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Tilly’s and Zumiez Are Bullish on Brick and Mortar

Two of the top teen apparel retailers appeared to benefit from the normalized back-to-school shopping season in August and September.

Total net sales at Tilly’s skyrocketed 46.9 percent to $206.1 million, compared to $140.3 million in the 2020 third quarter. Zumiez saw net sales grow 6.8 percent to $289.5 million from $271.0 million in the year-ago period.

Tilly’s net income improved to $20.8 million, or $0.66 per diluted share, which are third quarter records for the company, compared to last year’s $2.1 million, or 7 cents per diluted share. Zumiez came in with a net income of $30.7 million, or $1.25 per diluted share, compared to net income of $29.1 million, or $1.16 per diluted share, in last year’s third quarter.

Comparable sales of women’s, men’s, girls and accessories increased by double-digit percentages on a two-year basis, while the footwear and boys categories increased by high single-digit percentages, Tilly’s president and CEO Ed Thomas said in an earnings call.  Hard goods like skateboarding accessories, which were an immaterial part of the Tilly’s business in 2019, drove $1.6 million in sales and are now sold in roughly 200 stores.

And in Zumiez’ earnings call, chief financial officer Chris Work said men’s was the largest growth category for the retailer, followed by footwear and accessories. Hardgoods was the largest negative category followed by women’s.

Tilly’s is planning to scale its physical presence. Currently sitting at 243 stores, the retailer will open approximately 15 to 20 new stores in existing markets, primarily in California, Texas and the Northeast, assuming “acceptable” lease negotiations.

And Zumiez, which operates 739 stores, including 607 in the United States, 52 in Canada, 63 in Europe and 17 in Australia, plans on opening five or six more stores in the final quarter. The skating-inspired retailer wants to build on that momentum in 2022.

“There’s good opportunities to work with landlords to fill spaces and find markets that we think we can do well over the long term,” Work said in the call. “At this point as we think to 2022, I think you could expect us to increase the number of store openings in each of the geographies that we operate.”

As for inventory, Tilly’s ended the third quarter up 31.5 percent to $86.7 million from $65.9 million last year, but on a per-square-foot basis, the increase was 29.4 percent.

Despite ongoing port congestion, the aggregate retail value of delayed products currently represents less than 10 percent of the retailer’s total inventory already on hand, putting the company in a better position for a successful holiday season, Thomas said.

Thomas said women’s inventory was “too light” at the moment, while executive vice president and chief financial officer Mike Henry said footwear was the hardest hit by delivery delays.

For Zumiez, the retailer ended the quarter with $175.1 million in inventory, up 8.8 percent from the third quarter of 2020 and down 4.5 percent on a two-year basis. On a constant-currency basis, inventory levels were up 8.4 percent from last year.

Work said footwear has been a challenge due to the current supply chain headaches, but “overall, the inventory on-hand is healthy and selling at a favorable margin.”

Gross margin at Zumiez was 39.6 percent of total net sales, up from 2020 third-quarter margins of 39 percent. The 60-basis-point improvement was largely due to a decrease in online shipping, decreasing impairment losses and an increase in product margin. These benefits were partially offset by a 110-basis-point increase in inventory shrinkage after historically low results in 2020.

Improved buying, distribution and occupancy expenses helped bolster Tilly’s gross margins to 37.2 percent of net sales, which is a record for the retailer, and up from 29 percent of net sales last year.

Both Gen Z-centric retailers also offered some insights into their fourth quarter performance to date, with Tilly’s touting a 19.6 increase in comparable net sales through Nov. 30, with physical store sales soaring 27.6 percent and e-commerce rising 3.9 percent.

With those figures, Tilly’s expects its fourth quarter net sales to be in the range of approximately $210 million to $215 million, which would be up within a range of 17.9 percent to 20.8 percent from last year’s $178 million. Earnings per diluted share are expected to range between 42 cents and 50 cents, up from the 29 cents generated during the 2020 holiday period. This outlook is based on expectations that product margins will improve by 50 to 100 basis points due to the current low-markdown environment.

And Zumiez broke out both net sales and comparable sales for the peak season-to-date, with sales as of Nov. 30 increasing 11.5 percent year over year, and boosting 8.6 percent on a two-year basis. Total comparable sales for the period were up 8.4 percent from the prior year, and increased 6.5 percent from the 2019 fourth quarter-to-date. Zumiez did not break out earnings.

While Zumiez is not providing an official guidance at this time for the full fourth quarter, Work said the company anticipates sales growth in the high single-digits, as well as gross margin growth that is more modest than the third quarter uptick. The retailer is still waiting to reopen its Austrian stores, which have been closed since the country went into another Covid-related lockdown to combat the Omicron variant. The Austrian stores, set to open back up Dec. 13, represent 25 percent of Zumiez’ European footprint.

In the call, Work said full-year net sales are projected to grow more than 20 percent over 2020 totals, and in the mid-teens from fiscal 2019.

As of Oct. 30, 2021, Tilly’s had $155.6 million in cash and marketable securities and no debt outstanding, while Zumiez had cash and current marketable securities of $338.1 million.

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