Tilly's, Inc. Q2 FY2027 earnings call

• Sales Momentum: Delivered third consecutive quarter of double-digit comp sales growth (12.1% in Q2). Achieved 13 consecutive months of YoY comparable net sales growth, including a strong 14.6% comp in fiscal August.
• Profitability Turnaround: Posted fifth consecutive quarter of YoY profit improvement. Returned to profitability on a trailing four-quarter basis (~$2 million profit) and YTD basis for fiscal 2026. Aimed for first profitable fiscal year since 2022.
• Merchandising & Inventory: All departments except footwear posted double-digit comp gains. Improved product margins driven by current inventory aging and AI-driven price optimization. Sales grew 8% while inventory dollars decreased 1% in Q2.
• Digital & Brand Growth: E-commerce grew 20.9%. TikTok followers nearly doubled to over 325,000. Loyalty program members grew 20% to 4.6 million.
• Store Real Estate: Opened 2 stores in late July/early August; expect 1 more in mid-November. Closed 1 store in July; expect closures in Sept, Dec, and Jan to end the year at 218 stores. Target opening 5-8 new stores in FY2027.
• Technology Investments: Launched AI price optimization (Oct 2025). Launching AI-driven smart inventory allocation tool soon. Implementing RFID in footwear stores in early 2027 to improve efficiency.

Total net sales were $163.5 million, an increase of 8.1% year-over-year. Physical stores contributed 78.9% of total net sales with a 5.1% comp sales growth, while e-commerce contributed 21.1% of total net sales with a 20.9% comp sales growth. Gross margin improved by 300 basis points to 35.5% of net sales. Product margins improved by 140 basis points due to better full-price selling and clearance productivity. SG&A expenses were $49.9 million, or 30.5% of net sales. Pre-tax income was $8.5 million (5.2% of net sales), compared to $3.1 million (2.1%) last year. Net income was $8.4 million ($0.27 per diluted share), compared to $3.2 million ($0.10) last year.

• Q3 Fiscal 2026 Net Sales: Estimated between $150 million and $155 million, implying a comp sales increase of 10% to 14%.
• Product Margins: Expected to be slightly improved relative to last year's Q3.
• SG&A Expenses: Estimated between $47 million and $49 million, excluding potential non-cash asset impairment charges.
• Net Income: Estimated between $2.2 million and $3.7 million, translating to $0.07 to $0.12 per diluted share.
• Effective Tax Rate: Low to mid-teens, with continuing impact of a full non-cash valuation allowance on deferred tax assets.
• Store Count: Expect to end Q3 with 240 stores (net decrease of 10 from prior year period).

• Seasonal Deceleration: Historical trends show comp deceleration after back-to-school in September/October in 3 of the last 4 years, which could impact the upper end of Q3 guidance.
• Lease Renewals: Approximately 60-65 lease decisions are pending for FY2027; outcomes regarding rent spreads and extensions remain uncertain.
• Inventory Management: While currently well-positioned, there was a noted gap in footwear during back-to-school requiring chase buying; continued tight inventory management is critical.
• Forward-Looking Statements: Actual results may differ materially from expectations due to various factors affecting the business, as outlined in SEC filings.

Q: Matt Koranda asked about the drivers behind the accelerating comp sales (approaching 15% in August) despite tougher comparisons, and whether the business inflection has changed vendor negotiations for new brands. / A: CFO Henry attributed the acceleration to broad-based double-digit gains across all departments (except footwear) and geographies, fueled by effective back-to-school execution. CEO Smith stated that brand conversations focus on fit rather than Tilly's performance inflection, but confirmed they are actively pursuing specific brands that align with their strategy.

Q: Matt Koranda questioned why SG&A guidance for Q3 does not show significant operating leverage given the strong comp growth, asking what costs are holding it back. / A: Henry explained that SG&A as a % of sales should improve slightly (20 bps) similar to Q2. However, bonus accruals, totaling $1.5M in Q2, are included in Q3 guidance because profitability targets were exceeded. These bonuses are a non-comparable expense that adds to SG&A, offsetting some operational leverage.

Q: Gowshi Sriharan asked if the strong two-year comp trend gives confidence for double-digit comps in Q4 against a difficult prior year comparison, and how e-commerce mix impacts cost leverage. / A: Henry declined to give specific Q4 guidance but noted the two-year stack suggests comping 10% is feasible, though he couldn't predict if it would be single or double-digit. Regarding costs, he clarified that occupancy is largely fixed via straight-line accounting, while distribution costs vary with e-commerce shipping volume, meaning leverage depends on managing these variable logistics costs against sales growth.