Tilly's (TLYS) PT Lowered to $6 at B.Riley

B.Riley analyst Jeff Van Sinderen lowered the price target on Tilly's (NYSE: TLYS) to $6.00 (from $7.00) while maintaining a Neutral rating.

The analyst commented: "Tilly's, Inc. reported 2Q AMC 9/5 with GM and EBITDA above consensus. Sales were up 1.8%, with stores and e-comm up 2% and 1.3%, respectively. Operating margin improved sequentially and Y/Y and came in at (0.5%) of sales versus (1.7%) in 2Q23. SG&A deleveraged 180bps to 31.2%, primarily due to increased payroll, digital marketing, and SaaS. GM increased 300bps at 30.7% (product margin improved, and BDO costs were favorable), above consensus of 27.9%. Merchandise margin increased 270bps reflecting improved markdowns and IMU. BDO costs leveraged by 30bps collectively, against higher sales. QTD as of 8/31, comps were up 1.0% Y/Y (trends improved during peak BTS, with seasonal fade anticipated). Private label performed well, but was light on inventory in some top-selling categories. Guidance for 3Q revenue and EPS was below consensus (considering the ~$18M revenue pull-forward into 2Q, due to the shift related to the 53rd week included LY), with net income and EPS below. TLYS continues to manage lease expense, noting that lease terms need to reflect appropriate economics that include HSD decrease in consumer traffic and conversion (~80 lease decisions in FY24, of which ~60% have been made). While we continue to expect that more favorable leases will facilitate LT occupancy leverage, sales/merchandise margin needs to recover further for more substantial improvement in that metric to take hold. The company continues to manage inventory carefully, with emphasis on optimizing markdowns. Beyond 3Q, comparisons are relatively easy, and we anticipate improvement in key metrics, but structural elements (e.g., inherently higher store labor expense) and ongoing macro headwinds prolong the impact of turnaround initiatives. The company continues to evolve its marketing while aiming to build a sustainable connection to its target demographic. In sum, when the sales/merchandise margin trend substantially improves (there are some early green shoots), we believe that TLYS remains positioned to grow its business and recover overall margins with a better digital business, improved lease terms, adept inventory management, and small store fleet with room to add. We are lowering our estimates and PT from $7 to $6, while maintaining our Neutral rating."

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