Tilly's CEO Presents at Goldman Sachs Global Retailing Conference (Transcript)

Sep.11.13 | About: Tilly's, Inc. (TLYS)

Tilly’s Inc. (NYSE:TLYS)

Goldman Sachs Global Retailing Conference (Transcript)

September 11, 2013 10:35 AM ET

Executives

Dan Griesemer - CEO

Jennifer Ehrhardt- CFO

Question-and-Answer Session

Unidentified Analyst

I think we are almost ready to begin. Up next, we have Tilly’s. Dan Griesemer, CEO and the debut of Jennifer Ehrhardt, who is the new CFO. So welcome you guys to the stage. I would like to kick it off with question we're asking all of our companies here which is relative to 2Q and some of the top ends we saw, how are you thinking about the environment for the back half of the year and then your early reading on 2014.

Dan Griesemer

So our view of the back half of the year is largely a function of some patterns that we've seen materialize in our sector and with our customer over the last several quarters around. vigorous shopping during the peak need to buy time periods and some relative softness in the non need to buy a more discretionary time periods, and our view of while Tilly’s remains this incredible destination of the most relevant product for the action sports lifestyle person and that’s a very broad and diverse demographic with an assortment of hundreds of brands and a compelling product that’s ever changing and evolving through our dynamic merchandize models.

We recognize there is some fairly challenging external influences going on and that’s where our efficiency of our business model, the way the company is built and this is just the way the company has been running for more than 30 years is to be able to ebb and flow and reacts to both some macro influences and some internal trends and things that might be happening in action sports to deliver what in a relative perspective is some decent results, not to the results that we're satisfied but certainly decent results given what we see happening out there in the broader sector.

We have a view that says we’re going to take a long term approach to how we’re going to run the business, not making short term decisions to try to effect some short term results, particularly around comp. Our inventory management remains a strong discipline that enables us to keep the inventory current and fresh and relevant and support product margins.

So we are able to avoid significant fluctuations in the promotional cadence, because our inventory stays so clean and current and that’s how we stay focused on the things we can control particularly around the product offering and maintaining pricing and inventory discipline in order to affects the greatest results and differentiate ourselves. And I think was things that I am encouraged by as investors watch how we run the business in more challenging time as well as in easier times, they see, okay now we understand the efficiency of this business model, the kind of the wisdom of the way this business model is built and how flexible and agile it is in order to affect the best result.

So our view is stay long term regardless of what may be some short term things are happening and use the business model to deliver the best results possible.

Unidentified Analyst

So as you think about some of the external factors that impacted your business over the last few quarters, teen unemployment, some intense competition in the mall from a promotional perspective, are those dynamics the same as we think about in the back half in 2014, or is there reason for optimism?

Dan Griesemer

Well I don’t see any signs of material changes in the macro environment. We’re not expecting internally the teen unemployment is going to abate in the fourth quarter. We don’t need that to happen in order for us to deliver quality results. What we are positioning in knowing and recognizing is that the back half of the year, we are coming up against easier comparisons from the year prior and that is somewhat helpful but we remain cautious saying, I think this pattern of robust shopping during the need to buy and softness in the non need to buy will probably continue and so we are not making decision based on what anyone competitor might do or any group of peers. During back-to-school we saw retailers take significant percentages off their entire store that doesn’t determine how we manage things. So we kind of keep that view.

Unidentified Analyst

Should we expect or is it reasonable to expect that even in a tougher macro climate that you guys should still be able to meet your long-term comp target and as you think about execution over the next six months do you have sort of the an arsenal of options to help you pick up the pace of your comps?

Dan Griesemer

Yeah the long-term comp targets and fundamentals of the long-term investment thesis we believe still are there, still exist. The potential for ecommerce growth, the potential for growth on new stores and how they are performing we are seeing a kind of river drop just slightly from that’s creating all relatively remain the same but the river has dropped a little bit because of the macro influence. We still see all of those fundamentals remain, what we do believe is that we need to be making the right decisions that are right for the long term and we are not talking and we haven’t guided to the long term targets for the back half of this year. We suspect they will remain more challenging then these long term models, but our view of are those realistic and possible for long term absolutely, we remained undeterred that way. But we are doing many things internally recognizing that the environment is the environment we are in and we have a responsibility as a public company to deliver quality earnings growth and so that’s what we remain focused on.

Unidentified Analyst

I think there are so people who are new to your story you’ve only been public for a year. One of the big questions that we continue to get is what’s the difference Tilly’s between some of the actions sports concepts out there (inaudible), who carry similar - might carry similar brands but obviously the format is different. Can you talk about what your customers sees is unique to Tilly’s versus shopping at some of these other competitors?

Dan Griesemer

Yeah, a visit to a store or go online or download the mobile app and you will kind of get a sense of the breadth and dominance that exists in the Tilly’s offering. Two, the actions sports inspired lifestyle customer, it doesn’t mean they have to be a hardcore participants but they generally connect and relate to the art and the music and the fashion associated with the actions for its lifestyle. And it’s a broad, diverse customer and a broad diverse offering.

Our store format and our ecommerce platform have the size and scale and breadth of offerings that is commensurate with the diversity that our customer has come to expect in our product offerings, and so we spend a lot of time, selecting and putting together the product that we believe is most relevant to that customers. So they can come to us and express their own individuality, but still fit in and that's important to that 14 to 24 year old and it is this decade after decade discipline of focusing on making sure that the product is as relevant and compelling as possible, and using this dynamic merchandise model to ebb and flow with fashion trends and with brands that are important and relevant and hundreds of brands with thousands of styles the customers in and says oh my gosh this place they get me, they totally get me in everything about what they do in.

Images that are playing, the music that's playing in the stores, the brand mix, the associates that are in the store and the way they can interact and relate to what's on the customer's mind and connect to them, it's across the board. It's a very different and unique experience and if you go in to any of the peers that you may refer to just visiting the store will tell you a lot about it.

Unidentified Analyst

You mentioned your dynamic merchandising model, can you talk a little bit about why that's a reason, what that's about and how to differentiate to?

Dan Griesemer

Yeah. And so it’s the term we use and probably I use it a little too much, but it is the best way to describe the process that happens throughout the entire merchandising and planning and allocation organizations around bringing in newness from hundreds of brands we have a strong relationship with brands that we've grown up with, located in -- 90% of them are located in Southern California. It's the epicenter of the action sports industry. We've grown up together with these brands and our destination that brands who want to break on to scene want to come and be a part of Tilly’s experience and growth. We leverage those relationships that are built out of executing the business in an incredibly quality way with great deal of respect for the brands and for our own brands.

That is then led to incredible partnerships that leads to our ability to be very flexible with what we offer and then how quickly we can react to at the sky level react to things that are happening and then connecting the dots and thing, why we're seeing this trend emerge from multiple brands, now we can maybe exploit and expand that trend even further with our own proprietary product that we source and also a very short lead time and then make sure that supports at various price points and styles and colors trends that have emerged through this compelling branded offering.

That 70% brand and 30% private label or proprietary branded mix remains intact and we see that being incredibly important. We don’t plan to grow the proprietary product because it's the branded offering that is the reason our customers come to us, we are house of brands and that’s the compelling piece, but it's our ability to reorder, to react, to push out, to cancel, to buy more of to get quick access to best selling product that gives us stability to sustain quality results even in challenging time.

Unidentified Analyst

So you have this your, the brands that you buy from like you because you don’t discount their product and help to maintain their brand image, but with some of your bigger competitors in the mall using pretty highly promotional strategies. Can you talk about what you see in response in terms of market share or shift to behavior when you have a competitor that starts really pressing down and accelerate for their promotions and what your approach is in terms of utilizing promotions to be more competitive?

Dan Griesemer

So it starts with a store and breadth of product offering that is differentiated and unique and while there is some overlap with some of the other peers, much of the product offering is unique and created specifically for our target customer.

We do not see any influence in our business based on what any individual competitor does. And our store, average store volumes, our store size, our mix of real estate between mall and off-mall has us less susceptible to what any individual competitor may do.

However, as we are watching our business and recognizing that there is some maybe challenges in cutting through some noise to get that compelling Tilly’s message out there, and it may be because competitors are being promotional or not, or whatever that may be solving inventory problems that they may have. We may allow in our mix of messaging which is heavily branded, heavily lifestyle and heavily value oriented. We may let the value messaging kind of bubble up a little bit more prominently. It doesn’t mean we are changing and taking promotions to a higher level. It’s maybe letting that part of the messaging rise to help us offset what maybe some be a more promotional competitive environment.

Unidentified Analyst

So if you are leaning on promotions to drive traffic, can you talk about some of the levers that you do use to get more people in the store?

Dan Griesemer

So we have a pretty expensive marketing capability that includes catalog, mailing, e-commerce, e-commerce is a significant customization and e-commerce communication with the customer through emailing, a mobile platform that is very rich experience and fully integrated into the store and the online experience will complement social, but when it all comes down to it, if the kid walks in and likes what they see then we’re going to be the place that they are going to continue to come back to when they want to shop.

And we remain intensely focused on making sure that the brand mix and the product mix and the fashion relevant product is there and that’s the bigger thing. We will mail the appropriate number of catalogs, we’ll be sending out an aggressively marketing on email and online and through social media the things that we have in our mix, but what you won’t see us do is take a percentage off the store in order affect some sort of short-term result.

Unidentified Analyst

Last year post back to school you saw a pretty precipitous drop in trends that you weren’t expecting and we talked about consumers buying closer to need, but even in that scenario, it seemed like a pretty dramatic shift versus what you are sort of wait for. Is the pace of that shift buying closer need as we think about better terms that you talk about in August and still conservative view given concerns about sporadic shopping, and are you still as worried about that as a drag as we move past key back to school selling period or could the pace across the quarter be less severe in terms of the shift towards back to school?

Dan Griesemer

We are still so some of our Southern California stores just went back to school a day before yesterday. So we are just host back to school. I don’t have anything that I can share other than, we were pleased with the positive results we saw out of the core back to school window, and we still remain cautious given the pattern that we have seen for multiple quarters now, not just, it’s been sustained that we could see this return to more soft non-discretionary time or discretionary time period selling.

So we are remaining, that’s why we talked about the flat comp guidance which is below what we believe is long term but we think it’s appropriate given what we are seeing in the business. So we don’t really have a different view right now.

Unidentified Analyst

And your store productivity related to some the couple peers to peers and the margins are comparatively low which suggests some opportunity to list both of those overtime as a P&L driver. We talked about some of the comp opportunity as you think about margins, how do you think about progression over the next 12 months with things like promotions, potential margin pressure, e-commerce, what's your outlook over that horizon?

Dan Griesemer

Do you want to take that or you want me to?

Jennifer Ehrhardt

Sure. Firstly when you look at from a margin perspective and opportunity, I think the one thing and Dan already mentioned it that we really focused on is always making sure we manage our inventory. So you manage your inventory, you keep it clean, you keep it fresh, you keep it relevant for the customer, that has been, I think, our [bigger recipe] from the perspective of really being able to deliver those margins that we have in the past.

And we're going to continue that practice going forward. When you look at margin and opportunities, I don't think it's anything that we feel like product margin, we can drive a lot more significant product margin out of there, I think it's same consistent with what we've done in the past and just tightly managing the inventory from margin perspective.

Unidentified Analyst

Your markdown rate as a percentage of sale are pretty low relative to the rest of industry. So is it really just a function of driving cost and leveraging and fixed cost or are there any other opportunities you can think of as far as efficiencies go in order to get that much metric up there?

Jennifer Ehrhardt

I think it's definitely a perspective of comp. I think we stated in the past that typically our leverage is at about a 3% comp and we can really start leveraging, SG&A is actually lower than that when we get leverage. So from that perspective, we will look at leverage going forward, being able to get back from our top line. But I think also just from a SG&A perspective, you'll see that we always from a cost savings management, we tightly manage cost in the business and we'll continue to do that going forward as well and any other opportunity we can get out of that we will.

Unidentified Analyst

We have on some moving mic, if anyone has a question raise your hand. As you think about.

Unidentified Analyst

Can you talk to the surf category given kind of what we are going to hear with (inaudible) the restructuring at Quick Silver and kind of how you see the growth of that category within your business and how you are approaching it?

Dan Griesemer

Yes, surfs specifically. Maybe I will defer talking about surfs specifically and say that what we're seeing out of action sports in general, and I think it's important to distinguish Billabong Inc. and Quicksilver Inc. versus the brands themselves and the brands that are in their portfolio. So we look at the actions sports industry in general, and say the industry is capable of newness and innovation and rejuvenation and morphing in to whatever is relevant to this action sports inspired kit, and it’s much broader than surf, it’s broader than surf and skate. It includes a lot of different components of lifestyle that are relevant nationally.

So I kind of defer talking specifically about surf and more that the industry itself and the newness that continues to come out of the industry and how it expresses itself in both core and fashion styles and looks is part of what I think makes this so different than a lot of the other components of team retail because it directly caters to the kids who wants to be a bit of an independent, express themselves uniquely, a bit of a rebel, a little bit off the mainstream but still fit in with this kind of overall lifestyle. So it's our view, my view is that it's an incredibly healthy and dynamic.

Unidentified Analyst

Just a follow-up question. Separately when you think about the trends that have been happening with teen retail specifically with the phenomenon for over 21 and kind of fast retailing, fast fashion, have you seen any changes in your consumer buying behavior given that you guys aren’t really kind of a fast fashion group and you see any in kind of your consumer preferences?

Dan Griesemer

Well the shifts that came, actually we have a pretty meaningful fast fashion component on our junior side of the business, which is very large part of our business again very balanced, a little bit more heavily weighted towards men than women, but the junior business is a very big and vibrant part of our business and if you go into our store you will see branded junior product, but you will also see a strong compliment of fast fashion that really is whatever is happening right now in that customers mind.

So we’ve been doing that for quite some time and again of the back to the way the business model is still and the way we procure product we are reacting to those trends very closely and staying, keeping on pace and keeping very relevant to that and there are some great things happening in that part of business.

Unidentified Analyst

So are you happy with the mix as you sense today or how do you see that mix evolving between your typical standard business versus the fast fashion business that you have going on?

Dan Griesemer

Yeah. So it’s a pretty meaningful component on the junior side, but in total its within balance, we still remain 70% branded, 30% private label. Of that private label of portion of that is fast fashion and we really like and I think now and in times, when its may be a little bit more challenging from a macro standpoint, you see the brilliance of the business model and its ability to deliver quality results even in more challenging time periods and maintaining integrity of the brand and the pricing structure.

Unidentified Analyst

Thank you.

Unidentified Analyst

Could elaborate and/or define what you mean by need to buy period and when those periods are. I have three children clearly in your target age group and it’s always a need to buy (inaudible)?

Dan Griesemer

Okay good. So for our 14 to 24 customer that’s kind of the demographic we’re talking about. We remain focused on and relevant to and have for a very long-time. What I am referring to is the peak - is the back-to-school time period let’s talk the most recent back-to-school. Black Friday weekend and cyber week, the key Christmas purchasing time period and for our customer it’s shortly before Christmas and then it’s just post which is an important time, then spring break is a meaningful need to buy time period as well as right when the kids get out of school. So the kick off of summer whatever that maybe and it’s different nationally. So right back-to-school happens different times, Thanks Giving and Christmas happens the same time everywhere, but spring is also different and when kids get out of school, so it’s kind of [cool] school, but that’s what I referring to the need to buy.

Unidentified Analyst

Yeah just wondering your thoughts on during those discretionary periods of time how much is shifting from retail Brick & Mortar to internet, if you are seeing kind of trends fall off within the internet channel as well.

Dan Griesemer

The trends and relativities in our business have remained the same across product categories, across channels, across venue types malls versus up malls, its been a river dropping a little bit in those kind of more discretionary time periods, and its not lead by anyone channel or category or brand or anything.

Unidentified Analyst

Can you talk about A, your concentration and a few sort of sunbelt markets and your expansion in to new markets, what your difference in brand awareness, if you look at that data is between those heritage markets and some of the newer markets and then the difference in sale productivity per square foot, in some of your newer markets versus the areas where you are really well known.

Dan Griesemer

So we continue to see as we are moving forward with our national expansion in a very manageable and controlled way, targeting long term targets in the mid teens square footage growth, but not demanding any particular number. It’s let - only the very best real estate opportunities proceed and when you recognize that we do have a large concentration in stores in California and Arizona and to a lesser degree Florida to your sunbelt comments.

We see significant opportunity nationally and in all parts of the country. There really is no region for markets types that isn’t working for us, and we know that because we also see significant ecommerce business across the country and that remains an important part of our growth story, we see at last measure about 40% of our business comes from places outside of 25 miles from the store, and we also know when we put a store in a new market, we see both the store perform well and the e-commerce sales growth from there. So it's not a transfer, it’s kind of now they have the full Tilly's experience.

We believe that there remains significant growth, but there are no rates here. So I want, I like everybody to understand, it's not like we have to get to 500 stores in X number of quarters or the game is over. It's quality, sustainable growth bringing to the business only the right long term deals from a real estate standpoint. To the brand recognition, we see extraordinary performance all over the country. We continue to open new stores that we are pleased with their performance, their relativities, their performance in new markets and if I suppose if we go through some of the metrics, but they all remain same just slightly drop because of the overall traffic in macro environment.

But every component of this model, the new store economic model, we remain completely committed to and see that performing. Performance of new stores and new markets versus new stores and what we've historically heritage markets, that all remains the same. It is the same sort of growth curve, new markets and got new stores in new markets roughly having a five year or so ramp period to get to maturity. We are now at the five year mark for the very first stores in Florida and they are approaching that number and reinforcing that. So it all remains quite stable.

Unidentified Analyst

You have one of the -- you talked about your sort of dynamic model and the frequency with which you flow products and stores very (inaudible) product and stores. And it seems like you have some unique feedback between your individual stores or ability to sort of understand on a decentralized level how product is working. Can you talk about your systems and the way that they allow you to keep on top of what products are selling well in the market and what's not?

Dan Griesemer

So our entire infrastructure is built around getting newness and freshness in front of our customers as quickly and efficiently as possible. And so the all systems and operational procedures and the distribution center and how the DC prepares product for floor ready so it can once it's received, it's quickly out on the floor versus pushing a lot of that to the store to get it ready. All of it is built around as quicker read of newness to the customers possible and that manifests itself in all kinds of ways.

The reporting in systems that we have in our -- that our teams used to determine what to reorder and what product to put in more stores and how to reallocate or plan for a new seasons, all those systems and capabilities which by the way, all the systems, all that investment has been made. So it's all there. It's like something we need to do in order to continue to grow. All that exists so that we can uniquely customize the offering based on the brands and styles to perform best in each individual location to the system capabilities there.

Unidentified Analyst

Jennifer, you too show on the spot, you are pretty new in the CFO seat, it would be great to hear a little bit about your background and how you came to Tilly’s?

Jennifer Ehrhardt

Sure. (inaudible) it would be better on Saturday, Bill is back, back in Orange County right now getting our 10-Q out today and finishing that up for us. But a little bit about me, I actually came from Wet Seal, I was there for four years since I joined this company back in May. So joined on as the Vice President of Finance and was helping Bill with projects and different things along that way, that line and then was just recently in August appointed as CFO.

Prior to my time at Wet Seal, I was actually a long-term Deloitte employee, I was there for 13 years, worked in various industries, various cities kind of moved all around, spent a couple of years here international headquarters as well.

So a of different experience from a public accounting perspective, the SEC reporting along those lines, retail more recently related to Wet Seal, which is, for those of that don’t know, junior fast fashion that we are just talking about our junior business and that fashion aspect of that is very similar to what I am used to as well.

Unidentified Analyst

And as you’ve been in your first, I guess few months of company some of the opportunities that you see as far as growth in developing the brand?

Jennifer Ehrhardt

Those one of the reasons I came here is just the opportunity. When you look at our stores at the end of Q2, we are 182 stores and as we’ve mentioned expansion up to 500, when we believe we have the right deals to get there and to grow over the years. So when I came in May, quickly looked at what Bill, the team here built the processes, the foundation, he has built a really strong foundation to grow this company.

I believe the infrastructure that we have in place and the investments we have made actually will also allow us to grow the business without a lot of added cost. My focus is going to be on continuing to maintain what I believe Bill and the team has done a great job at and that is making sure we are on top of our inventory management really expressing and demonstrating tight cost controls and savings. I think a lot of the other thing that I like and I have done in my past as well is just looking at opportunities for efficiencies around processes and how we could do things in the back offices a little bit differently and save more money and be able to get more of the leverage that we are talking about earlier.

Unidentified Analyst

Bill you talked a lot about this very methodical approach to store expansion and the importance to protecting the brands and not growing for growth stake. So what are some and that’s actually distinct from some other retailers as we’ve heard to even now who have very specific store targets and are sort of merits to them. So as you think about what you look for to determine we should either accelerate or slow down the pace of those expansion really key things that you are focused on?

Dan Griesemer

Well, there is a lot to that. For us it’s about the real estate pipeline and the ability to deliver the very best quality real estate. And so essentially what we are doing is not, there is more opportunity than we are taking advantage of. And so for us it’s a process to let each individual deal, deliver the very best combination of venue location within the venue and economics as well as our ability to execute it in a quality way. So we could probably open lot more stores, but this 15% range is the number that we feel comfortable as a company that we can also still with compelling merchandize and with trained quality people to create facilities experience that our customer expects.

In terms of macro signals, internally we are looking at every metric you can imagine to go is there a regions in country, is there a venue type, is there some sort of fundamental or brand or category of business that isn’t working in certain places to have a second guess, and all signals continue to reinforce the long-term opportunity that we have nationally for this brand, there is no question.

So then it becomes, well what’s the macro environment and what are the implications of proceeding at whatever pace and so we continue to model near term and long-term financial plans that show. We have a huge opportunity but no raise, and we will only bring to the business the economics and the deals that make the most long term sense to the ten year for the most part, ten year or plus commitments. So we want to make sure they are of the highest caliber and then reading all of the elements of the business to say well, if we ratchet it up in more challenging times and becoming the more disciplined or more discretionary, expect or require higher threshold spend they are most capable of weathering anything in the future. So we are just very rigorous in the process across the board, but reading all the macro and internal signs to say how do we keep proceeding.

Unidentified Analyst

You have capacity to open up even more stores in the markets like an California for example or you select your?

Dan Griesemer

We believe there is still opportunity in California and in Arizona and in markets where we've been for quite some time and it's evidenced by the performance of those stores and the performance of the new stores. And anywhere we put a store in those heritage markets, they perform and come out of the box as they have historically better and leverage that brand recognition. But it is obvious with such a large percentage in California that the majority of the growth would be elsewhere, but as markets evolves and we have presence over years that becomes easier too.

Unidentified Analyst

Okay. And then on just on capital allocation. A, how are you prioritizing uses of cash and do you expect to see CapEx over the next one or two years increasing same, same, decreasing?

Dan Griesemer

Do you want to take that?

Jennifer Ehrhardt

With perspective of how we’re allocating cash, if we look at what we've spent so far and what we've actually cut out that we expect CapEx this year to be anywhere between $40 million and $45 million, of that the $23 million is for new stores and remodel of existing stores. So you can look at that's where a significant chunk of cash of being invested right now.

And also we've mentioned as well our e-com distribution facility that we began investing in and that's a $40 million spend as well. So when you look at that on the $40 million to $45 million and you would say going forward we just expect more of about a $30 million to $35 million spend, with the difference going to your normal IT maintenance upgrade, things along those lines.

Unidentified Analyst

Okay, great. Well, I guess we'll wrap there. There is a break out in the Pulitzer Suite. Thank you, guys.

Dan Griesemer

Thanks so much.

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