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Teen Chains Zumiez, Tilly’s Warn of Declining Demand in Q1

Despite coming off a successful holiday season, teen retailers Tilly’s and Zumiez are guiding for declining sales in the first quarter of 2022 as macroeconomic factors are expected to chip away at consumer demand.

Total net sales at Tilly’s improved 14.9 percent to $204.5 million, compared to last year’s $2.1 million. Total comparable net sales, including both physical stores and e-commerce, increased by 12.5 percent compared to last year.

From a product perspective, all departments saw positive growth in the fourth quarter, with accessories, men’s and boys having double-digit percentage sales increases, Tilly’s president and CEO Ed Thomas told Wall Street analysts in an earnings call.

“As we begin fiscal 2022, we have seen good, early reads from our spring assortment offerings in shorts, dresses and more fashionable tops,” Thomas said. “Graphic tees with retro content from the 1990s and Y2K era are growing in popularity. We’ve launched a print-on-demand T-shirt initiative through a third-party service provider that is off to a nice start, and we expect this initiative to grow over the course of fiscal 2022 and beyond.”

Zumiez saw net sales grow 4.6 percent to $346.7 million from $331.5 million in the year-ago period. The teen retailer doesn’t break out comparable sales.

During the quarter, the men’s category was Zumeiz’s largest growth category, followed by footwear, accessories and women’s. Hard goods, which includes skateboarding accessories, was the only negative category for the period.

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“[Footwear’s popularity] may seem surprising in today’s constrained inventory position for shoes, but our shoe business has been quite good,” Zumiez CEO Rick Brooks said in an earnings call. “And I really appreciate the support of our shoe partners in helping us work through the challenges that we’ve had in supply chain on the shoe business and that’s continued…I think there’s a potential opportunity for us based on better inventory as we look forward.”

But the upcoming quarter is expected to be a bumpy road for both mall retailers, with both citing 2021 economic stimulus payments, last year’s pent-up apparel demand and continued supply chain disruptions as reasons for a projected slowdown.

Through March 5, first quarter sales at Zumiez declined 1.9 percent, with the retailer anticipating full quarterly sales of $215 million and $221 million, down from the prior year’s $279.1 million. That translates to a 20.8 percent to 23 percent decline.

Tilly’s has fared better thus far through March 6, with net physical store sales improving 14 percent and e-commerce sales slipping 1.3 percent. Comparable net sales for February 2022 increased by a double-digit percentage, but have been negative in March.

The California-based retailer currently estimates total sales between $143 million and $148 million for the first quarter of fiscal 2022, which translates to a comparable net sales decrease of 10 percent to 13 percent relative to the 2021 first quarter.

While neither company gave a comprehensive full-year outlook, Zumiez anticipates that total sales will be down in the “low-single-digit levels” in 2022 as compared to 2021, according to Brooks.

The current retail environment, which has been plagued by inflation and rising freight costs and raw materials costs, is putting pressure on merchants to pass elevated prices to the consumer. Tilly’s and Zumiez are among the brands taking advantage of the opportunity.

Zumiez chief financial officer Chris Work said “the market will support” price increases but stressed that the retailer is figuring out where it is fair to pass on costs.

“Some areas, we are taking prices up,” Work said. “Some areas are probably staying a little more stagnant. It just really depends on what the cost structure is behind it that supports it. But we have seen overall price increases across the business, and our strategy will be to continue to manage that based on what our inbound supply chain and brand costs are.”

Thomas was similarly vague in addressing current price hikes at Tilly’s, noting that increases have resulted from higher vendor asking prices in some cases, but that “it hasn’t been across the board.”

“It’s kind of like we’re all in the same—anybody that sells these brands is going to be in the same category,” Thomas said. “But we haven’t seen anything that’s really material. And certainly, we’ll adjust our pricing where necessary to minimize the impact on gross margins.”

Both banners maintained profitability throughout the holiday season. Tilly’s net income was $12.1 million, or 38 cents per diluted share, compared to $8.9 million, or 29 cents per diluted share, in the 2020 fourth quarter. Zumiez had net income of $38.2 million, or $1.70 per diluted share, compared to net income of $42.8 million, or $1.68 per diluted share, last year.

Although the companies anticipate sales to dip in the first quarter, both expect to be profitable, with Zumiez expected to be break-even to positive to 10 cents per diluted share, while Tilly’s projects 5 cents per diluted shared.

In the prior quarter, Tilly’s said it plans to open approximately 15 to 20 new stores this year in existing markets, primarily in California, Texas and the Northeast. But now the teen retailer expects six of those stores to open during the second quarter and four in the third quarter.

Zumiez aims to open approximately 34 new stores, including up to 15 in North America, 14 in Europe and five in Australia.

Tilly’s is also evaluating potential investment options to expand its distribution capacity.

The teen retailers have had different experiences regarding inventory management, with Tilly’s ending fiscal 2021 with merchandise inventories per square foot up 17 percent to $65.6 million compared to last year’s $55.7 million as the company sought to position itself for the spring season amid the ongoing supply chain challenges.

Tilly’s has since trimmed down its available merchandise, with inventories up 7.3 percent in total year over year as of March 6.

Zumiez, on the other hand, saw inventory dip 4.2 percent at the end of its fourth quarter to $128.7 million, from last year’s $134.4 million. On a constant-currency basis, inventory levels were down 2.1 percent. But the company expects inventory to grow in excess of sales in 2022 amid the expected revenue slowdown.

For Tilly’s, gross margin as a percentage of net sales was 34.4 percent, an improvement of 170 basis points (1.7 percentage points) compared to 32.7 percent last year. Product margins decreased by 20 basis points (0.2 percentage points) primarily due to an increase in sales return reserves and less favorable inventory shrink results than last year.

Gross margin at Zumiez was 38.6 percent, down 50 basis points (0.5 percentage points) from 39.2 percent in the 2020 fourth quarter. The decrease was primarily driven by 40 basis points (0.4 percentage points) of increased costs related to inventory shrinkage and obsolescence. Unlike Tilly’s though, Zumiez did see a 40-basis-point increase in product margins.

Both companies have significant cash reserves headed into 2022, alongside no outstanding debt. As of Jan. 29, Tilly had $139.2 million of cash and marketable securities, while Zumiez had cash and current marketable securities of $294.5 million.