Tilly’s Shares Drop on Q4 Guidance

Investors shy away from teen sector after retailer projects comp declines for holiday period.

Shares of teen retailer Tilly’s Inc. lost nearly a quarter of their value in morning trading today after the firm projected a decline in its fourth-quarter comparable sales.

By noon, shares of the Irvine, Calif.-based specialty chain had fallen $3.90, or 24.6 percent, to $11.98 as investors digested third-quarter results and fourth-quarter projections after the markets closed Tuesday.

Tilly’s estimated that fourth-quarter same-store sales would decline in the mid- to high-single digits and that earnings would decline to between 15 cents and 21 cents a diluted share from 32 cents, on an adjusted basis, in the final quarter of 2012. On average, analysts had estimated Tilly’s would generate 34 cents a share in EPS.

Daniel Griesemer, president and chief executive officer, said on a conference call with analysts that the firm had seen softness in the teen retail sector since Labor Day. He described it as being “consistent across all product categories, real estate formats and store vintages, as well as in our e-commerce channel.”

“And then that softness really continued, if not slightly intensified,” he said. “And the guidance that we have here is a caution and concern given the multiple factors that seem to be kind of a perfect storm here for the fourth quarter….”

He added that Tilly’s would continue to look to minimize its exposure to the highly promotional climate in teen retailing, referring to “our own intentional push to a cleaner business with cleaner inventories and less clearance.”

Inventories at the end of the third quarter ended Nov. 2 were down “just under 16 percent on a per square foot basis” compared with the same date a year ago.

Tilly’s net income dropped slightly more than a third during the quarter, to $6.1 million, or 22 cents a diluted share, from $9.3 million, or 33 cents, in the year-ago period. The most-recent quarterly performance matched the Wall Street consensus estimate.

Revenues slid 0.9 percent to $123.8 million from $124.9 million a year ago, with comparable sales down 2.4 percent despite 3 percent growth in e-commerce sales, to $13.3 million. Gross margin declined to 30.9 percent of sales from 33.5 percent.

In anticipation of downward movement in the firm’s securities, Stifel Nicolaus analyst Richard Jaffe maintained his “buy” rating on the stock, noting that downward pressure could constitute a buying opportunity. The 189-unit chain must use its “broad and dominant assortment of California-inspired brands, well differentiated from its competitors,” to attract the customer and “an equally broad array of marketing and promotional efforts to help convince the consumer to buy,” the analyst wrote.

The weakness in Tilly’s stock affected other teen retailers as well, including Zumiez Inc. and Pacific Sunwear of California Inc., which were down 5.8 percent to $27.76 and 3.3 percent to $2.90, respectively. Delia’s Inc., Aéropostale Inc. and American Apparel Inc. all saw their shares pull back at least 1 percent.

For the nine months, Tilly’s profits contracted 9.5 percent to $12.7 million, or 45 cents a diluted share, while revenues were up 9 percent to $355.9 million. Year-to-date comps fell 0.7 percent despite a 14.9 percent in e-commerce sales to $38.7 million.