Tilly's, Inc. Class A Aktie

Greetings, and welcome to the Tillys Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Gar Jackson with Investor Relations. You may begin.

Thank you. Good afternoon, and welcome to Tillys' fiscal 2026 second quarter earnings call. [ Nate Smith ], President and Chief Executive Officer, and Mike Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results, followed by a Q&A session with analysts. For a copy of Tillys' earnings press release, visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days.

Certain forward-looking statements will be made during this call that reflect Tillys' judgment and analysis only as of today, September 2, 2026, and actual results may differ materially from current expectations based on various factors affecting Tillys' 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2026 Form 10-K filing, which is furnished to the SEC today on Form 8-K, as well as our other filings at the SEC referenced in that disclaimer.

Today's call will be limited to 1 hour, and I will include a Q&A session after our prepared remarks. I now turn the call over to [ Nate ].

Thanks, Gar, and to all for joining us today. Good afternoon. A couple of weeks ago, I completed my first full year at Tillys, and I can say without a doubt that it's an exciting time being part of the team. The company has once again executed with discipline, delivering our third straight quarter of double-digit comp sales growth in the second quarter, with that momentum holding strong through back-to-school in July and August. In reflecting on this past year, we have clearly demonstrated a consistency in execution that we can be proud of. I'd like to acknowledge some important achievements that speak to the turnaround momentum that we have been building over the last year.

First, we have now produced 4 consecutive quarters and 13 consecutive months of year-over-year comparable net sales growth, including our 12.1% comp sales increase in the recently completed second quarter, and our 14.6% comp sales increase in fiscal August to begin the third quarter. Next, we have now delivered 7 consecutive quarters of year-over-year product margin improvement. We are not only seeing stronger full-price sales overall, but we are also seeing significantly improved average unit retails on aged clearance items from the impact of the AI price optimization investment we made last year. We've been delivering higher sales on lower inventory levels so far this year, further aiding our product margin gains.

Third, we have now posted 5 consecutive quarters of year-over-year profit improvement on the bottom line. This has been driven not only by improved merchandise assortments, tighter inventory planning and management, and sharper pricing decisions, but also through significant efficiencies in store and distribution labor management and stable home office expenses as sales have grown. And finally, the collection of these improvements has now returned us to profitability on a trailing 4-quarter basis, as well as on a basis for fiscal 2026. It's just under $2 million of profit over the past 4 quarters, and $400,000 of profit on a year-to-date basis. But these are important milestones cleared in our turnaround story as we work towards producing what we currently believe will be our first profitable fiscal year since 2022.

We are encouraged by our progress, but we're not finished. We intend to keep executing and building upon the momentum we've generated. From a merchandising perspective in the second quarter, all departments but footwear posted double-digit percentage comp sales gains. Performance was once again strong across both proprietary and third-party brands in apparel, with few exceptions. These results reflect an assortment that was well positioned for our critical back-to-school season. In terms of store performance, all geographic markets posted comp sales gains in the second quarter. Conversion, units per transaction, and average sale growth fueled the performance in our stores. We believe this demonstrates the strength of our assortment and the effectiveness of our customer engagement.

In terms of store real estate, we opened 1 new store in each of late July and early August, and we currently expect to open 1 additional store in mid-November. We also closed 1 store in mid-July and currently expect to close 1 store in each of late September and December, and 2 more at the end of January to finish the year with 218 total stores in operation. In fiscal 2027, we are tentatively targeting to open 5 to 8 new stores, depending on available opportunities and our ability to achieve appropriate lease economics. Our e-commerce business grew by 20.9% in the second quarter. Expanding our presence across the platforms our customers use most, including TikTok and other emerging channels, has been an important evolution of our online capabilities.

We believe our improved focus on social media platforms has helped reach new audiences based on our TikTok follower count nearly doubling to over 325,000 and our 1-year active loyalty program membership growing by 20% to 4.6 million members since this time last year. We need both stores and online performing well to reach our profitability goals, and we are encouraged by our customers' response to our product offerings and content across all touchpoints. In terms of technology investments, I already noted our investment in AI price optimization that was launched in October last year. We are also about to launch an AI-driven smart inventory allocation tool to improve accuracy in terms of units, sizing, and balance across our fleet of stores and online.

We will also implement RFID in our stores in early 2027, starting with footwear, to improve customer experience and in-store efficiency relating to size availability. These investments clearly indicate that we're moving forward with confidence and conviction as we continue to invest in the future of our business while we continue building our turnaround momentum. In closing, I want to once again thank and recognize our stores, field management, distribution centers, and home office teams for everything they've accomplished together this past year. There's still work ahead of us as we work toward returning to historical levels of profitability, but we are encouraged by the progress we've made and confident in the direction of the business. We look forward to updating you as we continue to execute against our long-term plan.

I will now turn the call over to Mike to walk through the details of our fiscal 2026 second quarter operating performance and to introduce our third quarter outlook.

Thanks, [ Nate ]. Details regarding our operating results for the second quarter of fiscal 2026 compared to last year's second quarter were as follows. Total net sales were $163.5 million, an increase of $12.3 million, or 8.1%. Total comparable net sales, including both physical stores and e-commerce, increased by 12.1%, marking our third consecutive quarter of double-digit comparable net sales increases. Total net sales from physical stores increased by 5.1% despite operating 12 fewer stores, or 5.2% less, than at the end of last year's second quarter, and represented 78.9% of total net sales for the quarter compared to 81.1% last year. E-commerce net sales increased by 20.9% and represented 21.1% of total net sales for the quarter compared to 18.9% last year.

Gross margin including buying, distribution, and occupancy expenses improved by 300 basis points to 35.5% of net sales from 32.5% of net sales last year. Product margins improved by 140 basis points compared to last year, primarily due to improved full-price selling of inventories that were more current in terms of aging and improved productivity from selling of clearance items. Buying, distribution, and occupancy costs improved by 160 basis points due to carrying these costs against higher net sales this year. Lower occupancy costs associated with our reduced store count were largely offset by higher e-commerce shipping expenses associated with e-commerce net sales growth.

Total SG&A expenses were $49.9 million, or 30.5% of net sales, compared to $46.4 million, or 30.7% of net sales last year. SG&A improved by 20 basis points as a percentage of net sales due to carrying these expenses against higher net sales this year. Bonus accruals associated with our significantly improved operating performance exceeding budgeted sales and earnings targets added $1.5 million to the quarter. Marketing expenses increased by $0.8 million in support of our net sales growth. Store payroll and related benefits increased by $0.6 million, but improved by 70 basis points as a percentage of net sales. Pre-tax income was $8.5 million, or 5.2% of net sales, compared to $3.1 million, or 2.1% of net sales last year.

Income tax expense was $86,000, or 1% of pre-tax income, compared to an income tax benefit of $41,000, or 1.3% of pre-tax income last year. Both years' income tax results include the continuing impact of a full non-cash deferred tax asset valuation allowance. Net income was $8.4 million, or $0.27 per diluted share, compared to $3.2 million, or $0.10 per diluted share last year, representing an improvement of $5.2 million, or $0.17 per diluted share compared to last year's second quarter. As [ Nate ] noted earlier, this represents our fifth consecutive quarter of year-over-year profit improvement, and we have now returned to profitability on a trailing 4-quarter basis for the first time since the end of fiscal 2022, and we are profitable on a year-to-date basis for the first half of fiscal 2026.

On our debt-free balance sheet, we ended the second quarter with total cash and investments of $62.2 million, an increase of $11.5 million compared to $50.7 million at the end of last year's second quarter. We had no borrowings at any time with available undrawn borrowing capacity of $63.3 million under our asset-backed credit facility at the end of the second quarter. Total balance sheet inventory decreased by 1.3% compared to the end of last year's second quarter, while being several percentage points more current within 90 days aged than a year ago. Looking to the third quarter of fiscal 2026, total comparable net sales for fiscal August ended August 29, 2026, increased by 14.6% relative to the comparable period of last year, marking our 13th consecutive month of comparable net sales growth.

Based on current and historical trends, we estimate the following ranges for the third quarter of fiscal 2026. Net sales of approximately $150 million to $155 million, translating to a comparable net sales increase range of 10% to 14% respectively, which if achieved would represent our fourth consecutive quarter of double-digit percentage comp sales growth. Product margins to be slightly improved relative to last year's third quarter. SG&A of approximately $47 million to $49 million, excluding any potential non-cash asset impairment charges. An estimated effective income tax rate in the low to mid-teens as a percentage of pre-tax income with a continuing impact of a full non-cash valuation allowance on our deferred tax assets.

Net income in the range of approximately $2.2 million to $3.7 million, respectively, to net sales and earnings per diluted share of $0.07 to $0.12, respectively, based on approximately 32 million diluted shares. This compares to a net loss of $1.4 million, or $0.05 per share, during last year's third quarter. These results would represent a sixth consecutive quarter of year-over-year profit improvement for us. We expect to end the third quarter with 240 total stores after 1 new store opening and 1 closure during the quarter, which represents a net decrease of 10 stores, or 4.3%, compared to the end of last year's third quarter.

We expect to end the third quarter with total liquidity of approximately $125 million or more, comprised of cash and investments of approximately $62 million to $65 million, and available undrawn borrowing capacity of approximately $63 million under our asset-backed credit facility. We'll now go to our Q&A session. Thank you.

We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Matt Koranda with Roth Capital Partners, LLC. Please proceed with your question.

I guess the August comp that you cited approaching about 15%, accelerating off of the 12% you put up in the second quarter, despite the tougher comparison that you got going on on a year-over-year basis. So I guess maybe just speak to that acceleration that you're seeing, what's working in the assortment, any incremental benefit from the TikTok Shop initiatives or other kinds of drivers that are driving that acceleration.

Well, really everything, as we mentioned, almost everything was double-digit positive in the second quarter, and that continued on through August. All departments but footwear were up double digits. It was broad-based across geographies. So really doing well just about anywhere you look. Really nice to see that kind of momentum continue all the way through the back-to-school season.

Okay, and then I noticed, I mean, inventory really tight and good performance there. Curious how you feel about sort of the assortment and the setup into the fall period here as you gear up for holiday? Are we in chase mode? How should we think about sort of inventory movement in the back half of the year as you sort of set up for the holiday season?

Yes, good question, Matt. So we, you know, we feel very strongly about how we're set up. We were, throughout the back-to-school season, we were largely speaking where we needed to be. There was a little bit of a gap in footwear. We chased some there, but going into fall and obviously heading into holiday, we feel good about where we're at. The team has done a nice job obviously managing the inventories where sales were up 8% on inventory down 1% in dollars in the second quarter, which is a great sign. So we feel good about the second quarter, and we feel strongly about how we're sorted and how we're preparing for the third quarter and holiday.

But overall, we continually sharpen our assortment. So we like where we're at. We were well positioned for back-to-school. But our CMO and team are continually sharpening the assortment every single week.

Okay. And then maybe just 1 or 2 more from you here. The inflection in the business and the acceleration that you're seeing in comp, has that changed the discussion with some of the vendors that historically you'd wanted to bring into the store, some of the brands that you were looking at bringing in but hadn't been able to before? I mean, maybe just speak to where the assortment sits in terms of the brand portfolio that is in existence now, and what you have available to you with the better performance here.

Yeah, it's a good question. I don't think the inflection of the business has a bearing on those conversations. I mean, we are a strong retailer, and the brands that we are speaking to understand what we have to offer as far as a customer base and our store experience. So, you know, generally speaking, the conversations we have with brands we want to bring in revolves more around, you know, is it a great fit for Tillys as opposed to the business is reaching an inflection point and now we're ready to engage with Tillys. So we feel good about where we're at. There are some brands on our radar that we are actively going after, and we feel good about our, you know, respect, you know, possibly bringing those in.

Okay. And maybe just last 1 on the, on what's built into the guidance from an operating leverage standpoint. I guess maybe Mike, I would have assumed with the really strong positive comp that you're guiding for the third quarter that maybe we'd get a little bit of leverage out of SG&A, but it doesn't look like that's built in at least at the midpoint. So maybe just speak to what are the, I guess, what are the things holding it back? I would assume maybe bonus accrual, but any other items to think about that are kind of keeping SG&A sort of growing in lockstep with sales?

Yes. SG&A should have a little bit of improvement as a percent of sales relative to last year's third quarter. Similarly to what you see in the second quarter, we were 20 basis points better. Most accruals are coming into that, given that we've returned to profitability and generating strong product margins and everything. Beating our targets significantly. That's an expense that hasn't existed in our model for 4 years. So it's a non-comparable if you think about that. And so as long as we can continue to execute the way that we've been executing, you might see similar sorts of movements from bonus in particular, that would maybe add a little more to SG&A than what you would typically expect.

Okay, got you. I'll end it there, guys. Thank you.

Our next question comes from the line of [ Gao Shui ] with Singular Research. Please proceed with your question.

Nice quarter, guys. Just on the question of third quarter guidance, with August already at kind of 15, what's the single biggest swing factor that decides what's going to happen? Or barrier to landing at the top end of the range?

Yes, good question. Most of the scenarios that we look at do point towards the upper end of our range. But when you look over the recent years, 3 of the last 4 years, our comp actually decelerated after back-to-school finished. And you got out of what I'll refer to as the need-based period of the quarter. We did see 3 of the last 4 years that September slowed by about 8 comp points relative to August. And that was consistent through 2022, 2023, and 2024. Last year was the exception where September was consistent with August and then October actually accelerated.

We're taking into account where we are. More of the scenarios that we've looked at do point to the upper end of the range as being the most likely landing point, but we are allowing for what if there is a deceleration like there has been in 3 of the most recent 4 years in the September-October timeframe, and acknowledging that October will be the toughest comparison of the quarter, even though it's the smallest month of the quarter, given it had the strongest performance of the quarter in last year's third quarter.

Got you. Okay. You said the merchandise commitments that you won't be chasing. But fourth quarter last year comped to around 10.1, and that's kind of generally a hard lap you've faced. Does the 2-year stack, as you're seeing in August, give you confidence that you can hold a double-digit comp against that, are we still kind of planning for a single-digit or planning to stack to flatten out?

Well, we haven't issued any kind of specific guidance for fourth quarter yet. We always just go 1 quarter at a time. But looking at the 2-year would suggest that we can comp the 10%. Whether or not it's in single digits or double digits, we'll see that when we get into the holiday season. I'd really love, I think we'd all really love it if we could see us double digit on top of double digit. That would be phenomenal. But, you know, I can't predict the future with any specificity to know whether that's coming or not. But I can tell you we're certainly planning for and expecting for us to have a positive comp in the fourth quarter. To what extent, I don't know. It's too early.

Got you. With the e-commerce industry, you said the low occupancy costs were largely offset by higher e-commerce shipping this quarter. E-commerce was around 28% fourth quarter last year. As the mix, highest mix, does buying and distribution and occupancy still leverage on a positive comp?

It has been. As we've been producing the comps that we've got. Occupancy, from an accounting perspective, most of it is recognized on a straight-line basis over the life of the lease. So occupancy dollars, all things being equal in terms of store count, you would expect occupancy to stay pretty stable dollars-wise. And then there are relatively fixed elements of distribution as well. Things that move within distribution are e-commerce shipping and shipping costs to our stores, depending on volume, number of units and boxes that we're shipping. So that's the variable element of distribution that can move around. And then buying is just the buying team. So it's the salaries and efforts of the buying team. So that stays pretty consistent from quarter to quarter as well.

I'll make this my last question. [ Nate ], you said this is your first profitable year since 2022. I know your landlords must be hearing that too. So how many of your leases come up for renewal in the next 12 months, and what part of that renewal spread will be looking like versus expiring rent?

I know Mike's got the actual numbers, and we're already engaged with many of our landlords. Every year we have leases that expire that will begin negotiating. In the prior years, we're negotiating now for extensions on those stores that are coming due, no different than any other year. Mike, you know, do you have the exact numbers?

Yeah, we have 20 lease decisions left to make for this fiscal year by the time the end of the fiscal year comes, and we would anticipate keeping all 20 of those stores. Next year we have roughly 60 to 65 lease decisions to make for leases that are expiring during fiscal 2027. We're starting to have conversations about 2027 expirations. We've agreed to certain things already. So it's a constant effort working through the lease expirations that are coming up anywhere in the next 6 to 12 to 18 months. And that will continue as we sit here today. We don't know of any additional closures that would come up. There likely will be some as we go forward, but it's just not clear what that number is. The great majority of our leases tend to expire towards the end of the fiscal year. As it relates to 2027, most of those decisions are still 15 months out, 16 months out.

Thank you, guys. Congratulations, and I'll get back to you.

Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back over to CEO [ Nate Smith ] for closing remarks.

Thank you for joining us on the call today, and we look forward to sharing more progress with you during our third quarter earnings call in early December. Have a good evening.

Thank you, and this concludes today's conference. Thank you for participating. You may now disconnect your lines at this time.

Greetings, and welcome to Tilly's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Gar Jackson with Investor Relations. Thank you, Gar. You may begin.

Good afternoon, and welcome to the Tilly's Fiscal 2026 First Quarter Earnings Call. Nate Smith, President and Chief Executive Officer; and Mike Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results, followed by a Q&A session with analysts.

For a copy of the Tilly's press release, please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, June 3, 2026, and actual results may differ materially from current expectations based on various 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2026 first quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer.

Today's call will be limited to 1 hour, and I will include a Q&A session after our prepared remarks. I now turn the call over to Nate.

Thanks, Gar, and to all for joining us today. The turnaround momentum that we began building in fiscal 2025 has carried meaningfully into the new year, and we are pleased with how we have started fiscal 2026. For the third consecutive quarter and ninth consecutive month, we delivered comparable net sales growth with total sales landing at the top of our outlook range for the first quarter.

We posted a robust 22.9% comparable net sales increase for the first quarter with both stores and e-com comping in excess of 20%. In what is historically our smallest sales quarter of the fiscal year, we narrowed our net loss to just under $8 million from last year's first quarter net loss of over $22 million, delivering our fourth consecutive quarter of year-over-year profit improvement and coming in $0.01 ahead of the upper end of our earnings per share outlook range.

The trend of our business has been moving in the right direction, and it is doing so with increasing consistency. Returning to profitability in fiscal 2026 is our foremost priority. While there is still work ahead of us, the sales trends we have been seeing, assuming they continue, give us genuine confidence that we're on the right path to potentially get there.

Comparable net sales in fiscal May increased by 8.3% to start the second quarter, extending our streak of monthly comparable net sales growth to 10 straight fiscal months. That consistency is not something we take lightly. It reflects real progress in the business. We aim to continue building on this momentum as the year progresses.

In terms of first quarter merchandise performance compared to last year's first quarter, all departments posted double-digit comp sales gains. Performance was strong across both proprietary and third-party brands with very few exceptions. Product margins improved by 400 basis points with improved full price selling from inventories that were more current in terms of aging versus a year ago.

This was our sixth consecutive quarter delivering product margin rate improvement relative to the corresponding period of the prior year. We believe the work we have put in to more clearly understand and define our key customer profiles has helped us build and merchandise assortments, both in-store and online with clearer strategy and focus than in the past.

This, in turn, has resulted in greater and more consistent customer engagement for us as evidenced by both store and online traffic growth compared to last year's first quarter and customer loyalty program growth of 10% in terms of customers with activity within the last year and the doubling of our TikTok following since launching our TikTok shop last March to meet our customers where they spend much of their commercial lives.

We believe the dual impact of improved product assortments that are merchandised well, blended with impactful marketing strategies has led to these results. And these results speak for themselves. Customers are coming back. We believe that our efforts are moving the needle in a real and measurable way.

In terms of stores, all geographic markets posted double-digit comp sales gains relative to last year's first quarter. As planned, we opened 1 store and closed 4 during the first quarter. We currently expect to open 2 new stores in late July and 1 more in late October and to close one existing store in mid-July and another at the end of the fiscal year.

The improvement in our business has us looking forward with optimism, including the possibility of expanding our net store footprint in fiscal 2027. We are not ready to commit to specific numbers of all the locations just yet, but we are having those conversations, and that alone marks a meaningful shift in how we are thinking about future opportunities of this business.

We continue to invest in our infrastructure to improve operating efficiencies. Over the last several months, we have been reviewing and making changes to various strategic and tactical elements relating to our online business and digital marketing efforts, which we believe are beginning to generate improved site performance and efficiency.

In addition, we expect to launch an AI-driven merchandise allocation tool before the holiday season to help us improve initial allocation accuracy across our stores and online. These are just a couple of examples among many others that are underway with the overarching goal of improving our execution quality and operating efficiency. In closing, I want to take a moment to recognize what this team has accomplished.

Turning a business around is hard work. It requires discipline, focus and a willingness to make difficult decisions day after day. Our stores, field management, distribution centers and home office have all risen to that challenge, and the results we are seeing are a direct reflection of their effort and commitment. I'm genuinely proud of what we have built together over these past several quarters. That said, we are not done.

Returning to historical levels of store sales productivity and the operating performance this business is capable of is the goal we're driving toward, and we know there is meaningful work still ahead of us to get to that point. We are also clear-eyed about the external environment.

There are headwinds out there, but we have demonstrated that we can execute, and we enter the balance of fiscal 2026 with confidence in our plan and in the people carrying it out. The progress and momentum is real, and we look forward to continuing to share it with you.

I'll now turn the call over to Mike to walk through the details of our fiscal 2026 first quarter operating performance and to introduce our second quarter outlook.

Thanks, Nate. Details regarding our operating results for the first quarter of fiscal 2026 compared to last year's first quarter were as follows: Total net sales were $124.7 million, an increase of $17.1 million or 15.9%. Total comparable net sales, including both physical stores and e-commerce, increased by 22.9%.

As Nate noted earlier, one of the strongest first quarter results in company history. Total net sales from physical stores increased by 12.1% despite a 7.6% reduction in quarter end store count compared to last year's first quarter and represented 77.2% of total net sales compared to 79.8% last year.

E-commerce net sales increased by 30.9% and represented 22.8% of total net sales compared to 20.2% last year. Gross margin, including buying, distribution and occupancy expenses, improved by 910 basis points to 28.9% of net sales from 19.8% of net sales last year.

Product margins improved by 400 basis points compared to last year, primarily due to improved full price selling of inventories that were more current in terms of aging. Buying, distribution and occupancy costs improved by 520 basis points or $0.9 million due primarily to reduced occupancy costs associated with our lower store count and carrying these costs against higher total net sales.

Total SG&A expenses were $44.2 million or 35.4% of net sales and improved by 550 basis points as a percentage of net sales due to carrying these expenses against higher net sales. Minor increases in digital marketing spend in home office and store payroll were largely offset by lower noncash asset write-off charges of $1 million.

Pretax loss was $7.8 million or 6.3% of net sales compared to $22.3 million or 20.7% of net sales last year. Income tax expense was $137,000 or 1.7% of pretax loss compared to an income tax benefit of $139,000 or 0.6% of pretax loss last year.

Both years income tax results include the continuing impact of a full noncash deferred tax asset valuation allowance. Net loss was $8 million or $0.26 per share compared to $22.2 million or $0.74 per share last year, resulting in an improvement of $14.2 million or $0.48 per share compared to last year's first quarter.

On our debt-free balance sheet, we ended the first quarter with total cash and investments of $41.1 million compared to $37.2 million last year and no borrowings at any time with available undrawn borrowing capacity of $50.7 million under our asset-backed credit facility. This represents an important moment in our turnaround journey as we have returned to building cash year-over-year for the first time since the end of the third quarter of fiscal 2021.

Total balance sheet inventory was 6.4% lower than at the end of last year's first quarter and meaningfully more current within 90 days age than a year ago. Looking to the second quarter of fiscal 2026, total comparable net sales for fiscal May ended May 30, 2026, increased by 8.3% relative to the comparable period of last year, marking our 10th consecutive month of comparable net sales growth.

Based on current and historical trends, we estimate the following ranges for the second quarter of fiscal 2026. Net sales of approximately $154 million to $160 million, translating to a comparable net sales increase range of 6% to 10%, respectively.

Product margins to be flat to up slightly compared to last year's company record rate for a fiscal second quarter; SG&A of approximately $48 million to $49 million, excluding any potential noncash asset impairment charges; a near 0 effective income tax rate due to the continuing impact of a full noncash valuation allowance on our deferred tax assets; net income of approximately $3.8 million to $6 million, respectively, to net sales and net income per diluted share of $0.13 to $0.20, respectively, based on approximately 30.3 million diluted shares.

These results would represent a fifth consecutive quarter of year-over-year profit improvement for us. We expect to end the second quarter with 221 total stores, a net decrease of 11 stores or 4.7% compared to the end of last year's second quarter. We expect to end the second quarter with total liquidity in excess of $120 million, comprised of cash and investments of approximately $59 million to $63 million and available undrawn borrowing capacity of approximately $63 million under our asset-backed credit facility.

This compares to total cash and investments of $51 million and $63 million of undrawn borrowing capacity at the end of the second quarter last year. Operator, we'll now go to our Q&A session.

[Operator Instructions] And our first question comes from the line of Matt Koranda with ROTH.

It's Joseph on for Matt. Just want to see if we could start here on the cadence of comps during 1Q. If you could just talk about the month-to-month trends. I know you mentioned in May, you've seen off to a good start right at the midpoint of your 2Q guide, but if we could talk about 1Q comps during the quarter.

Sure. So as we announced with our last earnings call, fiscal February was up 20.1%. And then March was up 39.5% and April was up 5.1% to finish the quarter at 22.9%.

We had the Easter shift this year. Recall, Easter was a couple of weeks earlier, so it did shift business into March and out of April. So that's why you see such the wide disparity between March and April comps.

Got it. And as we look out to, I guess, 2Q, how should we expect just qualitatively, if you could talk about comps into 2Q as we're entering the back-to-school season, anything to call out here?

Sure. In terms of size of the month, May is typically about 25% of the quarter, and the quarter gets -- each month gets larger as you go through the quarter. So June is a 5-week month in the retail calendar, so it will be larger than May.

And then the 4 largest sales weeks of the quarter are all in July in ascending order to where the very last week is the largest week of the quarter. So we won't really know the full answer of the quarter until we get completely to the end of the second quarter because the early stages of the back-to-school season kick in, especially in that latter half of July.

So we'll have meaningfully higher weekly sales volumes as we go through July than what we have had through May and what we will have likely in June to finish out the quarter. And then the range that we put out of the plus 6% to plus 10% comp is really just rooted in recent year sales trends and how those cadences in second quarter has performed, capturing right in the middle where we're sitting right now.

There is opportunity for us to perform a little better than where we're sitting right now. The back-to-school season has been in recent years, the strongest performing period of the year for us, even in the years when we were struggling with negative comps through '22, '23, '24, first half of '25.

And then, of course, as Nate noted, we know there's headwinds out there, too. So trying to give a little bit of room to absorb anything that might be unexpected, things that are outside of our control that we might not be able to influence.

Got it. Okay. I just want to see if you can just hop down into product margin improvement. Just want to see how much is structural in the new baseline versus the recovery? Just wanted to see how you're thinking about product margins as we kind of face 2Q and toward the back half of the year.

Yes. The first quarter, we had 400 basis points of margin improvement, and we don't expect that kind of level to continue through the rest of the year. We do expect to continue to improve our product margins year-over-year. As we said for the second quarter to be flat to slightly up.

We've produced 6 consecutive quarters of product margin improvement and we've actually been producing company record rates of product margin for the last few quarters. So we're performing very well, very healthy on the product margin side, inventory control, all those things working together to produce these kinds of results, and we expect our product margins to remain very healthy as we go forward.

And our next question comes from the line of Gowshi Sri with Singular Research.

Can you guys hear me?

Yes.

I'll keep this tight and get straight to the questions. But what I did want to say is that the strong numbers kind of validates a lot of what you've been telling the market for the last 12 months and the trajectory seems to be clearly real.

So my questions today are really about the durability and the mechanics of what comes next. So in terms of inventory buildup, as you're running at 20% comps and you've talked about deliberately staying in the chase mode and making sharper upfront commitments and chasing winners.

At what point does the strong comp momentum actually force you to kind of build more inventory upfront than you're comfortable with? Have you had to loosen the inventory discipline to support the kind of the back-to-school floor set? And if so, is there any kind of comp deceleration risk in kind of the back half of the year?

We're planning for a successful back-to-school season. We actually have run into situations where certain key items have sold through so fast that we are running lighter than we'd like in certain areas.

So to your question, as the business dictates, we're chasing as best we can to continue to fuel the momentum that is clearly in our business currently. Unfortunately, we've had a couple of key items where we haven't been able to replenish as fast as we would like to continue the momentum in a couple of areas.

But broadly speaking, we're real happy with the age and the content of our inventory, and we're doing everything we can to continue to fuel the business. As we go into the second half of the year, we are going to start comping against what was the start of our positive comp trend, right? It started with August last year. We were plus 2% in Q3, and we were plus 10% in Q4.

So purely from a comparable standpoint, we're going to start going up against positive comp quarters as opposed to negative comp quarters, which we've been going against the last 3 quarters. But we still expect ourselves to deliver positive comps against those numbers. Those are our plans.

And I know, Nate, earlier we talked about the $280 kind of the range that you start generating profitability and kind of FY '25 ended at $260 per square foot. And now you've had kind of 2 quarters at plus 20 comps. Without giving me exact number, are you comfortable saying you're already past that $280 mark? Or what does the path to $300 actually look like from here in terms of comps or rate required?

Yes, I can tell you, Gowshi. Right now, finishing the second quarter, we've gotten our sales per square foot metric up to $271. So still well below the $300 plus that this company has delivered in the past.

So when we referenced that there's more work to do and still work ahead of us to get back to profitability, that's what we're focused on is getting that sales per square foot store productivity level back above $300. We are making progress. A quarter ago, that was at $260. Now it's at $270, and we're planning to continue to improve upon that as we go forward.

Excellent. And on the e-com, now that you guys have been in the range of around 20%, 22% could you definitely tell us whether TikTok is driving new customers or migrating existing new ones?

Now that the both channels are kind of running at double-digit positive simultaneously, have you gotten any better data on the customer acquisition through TikTok specifically? And is that 22.3% kind of structural breakout? Or does the channel mix structurally normalize back once the clearance lap comparisons fully washes out?

Yes, I think it's a combination of both, Gowshi. I mean certainly, we are gaining new customers. And certainly, there are some existing customers shopping we have seen over on TikTok. But in the end, the way the team and we are approaching this is it's all about this, what I would say is disciplined channel management.

TikTok is expanding our total addressable customer base. It's also increasing the purchase frequency of our existing base. And what we really like is it's reducing our long-term dependence on expensive paid acquisition. In the meantime, all of our blended comps remain positive. So in the end, I don't think our customer -- he doesn't think -- and she doesn't -- they don't think in channels.

They might discover us on TikTok, research us on Claude and buy on our dot-com or buy wherever is most convenient for them at the moment. And we really have to be present where they are and TikTok is where a large and growing segment of our customer base lives their commercial life.

And our job really is to remove that friction between intent and purchase. And TikTok Shop, frankly, eliminates that steps in that journey for a customer segment that we would otherwise have to acquire at a much higher acquisition cost through paid search or another avenue.

Got you. Got you. And in terms of now that you are thinking about opening stores as well as an e-comm is growing at double digits, what point does a distribution center become a capacity constraint, either e-com fulfillment or for store replenishment?

Is there any -- I'm wondering if there's any CapEx event in the next 12 to 18 months if this either to expand the distribution center or add a second node because would that be a step change in CapEx that your current sub-$10 million guidance doesn't appear to have baked in?

Absolutely not, Gowshi. We have plenty of capacity in both our stores distribution center and our e-comm fulfillment center. Not expecting any major CapEx, major overhaul or needing to find additional distribution capacity for us.

And with that, this does conclude our question-and-answer session. And I would now like to turn the floor back to Nate Smith for any closing remarks.

So thank you, and we look forward to sharing our continued progress.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful rest of your day.

Good afternoon, everyone, and welcome to the Tilly's Fourth Quarter and Full Year 2025 Earnings Conference Call.

[Operator Instructions]

Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Gar Jackson with Investor Relations. Please go ahead.

Good afternoon, and welcome to the Tilly's Fiscal 2025 Fourth Quarter Earnings Call. Nate Smith, President and Chief Executive Officer; and Michael Henry, Executive Vice President and Chief Financial Officer; will discuss the company's business and operating results and then host a Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of the call for the next 30 days.

Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, March 11, 2026, and actual results may differ materially from current expectations based on various 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2025 fourth quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer.

Today's call will be limited to 1 hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Nate.

Thank you, Gar, and good afternoon to everyone joining us today. We finished fiscal 2025 surpassing our expectations on both the top line and bottom line for the fourth quarter relative to our outlook provided in early December. We ended the fiscal year with 6 consecutive months of accelerating positive comp momentum and 18 consecutive positive comp weeks. That momentum drove our first profitable fourth quarter and first positive comp sales fiscal year since fiscal 2021. Our momentum has continued to start fiscal 2026 with a plus 20% comparable net sales result in February. We have meaningfully improved our merchandise assortments and evolved our brand and digital marketing efforts to improve our customer engagement.

Additionally, we have closed underperforming stores and sustained solid operational execution, delivering significantly improved results compared to last year. From a merchandising perspective, we began fiscal 2025 looking to reinvigorate our brand mix and to clean up excess [indiscernible] age inventory. With each passing quarter, our comparable net sales results and product margins improved as these changes were being made, ultimately leading to comp sales growth throughout the second half of fiscal 2025, which is momentum we are carrying into early fiscal 2026.

Our merchandising teams put in a lot of effort to make the necessary changes to drive these improved results and I'm confident in their abilities to drive further improvements in fiscal 2026. I'd especially like to acknowledge Michael Cingolani, who we just promoted to Chief Merchandising Officer for his leadership and tireless efforts in turning our sales trajectory around over the past year and setting us up for such a strong start to fiscal 2026.

Good product offerings need to be supported by effective marketing strategies and tactics to help new customers realize who we are and what we have to offer, to update existing customers on changes we have made and to reintroduce Tilly's to former customers who may have disengaged from our brand. We believe our marketing team's efforts to drive greater consumer awareness and consideration for Tilly's have made a significant impact through engaging campaigns, refreshed content and exciting events as evidenced by our growing TikTok following and reversing declines in our active customer loyalty program membership. These efforts will continue in various ways throughout fiscal '26 to build upon the successes achieved in fiscal 2025.

In terms of store real estate, with the improved store comp trends we've seen over the last 7 months and counting and because our unit economics support it, we are now pivoting from a store closure posture, to a disciplined approach to new store openings in fiscal 2026 with a plan to open 4 to 6 new stores. We will remain selective and reasonably conservative in our future expectations for new stores, but it is encouraging to reach an inflection point of feeling the confidence to begin strategically considering store growth again. Fiscal 2025 was a year of significant store optimization, resulting in 21 total store closures.

We are proud of the fact that we were able to deliver sales growth in the fourth quarter with 17 fewer net stores. At the present time, we have 4 known store closures that will take place late in the first quarter. And while that number may change as the year progresses, we do not currently expect to close a significant number of additional stores this year. Our infrastructure investments and a price optimization tool during the second half of fiscal 2025 and in warehouse management software in mid-fiscal 2024, have now been producing the anticipated benefits we expected.

Our price optimization tool has contributed meaningfully to our improved fourth quarter product margins, the new warehouse system is now helping drive significant labor efficiencies within our store and e-com distribution centers. Further investments in our business are expected to continue during fiscal 2026, including an AI-driven merchandise allocation tool that we believe will lead to greater operating efficiencies over time.

In closing, we are very excited about our prospects for fiscal 2026. We believe our turnaround is real. The fundamentals are fixed. Our top line is growing. We are looking to reinitiate store growth. We must continue to build upon the progress made thus far. The team has done the hard work, now we're optimizing.

We are not yet profitable on an annualized basis, but we see a clear path to get there after generating profit in 2 of the last 3 quarters. We built forward momentum in our business throughout fiscal 2025, and that momentum has carried into an unprecedented start to fiscal 2026. Given current trends, we expect to deliver further improvement in both top line and bottom line performance in each quarter of the year. We look forward to discussing our progress with you as the year progresses.

I will now turn the call over to Mike to share the details about our fiscal 2025 fourth quarter operating results and to introduce our fiscal 2026 first quarter outlook.

Thanks, Nate. We finished fiscal 2025 with stronger sales and product margins than we anticipated, along with lower expenses to achieve our first profitable fourth quarter since fiscal 2021. Details of our fourth quarter operating results compared to last year's fourth quarter were as follows: Total net sales of $155.1 million increased by 5.3% despite finishing fiscal 2025 with 17 fewer stores than a year ago. Comparable net sales for the 13-week period ended January 31, 2026, including both physical stores and e-com, increased by 10.1% with increases from both physical stores and e-com of 10.3% and 9.8%, respectively. That strong fourth quarter comp performance was enough to pull our full year comp sales slightly positive for the first time since fiscal 2021 at plus 0.3%.

Total net sales from physical stores increased by 3.6% despite our 7.1% reduction in year-over-year store count. Net sales from physical stores represented 72.3% of total net sales compared to 73.5% last year. E-com net sales represented 27.7% of total net sales compared to 26.5% last year. Gross margin, including buying, distribution and occupancy expenses increased to 33.2% of net sales, an improvement of 720 basis points compared to 26% of net sales last year. Product margins improved by 470 basis points as a result of higher initial markups and lower total markdowns associated with operating with reduced and more current inventories than a year ago. Buying, distribution and occupancy costs improved by 250 basis points or $1.9 million in the aggregate, primarily due to lower occupancy costs associated with our reduced store count and partially offset by increased shipping costs associated with our online net sales growth.

Total SG&A expenses were $48.9 million or 31.5% of net sales, a reduction of $3.5 million or 410 basis points as a percentage of net sales compared to $52.4 million or 35.6% of net sales last year. Significant SG&A reductions compared to last year's fourth quarter were attributable to store payroll and related benefits of $1.6 million, primarily related to our reduced store count, lower noncash impairment charges of $0.7 million, reduced e-com fulfillment labor of $0.7 million and a variety of smaller reductions across several line items.

Operating income improved to $2.6 million or 1.7% of net sales from an operating loss of $14.1 million or 9.6% of net sales last year. Income tax expense was $18,000 or 0.6% of pretax income compared to $0.2 million or 1.8% of pretax loss last year. Both years include the continuing impact of a full noncash valuation allowance on our deferred tax assets.

Net income improved to $2.9 million or $0.10 per diluted share compared to a net loss of $13.7 million or $0.45 per share last year representing an improvement of $16.6 million or $0.55 per share versus last year's fourth quarter.

Turning to our balance sheet. We ended fiscal '25 with total liquidity of $87.8 million comprised of cash of $46.3 million, no debt and available borrowing capacity of $41.5 million under our asset-backed credit facility. Net inventories were 10.8% lower with an improved inventory aging compared to a year ago. Total capital expenditures for fiscal 2025 were $4.7 million compared to $8.2 million in fiscal 2024.

Turning to the first quarter of fiscal 2026. Comparable net sales for the first month of the year ended February 28, 2026, increased by 20.1% relative to the comparable period of 2025. Based on current and historical trends, we currently expect the following for our fiscal 2026 first quarter operating results: Total net sales to be in the range of approximately $119 million to $125 million translating to a comparable net sales increase of 16% to 22%, respectively. We currently expect to generate product margin improvements of approximately 310 to 330 basis points compared to last year's first quarter. SG&A to be approximately $44 million to $45 million before factoring in any potential noncash store asset impairment charges, which may arise. Pretax loss and net loss to be in the range of approximately $10.1 million to $8 million, respectively, with a near 0 effective income tax rate due to the continuing impact of a full noncash valuation allowance on our deferred tax assets, and loss per share to be in the range of $0.34 to $0.27, respectively, compared to a loss per share of $0.74 in last year's first quarter with estimated weighted average shares of approximately 30.1 million.

We currently expect to end the first quarter with 220 total stores, a net decrease of 18 stores or 7.6% from the end of the first quarter of fiscal 2025. We are not in a position to provide annual guidance given we cannot predict our comparable net sales performance for the balance of the fiscal year with any certainty. However, for illustrative purposes regarding our potential to return to profitability in fiscal 2026 and subject to various assumptions with respect to product margins, inventory levels and expenses, we estimate that it would take an annualized comparable net sales increase of approximately 8% to 9% to begin generating profitability for fiscal 2026 as a whole.

In closing, as Nate noted earlier, we are optimistic about our prospects in fiscal 2026 based on the sequential improvement in our comparable net sales trend we achieved from quarter-to-quarter throughout fiscal 2025 and into our strong start to fiscal 2026. Operator, we'll now go to our Q&A session.

[Operator Instructions]

Our first question today comes from Matt Koranda from ROTH Capital.

Nice work in the quarter. I guess, first off, just curious about the composition of the strong comp for the fourth quarter, in particular, it looks like based on the comments from the last time you guys gave public commentary, it probably accelerated in December and January, so I wanted to hear about sort of the acceleration in comp, but also if you can break down traffic versus ticket for that period, that would be helpful as well.

Sure, Matt. So going back to the beginning of the third quarter, we did a plus 1% in August, plus 1% in September, plus 6% in October, then a plus 8% in November, plus 10.6% in December, plus 12.4% in January. And as we just said, a plus 20.1% in February and March is off to an even stronger start than that so far. So really significant acceleration in our comp sales trend from month to month on top of the quarter-to-quarter performance we were achieving throughout fiscal 2025 from Q1 through Q4. So just really excited to see this kind of performance. Our conversion rate has been super strong. It's been high teens, double-digit percentage increase compared to last year. Traffic has been improving, both stores and e-com performing all departments positive. So pretty much everything is moving in a favorable direction.

Got it. Okay. Good to hear. And then I guess just wanted to hear a little bit about what you think is working in the assortment, obviously, really strong acceleration all the way through the February commentary you gave, and it sounds like March sounds pretty good. What's working? What do you think is kind of driving higher traffic? And is there something in the assortment in particular? Is it a better marketing posture? Maybe just help us identify kind of the big levers you've pulled.

Yes. Thanks, Matt. This is Nate. Mike and I were talking last night about this. And we were constructing what -- we figured this question would come. It really is across every category. We're not seeing any spike in any particular category. We're seeing strength across the board, both genders and kids. So I think obviously, our private label is working as well. So I think when we think about what was causing some of our struggles, it started with the assortment. We feel very strongly now our assortment across the board across all categories is where it needs to be. And we mentioned Michael Cingolani coming in and taking charge of that and now being promoted to the CMO role.

So I think that was a huge component of it. But it's also -- the inventory situation was addressed too. Now we're selling far more full price than we were, say, a year ago that we were selling a lot of off-price with aged and obsolete inventory. So our inventory levels are healthier. Our assortment is stronger. We've obviously rationalized some of our underperforming store and the consequence of all that is now really healthy margins.

Okay. All right. That's helpful. On the store openings, it sounds like you're telegraphing net opener of stores this year, considering the 4 to 6, you mentioned in terms of open and only a handful of closures near term. What determines the path forward on further expansion, I guess, maybe just help us understand where your head's at on store expansion over maybe the medium to longer term? And then what are we factoring in maybe for Mike on CapEx for the store expansion this year?

So to your first question, Matt, I think what we feel good about our unit economics. We feel good about our ability to execute. For me, it's more the consumer spending environment in the long term. If the macro does turn against discretionary retail spending, certainly double-digit comps will become harder to sustain no matter how well we execute. But largely speaking, I'd say we're leaning into it this year and can only expect to be more aggressive in '27 the way we're viewing our business today.

Yes. In terms of total CapEx, we don't expect our CapEx to reach $10 million in the aggregate. It's been less than that each of the last 2 years, as we noted in our prepared remarks, should be similar neighborhood, I'd say, not more than $8 million to $9 million would be our expectation as we sit here today. And look, we're still on the path of recovery. We struggled for a lot in the first half of '25. So we've lost a lot of productivity in terms of sales per square foot, finishing fiscal '25.

[Technical Difficulty]

And again, we do apologize for the audio break. We are reconnecting Mr. Henry's line, one more moment, we should have them back on the line for you. And this is the conference operator. Once again, we've reconnected Michael's line into the conference. Michael, we still have Matt on the line for you if you like to continue with the Q&A.

Yes. Sorry about that, everybody. We had some sort of technical glitch happen here that booted us out of the line. So apologies for that little hiccup. We're back.

Right. Got it. Just want to make sure. I think Mike, you may have -- you kind of dropped off when you're talking about CapEx for stores, probably no greater than $8 million to $9 million, and then you started getting a little choppy. So maybe if you want to finish the commentary around that, would be helpful.

Yes. I started talking about our sales per square foot that we're ending fiscal '25 at roughly about $260 a square foot, which is still well below where we've been as a business in the past. And we would expect ourselves to continue to improve on that metric. And as we do, we'll continue to give us greater confidence in even expanding the rate of store expansion that we've noted for this year to even higher levels in future years is what we would expect to be able to do. So lots of room yet to continue to improve this business. We struggled a lot through fiscal '22, '23, '24, first half of '25 and we're just beginning to regain that lost ground that we struggled with for that 3- to 4-year period. So we'll walk before we run. We'll continue to be reasonably conservative in our expectations for new stores. They have to be at the right economics. But it's nice to reach this inflection point where we're starting to look ahead and feel confident about our ability to reinitiate growth.

Okay. Great. Maybe just last one from me. It was helpful to hear the commentary on sort of the zone in which you'd be profitable from a comp perspective? Just curious if there's any other assumptions that we should be embedding in that profitability outlook or hypothetical, I guess, profitability outlook. Is there more gross margin leverage embedded in that assumption with a 8% to 9% comp. Is there more you can do on SG&A expense that kind of gets you to the breakeven line? Or is it just a simple sort of comp assumption you're making?

So good question. So Mike talked about the sales per square foot, which is we have targets we want to hit. But on the other side of that, we're really on the efficiency journey now is what we're calling it. And we see a clear path with things like our price optimization tool, where we will continue to see margin upside. We've got our AI solution to planning allocation, rolling out here later -- latter part of this year with impact analytics. We'll be launching RFID latter part of this year, which will give us obviously, better inventory accuracy, resulting in a reduction of stock-outs. It will also cut our manual inventory accounting time by probably 80% to 90%.

And then we've got a series of back-end efficiency projects as it relates to all of our product handling and fulfillment processes to include store labor efficiency, which is another work stream we've got underway. So we're approaching this from both sides, not only sales per square foot, but what we would consider to be efficiency on the back end.

Yes. And just to add on to that, an 8% to 9% comp increase does not correlate to a proportionate increase in SG&A to the efficiency comments that Nate is making from a variety of angles. The aggregate increase in SG&A despite continuing minimum wage increases and other cost pressures would not cause SG&A in the aggregate to go up as much as you might expect with a 8% to 9% comp. We do also expect to continue to improve product margins this year, more in the front half of the year than in the back half of the year, if you follow the cadence of our product margin improvement that we achieved each quarter through fiscal 2025. We're still going to have a meaningful amount in Q1. It will start to moderate, but still be triple digits in Q2 if all goes as planned and then it would more moderate in Q3 and Q4.

And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

I'd just like to say thank you for joining us today, and we look forward to sharing our fiscal 2026 first quarter results with you in early June. Have a good afternoon. Have a good evening.

And with that, everyone, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Good afternoon, and welcome to Tilly's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the Tilly's Fiscal 2025 Third Quarter Earnings Call. Nate Smith, President and Chief Executive Officer; and Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results and then host a Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days.

Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, December 3, 2025, and actual results may differ materially from current expectations based on various 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2025 third quarter earnings release, which was furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to 1 hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Nate.

Thank you, Gar, and good afternoon to everyone joining us today. I have now been with Tilly's for 3.5 months. Having spent a good portion of my career on the brand side of the industry, I have always viewed Tilly's as a powerful retailer with a lot of opportunity, which is what attracted me to join the company. I've had the opportunity to get to know our team, familiarize myself with our processes and participate in fiscal 2026 departmental budget meetings. We have a highly experienced and talented team that is incredibly passionate about this business and is hyper focused on efforts to get Tilly's back to a profitable and sustainable growth model. I've been impressed by the level of effort and commitment I've seen from our team not only since I've arrived, but also by how hard they work to try to turn this business around prior to my arrival.

We believe we are now seeing green shoots of progress from those collective efforts. I'm very excited to announce that the third quarter of fiscal 2025 produced our first positive quarterly comparable net sales result since the fourth quarter of fiscal 2021, with positive comps in each month of the quarter and positive comps in stores for each week of the quarter. Coming on the heels of a profitable second quarter, our third quarter performance gives us confidence that we have started to stabilize our business and are moving in the right direction. It is also worth mentioning that the positive sales trend in the third quarter has continued into the fourth quarter with double-digit store comps and an accelerating sales trend overall in October and November compared to August and September.

We believe that these results are a direct byproduct of our strategic initiatives around merchandise assortment, inventory planning, marketing and expense management and our team's ability to execute them. We are very encouraged by our progress, yet still have a lot to accomplish to reach our goal of producing profitability on a consistent basis. First and foremost, we must continue to grow sales in healthy ways. We plan to increase the sales penetration of our proprietary brands to approximately 40% on an annualized basis, an increase of approximately 3 points from our current year-to-date penetration to seek to improve product exclusivity and control over logistics, pricing and product margins. Our customers have been choosing our proprietary brands to a greater extent this year than in the past, and we believe more opportunities exist.

We must consistently remain on trend and produce a high-quality assortment to accomplish our goal. While doing that, we will continue to source and support lifestyle relevant third-party brands, which has always been at the core of our multi-brand business and what our customers love about us. This is not expected to change. We do not plan to over-index on proprietary brands to the detriment of our important third-party brand partners, but we believe there is a better balance to be found that can generate greater sales and product margins for us overall. Additionally, we are leaning heavily into social commerce, and we've already seen rapid growth in sales this year from our TikTok shop launched back in March.

As we aim to build stronger connections and consideration for Tilly's, it's important that we clearly understand who our customers are and how we think about building our merchandise assortments from them for them. To that end, we recently completed an extensive consumer segmentation survey that defines 6 primary consumer profiles that currently exist in our customer demographics and drive a substantial majority of our business. We serve a variety of consumer types, not just one, and we must carefully plan how our assortment choices speak to these consumer profiles to help them define their look and build greater following for Tilly's over longer periods of time. We must now work to operationalize our understanding of these consumer profiles into our assortment building and marketing processes to help us to continue to make progress towards improving our business.

We will continue to invest in exclusive opportunities to build awareness, consideration and following for Tilly's. We have been very active in this regard recently and plan to continue to be going forward. For example, in late October, we launched a brand ambassador campaign featuring one of the original and most followed TikTok content creators, Loren Gray, who has over 50 million TikTok followers in addition to being an actor, singer and Tilly's customer while growing up. We will be hosting a VIP customer experience with Loren in our Irvine Spectrum store this Saturday on December 6. We believe she is a great representation of our brand ethos of fostering self-confidence and mental wellness through expression of personal style.

We also held an exclusive pop-up event in our Irvine Spectrum store in late October with Malibu Skyye brand Founder and CEO, Tia McKenzie, which was live streamed via TikTok. We believe these impressive and successful young women align with our brand very well, and we're looking forward to seeing the impact that these kinds of engagements can have for us as we continue to evolve how we think about utilizing our marketing resources. On the operational side of things, we are in the process of both implementing and evaluating various technological upgrades that we believe will improve our performance going forward. In September, we launched an AI-driven price optimization tool. Early indications are that this tool is leading to improved average unit retail selling prices with sharper, more surgical pricing decisions, leading to improved product margins and sell-through rates.

In the second half of fiscal 2026, we plan to launch an AI-driven merchandise replenishment and allocation tool to improve inventory efficiency in our stores and online. We also plan to launch RFID in our stores to improve inventory accuracy, customer experience and in-store efficiency. Finally, we are exploring the use of agentic AI in our business and believe there are some exciting opportunities to improve operational efficiencies through automation in certain aspects of merchandise planning and allocation, distribution, store labor planning and marketing campaign development. In closing, it's an exciting time to be here at Tilly's with ample opportunities to continue improving the business.

As I said before, the team has worked very hard to get to this point, yet we have so much more in front of us that can be accomplished to continue building upon the momentum we are currently seeing and the progress made thus far. I'm excited to be here. The team is enthusiastic, and I look forward to discussing our progress with you as time goes on. I will now turn the call over to Mike to share the details about our third quarter operating results and our fourth quarter outlook.

Thanks, Nate. Details of our third quarter operating results compared to last year's third quarter were as follows: total net sales of $139.6 million decreased by 2.7%. Comparable net sales for the 13-week period ended November 1, 2025, including both physical stores and e-com, increased by 2% with an increase from physical stores of 5.3% and a decrease from e-com of 9%. Total net sales from physical stores decreased by 0.9%, primarily due to a 6.5% reduction in year-over-year store count. Net sales from physical stores represented 79% of total net sales compared to 77.6% last year. The net sales decline online was primarily attributable to a 51% reduction in clearance sales compared to last year's third quarter, indicating a much healthier full price quality of online sales this year. E-com net sales represented 21% of total net sales compared to 22.4% last year.

Gross margin, including buying, distribution and occupancy expenses, was 30.5% of net sales, an improvement of 460 basis points compared to 25.9% of net sales last year. Product margins improved by 390 basis points as a result of higher initial markups and lower total markdowns associated with operating with reduced and more current inventories than a year ago. Buying, distribution and occupancy costs improved by 70 basis points and were reduced by $2 million in the aggregate, largely due to lower occupancy costs associated with our reduced store count. Total SG&A expenses were $44.5 million or 31.9% of net sales, a reduction of $6.7 million compared to $51.3 million or 35.7% of net sales last year. Primary SG&A reductions compared to last year's third quarter were attributable to store payroll and related benefits of $1.5 million, e-com fulfillment labor of $1.5 million, lower noncash impairment charges of $1.1 million and a variety of smaller reductions across several line items.

Pretax loss improved to $1.4 million or 1% of net sales compared to $12.9 million or 9% of net sales last year. Income tax expense was $25,000, a negative 1.8% tax rate compared to an income tax benefit of $5,000 last year, a near 0 tax rate. Both years include the continuing impact of a full noncash valuation allowance on our deferred tax assets. This quarter's income tax expense despite our pretax loss position was attributable to state net margin taxes. Net loss improved to $1.4 million or $0.05 per share compared to $12.9 million or $0.43 per share last year, representing an improvement of $11.5 million or $0.38 per share versus last year's third quarter.

Turning to our balance sheet. We ended the third quarter with total liquidity of $100.7 million, comprised of cash of $39 million and available undrawn borrowing capacity of $61.6 million under our asset-backed credit facility. Net inventories decreased by 12.8% compared to the end of the third quarter last year. Total year-to-date capital expenditures for the first 3 quarters were $3.4 million compared to $6.7 million last year. Turning to the fourth quarter of fiscal 2025. Fiscal November marked our fourth consecutive month of comparable net sales growth. Through December 2, 2025, quarter-to-date comparable net sales increased by 6.7% relative to the comparable period ended December 3, 2024, including comparable net sales growth of 9.3% from Thanksgiving Day through yesterday.

Based on current and historical trends, we currently expect the following for our fiscal 2025 fourth quarter operating results. Total net sales to be in the range of approximately $146 million to $151 million, translating to a comparable net sales increase of 4% to 8%, respectively. We currently expect to generate product margin improvements of approximately 300 to 350 basis points compared to last year's fourth quarter. SG&A to be approximately $50 million to $51 million before factoring in any potential noncash store asset impairment charges, which may arise. Pretax loss and net loss to be in the range of approximately $5.6 million to $3.5 million, respectively, with a near 0 effective income tax rate due to the continuing impact of the previously disclosed full noncash valuation allowance on our deferred tax assets and loss per share to be in the range of $0.19 to $0.12, respectively, compared to a loss per share of $0.45 in last year's fourth quarter with estimated weighted average shares of approximately 30.1 million.

We currently expect to close 7 stores near the end of the fourth quarter to bring our total store count to 223 at the end of the fiscal year, a net decrease of 17 stores or 7.1% from the end of fiscal 2024. The actual number of store closures may still increase by fiscal year-end depending on the outcome of remaining store lease negotiations. In closing, we're encouraged by the forward momentum we've been building during fiscal 2025 as evidenced by our sequential improvement in quarterly comparable net sales trends since the end of fiscal 2024 into positive territory for the third and fourth quarters of 2025. We believe we're on the right path to continue delivering improvements relative to the prior year in the fourth quarter and on into fiscal 2026. Operator, we'll now go to our Q&A session.

[Operator Instructions]. The first question will come from Matt Koranda with ROTH Capital.

Congrats on the return to positive comps. I guess let's start there. What I wanted to hear a little bit more on was how much do you attribute to the better assortment that you're holding versus sort of the different marketing posture that you've been talking about for a quarter or so. Maybe just unpack what you think the key drivers were to the return to positive comps. And then the acceleration into the fourth quarter, I wanted to hear more about what may be enabling that because given the, I guess, the product gross margin guide, it doesn't look like it's heavily promotion driven. So I just want to hear a little bit more on what's driving the recent acceleration.

Yes. Thanks, Matt. So I think to your question of what components are driving the positive comps, I truly feel it's a combination of both the assortment and the marketing. I would say our head merchant and his team have done a really great job bringing in third-party brands that are trend relevant and then obviously mixing that in with proprietary brands and collections that really resonate with our customers. But I have to give equal weight to our marketing team. They've done a really great job promoting Tilly's and what we stand for. So I would say short answer, I would call it 50-50.

And then I'll add in here, Matt, on your question about the acceleration into the fourth quarter. It definitely has not been promotionally driven. Generally speaking, product margins in the fourth quarter are the lowest of the fiscal year because of the Black Friday promos and deals around Christmas that occur. However, that's always been the case in the fourth quarter. And as we noted, we're anticipating improving our product margins by 300 to 350 basis points for the quarter. We just did 390 improvement in Q3. And we've been on this path of improving our product margins all through last year and this year, if you'll recall, our fiscal '23 product margins were the lowest in company history. And so that was certainly a focus of ours of starting the pathway towards improvement during 2024 is to start regaining some of that lost ground on product margin, and we've certainly accelerated that this year and particularly these last couple of quarters, which I think, again, speaks to the quality of the merchandise assortment, the brands we've been building in, all the work the merchant teams have done to improve our business.

Okay. That's good to hear. And then maybe just a little bit more on the composition of the improving comp. Are you seeing positive traffic embedded in that positive accelerating comp that you're talking about? I guess how much is in ticket as well? I was just curious sort of the decomposition of that.

Sure. So it's mostly driven by an improvement in conversion rate, a conversion -- improvement in average sale value and an increase in transaction count. Traffic has been roughly flat quarter-to-date in the fourth quarter. We did have positive store traffic on Black Friday itself. But quarter-to-date through yesterday, we're sitting just slightly below flat, minus 0.4%. It's really been a 6% to 7% increase in each of our conversion rate, our average sale transaction value and transaction count.

Okay. All right. Helpful, Mike. I 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? And I guess why are you confident that that's the right approach? It seems like the environment where maybe you have a bit of a trade down, consumers looking for value, so they may be looking to trade in a private label for now. But then if the environment shifts, there's maybe some risk to the inventory strategy. So I just wanted to hear a little bit more about sort of why you think it's the right way to proceed.

Well, I think I can -- I'll start, and then, Mike, maybe you've got some thoughts. I mean we have seen really strong sell-through on our proprietary brands year-to-date. So we've seen that trend continue. And I think the expansion we're doing, Matt, is really -- I don't want to call it ever so slight, but I don't think it will be noticeable at the store level. It will happen over time, I would say, over the next 3 to 5 months. But I don't think it's a dramatic shift in our business, but I think the team has really seen and we have seen really great sell-through and seen our proprietary brands resonate with our consumers.

Yes. And I'd just say, I think our merchant teams have done a really solid job of developing [ Rescue ] RSQ, our #1 brand, has been our #1 brand for the last couple of years, and they've continued to grow it. I think we've done a good job of being on trend with good quality product overall. Our year-to-date private label penetration is just under 37%. So we're talking about moving it 3 points, as Nate noted in his prepared remarks. And there are actually weeks right now where we're already north of 40%, quite honestly. So we're talking on an annualized basis. It does fluctuate through the year up and down depending on the season.

But it doesn't seem like a far stretch for us to go ahead and increase that by a couple of percentage points. And that's also some of the impact that you're seeing into the improvement in product margins as well as private label increases, generally speaking, product margins will go along with.

Yes. Okay. That's helpful. For context, I guess, what 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?

We haven't really given any details because it's different by product category. So you have to get a lot more granular, which obviously, we don't want to do that in a public setting like this.

Okay. Fair enough. And then I guess one of the other things you mentioned was the e-com headwinds in the quarter were really driven by less clearance selling. Remind us when we started the newer strategy in the e-comm channel in terms of just fewer clearances, -- when do we lap that and potentially, I guess, that becomes a bit less of a drag on the top line going forward?

It's been an effort of ours all year long, really entering this fiscal year. You'll recall, we had a much higher inventory level than we would have liked exiting last back-to-school and going into the holiday season, certainly had a very disappointing holiday quarter last year. And so we had to work our way out of inventory early this year through discounting as well as jobbing some things out to get rid of what didn't work. And as you'll know, having followed us as long as you have, we tend to -- once products have lived their healthy life in stores and have been through reg price selling, first markdown and then clearance, we tend to transfer things back to online and online over the history of our company has proven more effective at working through clearance items than stores.

We want the latest and greatest to be sitting in stores in the physical space as well as online, but online has generally proven to be a little more efficient at handling clearance business. There was too much of it last year, just quite frankly. And that was really the driver of the negative on the online comp in Q3. There's still a meaningful reduction in the percentage of clearance business this year in the fourth quarter compared to last year. And that will continue to be something that we'll go up against through the first quarter, especially given how much clearance we were doing at the time.

Yes. Okay. All right. That makes sense, Mike. And then I guess, just maybe 1 or 2 more. But on SG&A, it looks like really good control on the SG&A expense and 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 be thinking about maybe some operating leverage in the model go forward if the positive comp momentum sustains?

Yes. The leverage will really come from improved sales per square foot productivity in stores. That's ultimately what we need. I mean we're trying to be as thoughtfully sharp on our store payroll usage as we can. And -- in the third quarter, in particular, our stores used on average 7% fewer hours than they did a year ago while producing a positive comp. That's a tremendous effort, great deal of improved efficiency there. It's something that we pay strict attention to every single week all year long. It's a constant battle, trying to be as efficient as we can, trying to project individual store volumes as tightly as we can to make sure that we're putting our best effort at being as efficient as possible. That's going to continue.

Assuming that we continue to deliver improving comps and improved productivity, some of the raw dollars will continue to go up. We're going to continue to have minimum wage increases in certain jurisdictions. Those are pretty constant these days. Every year, we have another round of them. But we're doing everything we can to be as sharp as we can from an efficiency standpoint, and our store teams have just done a fantastic job in that regard, if you ask me.

Okay. Great. Maybe just last one, I'll make it two-pronged and leave it for whoever else wants to pick up the Q&A here. But on the capital allocation and footprint front, one, store posture, it seems like are we done with store closures for the near term? Or is there more we could do heading into next year to kind of rightsize the fleet? And then on the RFID implementation that you guys mentioned, just curious, is there incremental costs associated with that heading into next fiscal year, I guess, or even in the near term? I just want to hear a little bit more about how that may impact capital expense going forward.

Yes. So we noted that we have 7 store closures coming up towards the end of the fourth quarter. There's still some more that could happen depending on the outcome of remaining lease negotiations here in the last couple of months. We've been taking action on stores as we can at natural lease expiration or as available lease kickout clauses come up that we can execute, that's going to continue. So if a store is not acceptably profitable and we can't get the lease structure reset to be more reflective of where our current reality is, we're going to have to close stores as those opportunities present themselves. That's been a consistent effort of ours for the last few years.

But I think this year, you've seen more closures than at any time in the company's history previously, just so happens there have been quite a number of stores coming up that were not acceptably profitable or cash generating, and we've been getting rid of them as we have the opportunity to do so. And then on RFID, not a major spend there that would move the dial as you look at the total business. These technology investments that we're talking about have been in the works for some time. We've already initiated some of the preliminary work this year. So some of that spend is already in this year, and there will be some that will be added into next year, but not in a way that should create any meaningful expense increase that you'd notice.

That concludes our question-and-answer session. I would like to turn the conference back over to Nate Smith for any closing remarks.

Thank you for joining us today. We look forward to sharing our fiscal 2025 fourth quarter results with you in mid-March of 2026. Have a good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.