Tilly's Q2 2025 Earnings Call: Contradictions Emerge in Sales Performance, Inventory, Tariff Strategy, E-commerce, and Labor Costs

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 3, 2025

Financials Results

• Revenue: $151.3M, down 7.1% YOY
• EPS: $0.10 per diluted share, compared to $0.00 in the prior year (net loss of $69K)
• Gross Margin: 32.5%, up 180 bps YOY (vs 30.7% last year)

Guidance:

• Q3 net sales expected at $134M–$140M; comps -2% to +2%.
• Q3 SG&A ≈ $47M (excl. impairments).
• Effective tax rate near zero due to DTA valuation allowance.
• Q3 net loss $10.5M–$6.9M; EPS loss $0.35–$0.23.
• End Q3 with ~230 stores (close 4, open 2); remain debt-free in FY25.
• Q3-end liquidity ~$83M–$86M (cash/investments $20M–$25M; ABL availability $61M–$63M).
• Tariff headwind in H2 FY25 ~ $0.5M; FY26 impact likely larger but uncertain.
• Expect similar Y/Y product margin improvement in Q3.

Business Commentary:

• Improved Financial Performance:
• Tilly's, Inc. reported a positive comparable net sales trend with a decrease of 4.5% in Q2, marking the second consecutive quarter of sequential improvement.

• The improvement in financial performance was due to reduced inventory levels, improved product margins, and lower SG&A expenses compared to the previous year.

• Inventory Management and Margin Improvement:

• Total balance sheet inventory was 14.5% lower compared to the previous year's second quarter.

• The improved product margins of 210 basis points were attributed to higher initial markups and lower markdowns, benefiting from more current and reduced inventory levels.

• Cost Containment and Efficiency:

• Tilly's reduced total SG&A expenses by $4.4 million and 50 basis points as a percentage of net sales compared to the previous year's second quarter.
• The primary expense reductions were due to reduced store payroll costs and other operational efficiencies, with a continued focus on controlling labor costs.

Sentiment Analysis:

• “First profitable quarter since Q3 fiscal 2022” with EPS $0.10; revenue fell 7.1% YOY and comps down 4.5%. August comps were +0.9% with apparel positive, but Q3 outlook still expects a net loss of $10.5M–$6.9M and comps -2% to +2%. Gross margin improved 180 bps to 32.5%. Management is “cautiously optimistic” amid sequential improvement but mindful of historical post–back-to-school slowdowns.

Q&A:

• Question from Matt Koranda (ROTH Capital Partners): What broader opportunity and early priorities do you see at Tilly’s after joining?
  Response: Too early for specifics; focus on doubling down on what’s working and making course corrections, with a clearer plan over the next few months.

• Question from Matt Koranda (ROTH Capital Partners): How did comps progress through Q2 and into August, and what drove August strength?
  Response: Comps: May -2%, June -7.6%, July -3%; August +0.9% with improving weekly trend; all apparel categories turned positive.

• Question from Matt Koranda (ROTH Capital Partners): Clarify the e-commerce decline and vendor distribution change.
  Response: A vendor’s distribution shift removed $1.8M of last year’s August e-com sales; impact was industry-wide, not Tilly’s-specific.

• Question from Matt Koranda (ROTH Capital Partners): Why guide Q3 comps flat despite August strength?
  Response: Historically, September–October slow after back-to-school; guidance reflects potential repeat of that pattern, though inventory and assortment are better than last year.

• Question from Matt Koranda (ROTH Capital Partners): Discuss gross/product margin gains and inventory health.
  Response: Inventory is leaner and more current (down 14.5% YOY with fewer stores), shifting to chase model; expect similar Y/Y product margin improvement in Q3.

• Question from Matt Koranda (ROTH Capital Partners): How are tariffs and vendor pricing affecting costs?
  Response: Net H2 FY25 margin impact ~ $0.5M as some brands raise consumer prices alongside costs; sourcing changes mitigate; many moving parts.

• Question from Matt Koranda (ROTH Capital Partners): Can SG&A/store labor savings continue?
  Response: Yes; expect similar dollar SG&A reductions vs LY in Q3 and continued efficiencies despite minimum wage pressures, especially in California.