Tillys (TLYS) Fiscal Q2 2026 Earnings Call: Comparable Sales Rise 12.1%

Key Takeaways

• Fiscal Q2 2026 net sales increased 8.1% year over year to $163.5 million, while comparable net sales rose 12.1%, marking a third consecutive quarter of double-digit comparable growth.
• Gross margin expanded 300 basis points to 35.5%. Product margin improved 140 basis points, supported by stronger full-price selling, fresher inventory and better clearance productivity.
• Net income increased to $8.4 million, or $0.27 per diluted share, from $3.2 million, or $0.10 per share. This was Tillys’ fifth consecutive quarter of year-over-year profit improvement.
• E-commerce sales grew 20.9% and accounted for 21.1% of quarterly net sales. Physical-store sales rose 5.1% despite Tillys operating 12 fewer stores than a year earlier.
• Comparable sales increased 14.6% in fiscal August. Management guided fiscal Q3 2026 net sales to $150 million-$155 million, implying comparable growth of 10%-14%.
• Tillys ended the quarter debt-free, with $62.2 million in cash and investments. Inventory declined 1.3% even as sales increased, and the inventory mix was more current than a year earlier.

Core Financial Data

Tillys generated just under $2 million of profit over the trailing four quarters and $400,000 in year-to-date profit. Management said the company is working toward its first profitable fiscal year since 2022.

Business and Operating Performance

Comparable sales increased across every geographic market. All merchandise departments except footwear produced double-digit comparable gains, with strength across both proprietary and third-party apparel brands. Store performance benefited from improved conversion, units per transaction and average sale.

Product margin has now improved year over year for seven consecutive quarters. Management attributed the latest increase to stronger full-price sales, tighter inventory management and higher average unit retail on aged clearance merchandise following the launch of an AI-based price optimization system in October 2025.

Sales growth also outpaced inventory. Quarterly net sales rose 8.1% while inventory declined 1.3%, with a greater proportion of inventory aged less than 90 days.

E-commerce grew 20.9%, supported by a broader presence on TikTok and other emerging channels. Tillys’ TikTok following nearly doubled to more than 325,000, while one-year active loyalty membership increased 20% to 4.6 million.

The company is preparing to launch an AI-driven inventory allocation tool designed to improve unit, size and location accuracy. It also plans to introduce RFID in stores in early 2027, beginning with footwear.

For fiscal 2027, management is tentatively targeting five to eight new stores, subject to available locations and acceptable lease economics.

Management Guidance

For fiscal Q3 2026, management provided the following outlook:

The guidance compares with a net loss of $1.4 million, or $0.05 per share, in the prior-year third quarter. If achieved, it would represent a sixth consecutive quarter of year-over-year profit improvement.

Management said most scenarios considered point toward the upper end of the comparable-sales guidance range. However, the company retained a wider range because comparable growth slowed after the back-to-school period in three of the past four years.

Tillys has not issued specific fiscal Q4 guidance. Management said it is planning for a positive fourth-quarter comparable-sales result but did not indicate whether growth would be in the single or double digits.

Risks and Watchpoints

• Comparable-sales momentum could decelerate after the need-based back-to-school period. In three of the past four years, September comparable growth slowed by about eight percentage points from August.
• October carries the most difficult year-over-year comparison within fiscal Q3, although it is the quarter’s smallest month.
• Footwear was the only department that did not post double-digit comparable growth in fiscal Q2, and management said it had to chase some inventory during back-to-school.
• Higher e-commerce shipping costs largely offset lower occupancy expenses associated with the reduced store count.
• Performance-related bonus accruals added $1.5 million to fiscal Q2 SG&A and could continue to limit expense leverage if operating results remain above internal targets.

Analyst Q&A Highlights

Management described August’s 14.6% comparable-sales increase as broad-based across merchandise categories and geographic markets. Nearly every department continued to grow at a double-digit rate, with footwear remaining the exception.

On inventory, management said Tillys was generally positioned appropriately during back-to-school and feels well prepared for fall and the holiday period. The company continues to adjust assortments weekly and addressed a limited footwear inventory gap through additional orders.

Regarding brands, management said improved operating performance had not materially changed vendor discussions. Decisions remain focused on whether a brand fits Tillys’ customer base and store experience, although the company is actively pursuing several potential additions.

Management expects some SG&A leverage in fiscal Q3. However, bonus accruals have returned after a four-year absence because sales and earnings have exceeded internal targets, creating an expense that was not present in the prior-year comparison.

Tillys has 20 remaining lease decisions for fiscal 2026 and currently expects to retain all 20 stores. It has roughly 60 to 65 lease decisions associated with fiscal 2027 expirations, with discussions already underway for some locations.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

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.

Gar Jackson

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 ].

Nate Smith

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.

Michael Henry

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.

Operator

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.

Question-and-Answer Session

Matt Koranda

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.

Michael Henry

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.

Matt Koranda

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?

Nate Smith

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.

Matt Koranda

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.

Nate Smith

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.

Matt Koranda

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?

Michael Henry

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.

Matt Koranda

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

Operator

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

Unknown Analyst

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?

Michael Henry

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.

Unknown Analyst

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?

Michael Henry

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.

Unknown Analyst

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?

Michael Henry

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.

Unknown Analyst

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?

Nate Smith

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?

Michael Henry

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.

Unknown Analyst

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

Operator

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.

Nate Smith

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.

Operator

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