Zumiez and Tilly’s hit a bump in the road ahead of the back-to-school shopping season, with the teen retailers’ second-quarter net sales plummeting as both mall-centric retailers blaming inflationary headwinds and less discretionary spending for missed guidance.
Net sales at Zumiez decreased 18.1 percent to $220.0 million, down from $268.7 million in the year-ago second quarter, while net sales at Tilly’s dipped 16.7 percent to $168.3 million from $202 million last year.
Tilly’s breaks out its sales numbers into physical and digital, with the brick-and mortar component falling 16.7 percent as well to $137.1 million, from $164.6 million last year when people pumped their stimulus checks into retail’s coffers. Net sales from e-commerce totaled $31.2 million, a decrease of 16.4 percent from $37.3 million in a year ago.
Net sales from stores represented 81.5 of Tilly’s sales, while digital sales driving the balance. Both numbers are unchanged from last year. Tilly’s comparable net sales figures, including both physical stores and e-commerce, which in total, decreased by 16.4 percent.
Zumiez chief financial officer Chris Work weighed in on a noteworthy change in consumer payment habits that may be responsible for some of the sales declines.
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“We’re definitely seeing credit card spend has increased pretty meaningfully here as we think about just the domestic business,” Work said. “We’re seeing an increase in-store that’s pretty dramatic, with all of the offset really coming from our debit card and cash spend. We’re also seeing an increase on web that’s kind of giving way for other forms of payment.” It wasn’t immediately clear if “other” refers to pay-later options including Afterpay, Affirm and Klarna that give shoppers a way to spread out purchase costs over a longer period time in lieu of absorbing the full expense up front. Zumiez uses PayPal’s pay-in-four option.
At Lynnwood, Wash.-based Zumiez, net income for the quarter totaled $3.1 million, or 16 cents per diluted share, compared to net income of $24 million, or 94 cents per diluted share, in the prior-year quarter.
Similarly, Tilly’s net income was $3.8 million, or 13 cents per diluted share, compared to $20.4 million, or 66 cents per diluted share in the 2021 quarter.
Both companies appeared to buck the an industry trend by carefully managing inventory. Zumiez’s inventory ticked up just 1.1 percent to $151.1 million on annual basis (and 4.4 percent on a constant-currency basis), while Tilly’s saw its merchandise increase just 2.8 percent to $89.3 million. On a square-foot basis, Tilly’s saw inventories dip 1.1 percent relative to last year.
Tilly’s CEO and president Ed Thomas touted the chain’s success with managing stock, telling analysts that inventory levels are “pretty close” to where they should be and chief financial officer Mike Henry backing up the assertion by saying the company wants to enter fiscal 2023 with a lower overall inventory value.
Work, meanwhile, said Zumiez’s inventory on hand is “healthy and selling at a favorable margin,” with CEO Rick Brooks saying the company has successfully managed it on a “category-by-category basis…relative to where our sales will be.”
As they’re managing to keep a lid on inventory, neither teen retailer has resorted to major markdowns, despite industry-wide discounting making a comeback this year.
Taking a stance against big price breaks doesn’t come without a cost, however. Brooks admitted “sales are a bit tougher because we haven’t been marking down.” Zumiez, he added, wants to “stand on our own. We want to stand consistently for what our brand means for our customers and what it represents for our customers.”
Similarly, Thomas said Tilly’s has “not been overly promotional and is not getting into the promotional game” going into the holidays.
Gross margins still took a major hit in the period compared to the strong 2021 quarters at both retailers. Zumiez’s gross margins fell 5 percentage points to 34.1 percent, down from 39.1 percent in the 2021 quarter. Tilly’s had a 6.1-percentage-point margin rate downturn to 30.9 percent of sales, from the prior-year’s 37 percent.
Unfortunately for both retailers, the third quarter isn’t expected to be much better. Zumiez said third quarter-to-date sales for the 37 days ending Sept. 5 dropped 18.1 percent, compared with the same period in the prior year. On a three-year, pre-pandemic basis, total net sales still fell 12.6 percent. Total comparable sales for the 37-day period plummeted 19.7 percent from the comparable period in the prior year.
“While comparisons do begin to moderate in the back half of the year, based on recent trends, we believe it’s prudent to adopt a more cautious view on the remainder of 2022 that balances the headwinds we are facing,” Work said. “We now anticipate total sales will be down in the 18 percent to 19 percent range in 2022 as compared to 2021. This is inclusive of our third-quarter guidance and anticipates further pressure in the fourth quarter given the outsized inflation concerns in the current market and current trend lines.”
And Irvine, Calif.-based Tilly’s said total comparable net sales through Aug. 30 declined by 10.6 percent relative to the year-ago quarter. Back-to-school shopping trends boosted the retailer, as an initial 17 percent sales declines in the first half of July improved to 11 percent down in the second half of the month. By the first two weeks of August, sales were down by negative single-digits.
“The less negative comp trend that began in the latter half of July carried through the first half of August before returning to negative double-digits in the latter half of August,” Thomas said. “We are expecting the latter half of the third quarter to decrease significantly compared to last year once the traditional back-to-school shopping period concludes, particularly given the impacts of inflation this year and the early holiday shopping that took place last year.”
The teen retailers introduced guidance for the third quarter, with Zumiez expecting net sales between $220 million and $228 million, which would be a drop of 21 percent to 24 percent. Consolidated operating margins are expected between 0.5 percent and 2.5 percent, resulting in earnings per diluted share of approximately 3 cents to 18 cents.
Tilly’s estimates that its fiscal 2022 third-quarter net sales will be in the range of approximately $165 million to $170 million for a 17.5 percent to 19.9 percent decline. Comparable net sales are expected to decrease 18 percent to 21 percent. Operating income is forecast to range from approximately $1.9 million to $4.6 million, and earnings per diluted share is anticipated to be between 5 cents and 11 cents.
As of July 30, Zumiez had cash and current marketable securities of $166.2 million and no debt on its balance sheet, while Tilly’s had $116.4 million of cash and marketable securities and no debt outstanding.
In the half, Zumiez had capital expenditures of $20.6 million compared to Tilly’s $6.9 million. For the full fiscal year, the former expects capital expenditures between $29 million and $31 million, compared to $16 million in 2021, with the majority of the increase tied to the addition of 35 new stores this year. The latter expects total capital expenditures in the range of $22 million to $24 million, and is opening 11 stores for 2022.