bit closer to LY but there’s probably still some deleverage as with these very mild comp assumptions that we have.

Lindsay Drucker Mann - Goldman Sachs

Okay. And then how should we think about the SG&A stuff that you already know that you haven’t given fiscal ‘14 guidance but things that are in the work so far is incremental areas to spend for ‘14 beyond store openings?

Bill Langsdorf

The increment is going to be -- they’re just a very mild increases in a variety of areas, just with the normal course of the business expanding more stores and things. So it’s store payroll and other things you would expect when we open more stores. It’s not a large chunk of SG&A that would be added. What we would be adding this next year is a full cost related to our new DC for e-commerce but that will be built into our projections as we -- actually if we would give them to you for and that’s really under distribution and occupancy cost not under SG&A.

Lindsay Drucker Mann - Goldman Sachs

Okay. Thank you.

Bill Langsdorf

Okay. Thanks Lindsay.

Operator

We’ll now hear from Dave King with ROTH Capital Partners.

Dave King - ROTH Capital Partners

Thanks. Good afternoon everyone.

Bill Langsdorf

Hi Dave.

Dave King - ROTH Capital Partners

Hey Bill. Dan, so I guess since Lindsay asked some of my questions on the SG&A gross margin, I won’t get a chance to ask you one last question so disappointed about that. But Dan I guess just generally speaking more of a theoretical question if I back out e-com, the e-com sales this quarter and I kind of back into what kind of the core comp is just on retail store basis knowing that you don’t necessarily like to look at it that way, come up with it being down about 3.5% plus, understanding that a lot of that is due to the tough environment out there.

I’m just wondering if you could comment on how you think about that on a store level basis in the context of your build out plans for more stores. And at what point would you start to think about reevaluating your store opening plans if at all if these challenges even if they are industry related entirely, do persist? Thanks.

Daniel Griesemer

Sure. Good. Thanks Dave. The impact or the result there, your numbers are just a little high in terms of what you’re saying the negative comp would be there in the stores, but you’re close enough to get the gist of what you’re getting at. And we recognize that there is extraordinary opportunity all over this country for the Tilly’s brand. There is no race, there is no rush, there is no got to deliver a certain number every quarter or every year to get there.

We’re going to continue to do what we’ve been doing which is looking at the overall climate, looking at our own execution, looking at the real estate pipeline and making the best decisions out multiple years as well as intra year. So we may make course corrections next year if we see the things persist.

We’ll be very agile and we don’t have a fixed number that we have to deliver. So we see huge opportunity. We see a lot of potential in e-commerce. I’m so pleased that we’re investing the way we are in that business going forward. It is definitely paying off and will pay off long term and tremendous potential but like I said there is no race here.

Dave King - ROTH Capital Partners

Yeah. No. Fair enough. And then, I mean maybe just along those lines then, can you -- how do you think about then building out stores and the ability to have that help with e-com business. And is that a necessary requirement in certain new market for you to get that e-com business and just maybe help understanding that? Appreciate it.

Daniel Griesemer

Sure. Yeah, we’ve talked before about the kind of supportive nature of the combination of stores and e-commerce. We know a large percentage of our business comes from places that don’t have stores. We also know that once we put a store in one of those places, we see both the e-commerce business grow and the store business grow.

So we look at the business and the brand and the customer experience holistically. I have termed it omnibrand, not omnichannel because that’s simply a transaction-based view. This is more brand and customer experience view across the entire enterprise. And we see them closely related and lots of opportunity to create a great experience, both online and in-store and both and using technology and all kinds of things to exchange the brand message across various touch points.

Dave King - ROTH Capital Partners

Okay. Thanks so much.

Daniel Griesemer

Thank you.

Operator

Richard Jaffe with Stifel has the next question.

Richard Jaffe - Stifel

Well, thanks very much guys. Looking at the store growth and a variety of stores you are opening in variety of markets, wondering if you’re seeing any pattern either in terms of real estate or geographic location that has been stronger for you? And then broadly speaking, how the new stores are performing compared to the matured California market stores. And then lastly you comment on traffic versus transaction and just wondering how you’re defining traffic. Thanks.

Daniel Griesemer

Okay. So few questions there, there have been no meaningful differences in the performance by venue type region, anything there is nothing new there. I’d almost liken it to river analogy all the relationships and relativities and fundamentals of business model that we’ve had and talked about now for quite sometimes. All remain intact.

We see a great vibrant and reception to the brand in primary and in secondary markets in off mall and in mall venues. It’s pretty exciting and we recognize significant opportunity nationally. The performance of new stores is as you would expect and as we’ve expected given what the total business has done, so you’ve kind of some of the numbers that we’re talking about here with slightly negative total comps with a strong e-commerce business indicated a negative -- a low negative store comp and that’s a river kind of thing.

So the new stores -- their relationship to the rest of the chain is performing exactly as they have. And in fact the stores that we’ve opened are on our expectations year-to-date. So there is nothing fundamental. We feel just as confident about the potential as we always have.

Traffic, yeah, on the traffic, the traffic is we have counters in our stores we track traffic by hour. So that traffic number is a store traffic count that we’re referring to.

Richard Jaffe - Stifel

Great. Thank you.

Daniel Griesemer

Okay. Thank you.

Operator

Moving on to Pamela Quintiliano with SunTrust.

Pamela Quintiliano - SunTrust

Great. Thanks so much for taking my question and congrats Jennifer and Bill. Actually few questions for you guys. Can you give us an idea about the progression of comps throughout the quarter and also how do you think about performance of branded products versus unbranded products and where the team’s hunger really is and then just guide versus growth?

Bill Langsdorf

Sure Pam. I’ll take that first one and maybe Dan can take that second one. On the progression of comps, what we saw was looks like something similar to what so many others have been talking about which was kind of a dip when you got to late June and early July. And we did see -- and so that was the trough of the quarter for comps

And then we saw it’s trying to come back nicely at the end of July as it got close to back-to-school peak periods again. So it’s really doing well and then it troughed and then it came back late in the quarter.

Daniel Griesemer

And then I’ll take the branded. So we’ve always believed that Tilly’s is a destination of brands or house of brands and so therefore a strong branded business is critical to our success. We’ve seen that in the second quarter and we recognized that the mix that we have of branded product is compelling and relevant. And we’re seeing a positive response to the back-to-school offering as a result.

It remains around the 70:30 split, 70% branded 30% proprietary brands. We don’t manage to that and you may see minor variations from quarter to quarter or season to season but it’s a good strong mix. And we think that model works for the long term.

As we said in the -- I think it was the release, we said it was a pretty balanced business with all businesses being flattish, except for the footwear business which was only slightly flat. So the way we’re looking at this, there wasn’t any significant weakness.

There was general relative strength across all the businesses that balance is something I think is really important and an important takeaway about the Tilly’s business model is how important the balance is to deliver the profit that we’re able to deliver. So no new -- no big standouts one way or another, they’re on the mix between guidance in juniors.

Pamela Quintiliano - SunTrust

Can I just ask one follow-up question? You’d mentioned caution because right now you’re in a peak shopping period with back-to-school and how non-peaks there maybe because of the trail off of trend. Are you adjusting how you’re marketing or how you’re messaging to your core customer reflecting just the challenges that are out there in the team environment and that we’re about to enter more of a non-peak period?

Daniel Griesemer

Let me -- because to give a full and complete answer to that would give you a roadmap to everything you’re going to see us do over the next several months. So what I will say is we’re completely aware of it. We are tailoring in our dynamic model and in our omnibrand and vibrant marketing environment.

We’re tailoring our marketing message to reflect what we believe needs to be done to create the most engaging brand experience across all the channel. So, yeah, we recognize that the environment and are customizing our offering as a result.

Pamela Quintiliano - SunTrust

Great. Well, I look forward to seeing it. Best of luck.

Daniel Griesemer

Okay. Thank you Pamela.

Operator

We’ll now hear from Steph Wissink with Piper Jaffray.

Steph Wissink - Piper Jaffray

Hi. Good afternoon everyone.

Daniel Griesemer

Hi.

Steph Wissink - Piper Jaffray

Dan and Bill, if I could just ask a couple of questions. I think most of my questions have been answered but no one has asked yet about the prototypes of the new stores. If you could just share with us any changes that we should be watching for as you rollout kind of these next 20 to 25 units?

And then separately, Dan, just stepping back, if you think about the comp rate trend that has been more normalized and established here over the last call it 18 months on the lower end kind of low single-digit range? If that is the new normal, how does that change, how you think about net income growth, are there changes that you would or could make to potentially lower the leverage threshold in the business at that rate of comp? Thank you.

Daniel Griesemer

Yeah. I think, I will answer the second question first and I think you are asking a good question that we are looking at and we’ll continue to look at and read both the kind of the macro environment and our own performance, recognizing that it’s a public company, we have a responsibility to grow our earnings and if this is the new permanent normal then there are many things that we can do and will do to make sure that we improve our earnings.

So, yes, totally understand and we remain as bullish about the future and whatever future that that whatever external environment is, we will make sure that we are delivering the greatest results possible.

On the prototype, we have always kind of done iterations to model -- the overall financial model remains the same. But there is no -- nothing that we can -- we have to talk about here in terms of the economic model that new stores. If you are talking about the physical execution of that space where we are constantly tweaking and doing a little things to keep the store as relevant and experience as possible.

And so we are -- we remain looking at how the concept can be tweaked in little ways but not once that are kind of toll houses as the concept works and the brand experience and the physical environment works extremely well all over the country and a variety of venues. So we -- this is more about being very judicious about the real estate decisions rather than looking for tweaks on store designs.

Steph Wissink - Piper Jaffray

All right. Thank you. Best of luck, guys.

Bill Langsdorf

Thank you.

Operator

Our next question will come from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Hi. Good afternoon. I know you -- not to be a data horse on the comp guidance for the quarter, but I mean obviously your comparisons get a lot easier in the second half of the quarter versus the first? I think last year you had to weather in California and the gas spike really hurt you at the end of back half? So and those things would be separate from these peaks and valleys that you are referring to in terms of customer traffic? So just trying to really get my hands around why it sounds you give a positive comp right now, why I would expect things to get worse against some of those easier comparisons? I mean, is there actually anything you are seeing in the business specific to your business rather than broader retail that makes you concerned about those easier comparisons?

Bill Langsdorf

Yeah. Sure. And it’s Bill. It is not something we are seeing in the business. However, it is something that we are hearing in broader retail a lot of expectations and concern out there. So perhaps you could call us cautiously optimistic that we will see better than these numbers, but we do not know that, that we’re looking at a pattern in the past of falloff in non-peak periods. And, so, although, we are positive now we are well building that in and if we start to see this diverge that will be just -- that’ll be gravy for us.

But you’re quiet correct, last year we saw the pattern, there are a variety of things going on here in the macro environment and one of them was traffic fell off after that -- after Labor Day and for the rest of the quarter.

And so, we will be cycling against that weaker traffic and so, but we won’t really know until we get past Labor Day and rest of September at least how that -- how our customer is behaving in that period.

Sharon Zackfia - William Blair

I guess just a follow- up to that, I mean, philosophically did you think about just giving a broader range to encompass that that uncertainty rather than give a lower comp estimate than you are actually experiencing right now?

Bill Langsdorf

We thought about quite a bit actually about…

Sharon Zackfia - William Blair

Okay.

Bill Langsdorf

… we wanted to make sure that we are prudent here and we thought, well, given the -- what we are hearing in the macro world that we would be better off being a little bit more conservative on this and but, yes, we certainly thought about the right procedures.

Sharon Zackfia - William Blair

Okay. And given -- given where your stores are, sorry, go ahead.

Daniel Griesemer

I just could say, I think, Sharon, we are using our best judgment looking at all of the things that we can read about the business to make the best recommendation as to what we believe the quarter is going to deliver.

There are many, many variables and you’ve seen a lot of people just in the last week or so communicating that variability that was not expected. So if we -- it is our best judgment you could put the word ish next to the word flat and maybe would you feel better about that?

Sharon Zackfia - William Blair

Everything makes me feel better, Dan. Just one more follow-up, given the markets you are in, because you are not a national player per se, I mean, what inning are you in, in the back-to-school season across your markets? Are you in the seventh innings, are you earlier or later, I am not really as familiar with where California starts versus the rest of the country?

Daniel Griesemer

Okay. They are seeing pick up me at the ballpark, ball game right. The seventh inning stretch.

Sharon Zackfia - William Blair

Okay. Thank you.

Daniel Griesemer

Yeah. Sure.

Operator

We move on to Jeff Van Sinderen with B. Riley & Co.

Jeff Van Sinderen - B. Riley & Co.

Good afternoon. Dan, maybe you can give us a little color on the junior segment performance and then also maybe you could speak to denim in Q2 and then also what you are seeing in those two segments in Q3 so far?

And then also your overall promotional levels in Q2, was it up or down versus last year and then as far as your overall promotional level expected for Q3 versus last year given the promotional environment?

Daniel Griesemer

Yeah. Okay. So, let’s see. So, no real standouts as we said in that relatively flat numbers, flattish comp for the guys, juniors, kids and accessories with only slight negative in the footwear. So that kind of gives you the benchmark there is nothing to talk about there junior wise one way or another.

Denim, we haven’t really broken out or talked about that kind of detail in the business, I think every body knows color denim was a big thing last year. It’s shifted to more blue look denim and then there is a variety of other alternatives that seem to be out there and appropriate for the customer to wear be it on the guys or the junior side. So I don’t really have a whole lot of color that I can share there, yet certainly not on Q3. We are just -- we are not prepared to share that level of detail in the Q3 numbers.

The promotional levels for Q2 were basically flat to LY and we look for similar sort of execution in Q3. So we have planned promotions, anything you see going on in our business right now or that you saw in back-to-school or that you see in September and October all things that we planned or done last year.

So, we are really focused on making sure the product is relevant and new and compelling and that we are flowing newness and that we’re executing on all the things that we can control to deliver the best results.

Jeff Van Sinderen - B. Riley & Co.

Okay. And then would you mind sharing what the actual bricks and mortar comp was for Q2 and then what your approximate comp expectation for bricks and mortars is for Q3 now is what you have built into guidance there?

Bill Langsdorf

Yeah. So, historically the bricks and mortar comp has been giving us anywhere from, when I look back by quarter for the last few years, anywhere from 1.8% to 2.8% of our comp.

Jeff Van Sinderen - B. Riley & Co.

I see.

Bill Langsdorf

And, I am sorry, e-commerce has been giving us 1.8% to 2.8% of our comp and so this last quarter was no exception to that. It was about 2.5% of our comp. So the bricks-and-mortar was minus 3 while the overall was minus 0.5.

So when we are looking at flattish in Q3 it is going to be a similar kind of contribution by e-com in somewhere that 2-ish range that has been revolving around for the last couple of years at least.

Jeff Van Sinderen - B. Riley & Co.

Okay. Got it. Thanks and good luck for the rest of the quarter.

Daniel Griesemer

Thank you, Jeff.

Bill Langsdorf

Jeff, thanks.

Operator

We will take a follow up from Lindsay Drucker Mann.

Lindsay Drucker Mann - Goldman Sachs

Hey, thanks for the follow up. Bill, I just had a quick reminder if you could with the maturity curve, as far as your new stores looks like and then also if you guys comment on -- if there was something specific on your e-commerce business where you saw and I am sorry, if I missed this before, but where you saw the improvement and the increase sort of mix shift towards e-commerce last quarter it was more or less equal between the two channels, what happened in the second quarter versus first? Thanks.

Bill Langsdorf

Maybe I will take that first one and Dan, would you like to start?

Daniel Griesemer

Okay. The maturity curve it -- from everything we can see the maturity curve is still relevant and what we’ve been talking about for a while, if we open in a market that’s been well established for many years, people know it, it’s a shorter maturity curve than the approximate five-year maturity curve that we’ve seen in new markets.

And in fact, when we look back at our -- when we started in these new markets outside the Western United States, the first markets we went in to were in Florida and they -- these stores have just -- first few stores have just passed into their five-year period and they are right on track so where they need to be. So, we believe maturity curve is still appropriate that we’ve been talking about.

Bill Langsdorf

Yeah. On the e-commerce, Lindsay, the -- that weak shift had some impact into the total e-com growth and so that has to be accounted for. Aside from that we saw the e-commerce business have a very positive response from the customer to kind of the things that we have been doing to provide a more dominant broader assortment, more brands and more styles from those brands, as well as lots of tweaks we continue to do to the website in terms of search and navigation, and product features, and grouping of various products and messages and all those kind of things.

So it just continues to be a confirmation that our belief in the importance of e-commerce as a component and a meaningful component of our growth in the future, as well as the investments that we’re making this just another sign that we are on the right track and that the Tilly’s brand has incredible relevance nationally.

Operator

Ms. Drucker Mann, did you have anything else? Well, Mr. Griesemer that we have no further questions. I will turn the conference back to you for closing or additional remarks.

Daniel Griesemer

Okay. Great. Thanks again everyone for joining us. We look forward to speaking with -- with many of you at the Goldman Sachs Annual Global Retailing Conference in New York on September 11th and discussing our third quarter results in late November. Have a good evening.

Operator

And again, ladies and gentlemen that does conclude our conference for today. We thank you all for your participation.

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