Tilly's, Inc. Q3 FY2025 earnings call

• Nate Smith noted Tilly's returned to positive quarterly comparable net sales since 2021, with positive comps in each month and week of Q3, and the trend continued into Q4 with double-digit store comps. - Strategic initiatives include aiming to increase proprietary brand sales penetration to ~40% annually (a 3-point increase from current year-to-date), leveraging consumer segmentation, and marketing efforts like brand ambassador campaigns. - Operational upgrades: Launched an AI-driven price optimization tool in September, plans to launch AI-driven merchandise replenishment/allocation tool and RFID in 2026, and explore agentic AI for operational efficiencies.

Total net sales were $139.6 million, a decrease of 2.7%. Comparable net sales for the thirteen-week period ended 11/01/2025 increased by 2%, with physical stores up 5.3% and e-commerce down 9%. Physical stores contributed 79% of total net sales (vs. 77.6% last year), while e-commerce was 21% (vs. 22.4% last year). Gross margin was 30.5% of net sales, an improvement of 460 basis points from last year's 25.9%. SG&A expenses were $44.5 million, or 31.9% of net sales, a reduction of $6.7 million from the prior year. Pretax loss was $1.4 million (1% of net sales) and net loss was $1.4 million.

• Fiscal 2025 Q4 net sales expected in the range of approximately $106 million to $151 million, translating to a comparable net sales increase of 4% to 8%. - Expected product margin improvement of approximately 300 to 350 basis points compared to last year's Q4. - SG&A to be approximately $50 million to $51 million before potential non-cash store asset impairment charges. - Plan to close 7 stores near the end of Q4, bringing total store count to 223 at fiscal year-end.

• Uncertainties in remaining store lease negotiations affecting the actual number of store closures. - Potential risks associated with inventory strategy if the environment shifts, related to private label expansion. - Dependence on successful execution of technological upgrades like RFID and AI tools to achieve expected operational efficiencies.

Q: Hey, good afternoon, and congrats on the return to positive comps. I wanted to hear a little bit more on how much do you attribute to the better assortment that you're holding, sort of the different marketing posture that you've been talking about for a quarter or so?

A: Nate Smith said it's a combination of assortment and marketing, with head merchant team bringing in trend-relevant third-party brands and marketing team promoting well, roughly 50-50. Michael Henry added that comps are driven by improvement in conversion rate, average sale transaction value, and transaction count, with traffic roughly flat quarter to date in Q4.

Q: Wanted to hear a bit more on the private brand penetration that you're talking about. It sounds like you're ratcheting up the targeted percentage of revenue that may be coming from private label. How soon can you get to the penetration you're talking about?

A: Nate Smith said it will happen over time, over the next three to five months. Michael Henry mentioned year-to-date private label penetration is just under 37%, and they're aiming to move it three points.

Q: For context, I guess, have you said publicly, guys, on sort of the margin spread between your private label versus third-party brands, and how should we be factoring that into sort of the margin improvement over time?

A: Michael Henry said they haven't given details as it's different by product category and not something to get granular on in a public setting.

Q: One of the other things you mentioned was the e-commerce headwinds in the quarter were really driven by less clearance selling. Remind us when we started the newer strategy on the e-commerce channel in terms of just, you know, fewer clearances? When do we lap that in potentially, I guess, that becomes a bit less of a drag on the top line, going forward.

A: Michael Henry said it's been an effort all year long, entering this fiscal year, with too much clearance business last year being the driver of negative online comp in Q3, and there's still a meaningful reduction in clearance business this year in Q4 compared to last year.

Q: On SG&A, it looks like really good control on the SG&A expense. And, you know, pretty notable store payroll reduction. Some pretty notable fulfillment reductions as well, I guess. How sustainable are those, on a go-forward basis? How should we think about, you know, maybe some operating leverage in the model go forward if the positive comp sustains?

A: Michael Henry said leverage will come from improved sales square foot productivity in stores, with stores using on average 7% fewer hours than a year ago while producing positive comp, and they'll continue to be thoughtful on store payroll usage, though there are minimum wage increases to consider.

Q: On the capital allocation and footprint front, one, store posture seems like are we done with store closures for the near term, or is there more we could do heading into next year? To kinda rightsize the fleet? And then on the RFID implementation that you guys mentioned, just curious is there incremental cost associated with that heading into next fiscal year, I guess, or even in the near term?

A: Michael Henry said there are still more store closures possible depending on remaining lease negotiations, and on RFID, not a major expense that would move the dial, with some spend already in this year and some added in next year but not creating meaningful expense increase.