Tilly's Q2 Earnings Call Highlights

Key Points

• Tilly’s delivered strong fiscal Q2 results: Net sales rose 8.1% to $163.5 million, comparable sales increased 12.1% for the third consecutive quarter, and net income climbed to $8.4 million from $3.2 million.
• Profitability and liquidity improved: Gross margin expanded 300 basis points to 35.5% as inventory became more current, while cash and investments increased to $62.2 million and the company carried no borrowings.
• Momentum continued into the third quarter: August comparable sales rose 14.6%, and management expects Q3 comparable sales growth of 10%–14%, with net income forecast at $2.2 million–$3.7 million.

Tilly's NYSE: TLYS reported fiscal 2026 second-quarter results marked by double-digit comparable sales growth, wider gross margins and a significant increase in profitability, while management said momentum continued through the key back-to-school period.

Total net sales for the quarter rose 8.1% year over year to $163.5 million. Comparable net sales, including stores and e-commerce, increased 12.1%, representing the company’s third consecutive quarter of double-digit comparable sales gains. Net income increased to $8.4 million, or $0.27 per diluted share, from $3.2 million, or $0.10 per share, a year earlier.

• Betting On Tilly’s Inc NYSE: TLYS 12% Yield

President and CEO Nate Smith said the retailer has now generated four consecutive quarters and 13 consecutive months of year-over-year comparable net sales growth. He also pointed to improved merchandise margins, lower inventory levels and operating efficiencies as elements of the company’s turnaround.

“We have now returned to profitability on a trailing four quarters basis, as well as on a year-to-date basis for fiscal 2026,” Smith said. He said Tilly’s generated just under $2 million of profit during the trailing four quarters and approximately $400,000 of year-to-date profit.

Sales Growth Spanned Stores and Digital Channels

Physical-store net sales increased 5.1% despite the company operating 12 fewer stores than at the end of the prior-year second quarter. Stores accounted for 78.9% of quarterly sales, compared with 81.1% a year earlier.

E-commerce sales climbed 20.9% and represented 21.1% of total revenue, up from 18.9% in the prior-year quarter. Smith said Tilly’s has expanded its presence on platforms used by its customers, including TikTok and other emerging channels. The company’s TikTok follower count nearly doubled to more than 325,000, while one-year active loyalty-program membership increased 20% from a year earlier to 4.6 million members.

Smith said all merchandise departments except footwear posted double-digit comparable sales increases in the second quarter. Apparel performance was strong among both proprietary and third-party brands, he said. Store sales were supported by conversion, units per transaction and average sale growth, with comparable sales gains across all geographic markets.

During the analyst question-and-answer session, Chief Financial Officer Mike Henry said the broad-based sales trends continued through August, with nearly all departments posting double-digit gains.

Margins Improved as Inventory Declined

Gross margin improved 300 basis points to 35.5% of net sales from 32.5% a year earlier. Product margin rose 140 basis points, which Henry attributed primarily to stronger full-price sales of more current inventory and improved clearance-item productivity. Buying, distribution and occupancy costs improved 160 basis points as the company spread those expenses over higher sales.

Balance-sheet inventory declined 1.3% from the end of the prior-year second quarter and was more current, with inventory aged within 90 days several percentage points higher than a year earlier.

Smith said the retailer was “largely speaking where we needed to be” on inventory during back-to-school, though footwear had a gap that required some chasing. He said management feels positive about its fall and holiday assortment and continues to refine merchandise selections weekly.

Tilly’s also cited technology investments intended to support inventory management and pricing. The company’s AI-driven price-optimization tool, launched in October of the prior year, has helped improve average unit retails on aged clearance merchandise, according to Smith. Tilly’s plans to launch an AI-based inventory-allocation tool and begin implementing RFID in stores in early 2027, starting in footwear.

Expenses, Liquidity and Store Plans

Selling, general and administrative expense rose to $49.9 million from $46.4 million, but declined 20 basis points as a percentage of sales to 30.5%. The quarter included $1.5 million of bonus accruals tied to operating performance exceeding budgeted sales and earnings targets. Marketing spending increased $0.8 million, while store payroll and related benefits rose $0.6 million but improved 70 basis points as a percentage of sales.

The company ended the quarter with $62.2 million in cash and investments, up from $50.7 million a year earlier, and reported no borrowings. Available undrawn borrowing capacity under its asset-backed credit facility was $63.3 million.

Tilly’s opened stores in late July and early August and expects another opening in mid-November. It also closed one store in mid-July and expects additional closures through the end of the fiscal year, targeting 218 stores at year-end. For fiscal 2027, management is tentatively targeting five to eight new stores, subject to opportunities and lease economics.

Henry said the company has 20 lease decisions remaining in fiscal 2026 and anticipates retaining all 20 stores. It expects roughly 60 to 65 lease decisions during fiscal 2027, though management said it does not yet know of specific additional closures.

Third-Quarter Outlook Calls for Continued Growth

For fiscal August, which ended Aug. 29, Tilly’s reported a 14.6% comparable net sales increase, extending its comparable-sales growth streak to 13 months.

For the fiscal third quarter, the company forecast:

• Net sales of approximately $150 million to $155 million.
• Comparable net sales growth of 10% to 14%.
• Slight product-margin improvement from the prior-year third quarter.
• SG&A expense of approximately $47 million to $49 million, excluding potential non-cash asset impairment charges.
• Net income of approximately $2.2 million to $3.7 million, or $0.07 to $0.12 per diluted share.

The outlook compares with a net loss of $1.4 million, or $0.05 per share, in the prior-year third quarter. Henry said most internal scenarios point toward the upper end of the comparable-sales guidance range, but the company incorporated the possibility of a sales deceleration after the back-to-school period, as occurred in three of the past four years.

Management expects to finish the third quarter with 220 stores and total liquidity of approximately $125 million or more, including roughly $62 million to $65 million of cash and investments and about $63 million of undrawn credit capacity.

About Tilly's (NYSE:TLYS)

Tilly's, Inc is an American specialty retailer of casual apparel, footwear, accessories and hardgoods. Founded in 1982 by Hezy Shaked and Tilly Levine, the company has grown from a single denim and tops store in Garden Grove, California, to a nationwide retail chain. Headquartered in Irvine, California, Tilly's serves a youth-oriented market with an emphasis on surf, skate and streetwear brands.

The company's merchandise assortment includes products from leading lifestyle brands such as Vans, Nike, Billabong and Quiksilver, alongside its own private-label offerings.

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