TILLY'S, INC. [TLYS] Filings

10-Q 1 tlys-20221029.htm 10-Q tlys-20221029

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

__________________________________________________

FORM 10-Q

__________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35535

__________________________________________________

TILLY’S, INC.

(Exact name of Registrant as specified in its charter)

__________________________________________________


Delaware						45-2164791
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

10 Whatney

Irvine, CA 92618

(Address of principal executive offices)

(949) 609-5599

(Registrant’s telephone number, including area code)

__________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share	TLYS	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated Filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒

As of December 2, 2022, the registrant had the following shares of common stock outstanding:


Class A common stock $0.001 par value			22,537,461
Class B common stock $0.001 par value			7,306,108

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TILLY’S, INC.

FORM 10-Q

For the Quarterly Period Ended October 29, 2022

Index


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	6
	Consolidated Balance Sheets as of October 29, 2022, January 29, 2022 and October 30, 2021	6
	Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021	7
	Consolidated Statements of Comprehensive Income for the Thirteen and Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021	8
	Consolidated Statement of Stockholders’ Equity as of October 29, 2022 and October 30, 2021	9
	Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021	11
	Notes to the Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits	34

	Signatures	35

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Forward-Looking Statements

This Quarterly Report on Form 10-Q ("this "Report") contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this Report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, comparable store sales, operating income, earnings per share, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

•the impacts of inflation on consumer spending generally and on our expense management, operating results and financial condition;

•the continued impacts of the COVID-19 pandemic generally and on our operations, future financial or operational results, including with respect to our expense management, our ability to reduce costs, and our ability to effectively manage inventory levels on an ongoing basis relative to net sales performance and changing market conditions;

•our ability to adapt to downward trends in traffic for our stores and changes in our customers' purchasing patterns;

•our ability to successfully open new stores and profitably operate our existing stores;

•our ability to attract customers to our e-commerce website and generate acceptable levels of return from our digital marketing efforts and other e-commerce growth initiatives;

•increases in costs of energy, transportation or utility costs and in the costs of labor and employment;

•our ability to efficiently utilize our e-commerce fulfillment center;

•effectively adapting to new challenges associated with our expansion into new geographic markets;

•our ability to establish, maintain and enhance a strong brand image;

•our ability to generate adequate cash from our existing stores and e-commerce to support our growth;

•our ability to identify and respond to new and changing customer fashion preferences and fashion-related trends;

•our ability to compete effectively in an environment of intense competition both in stores and online;

•our ability to adjust to increasing costs of mailing catalogs, paper and printing;

•the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located;

•our ability to attract customers in the various retail venues and geographies in which our stores are located;

•our ability to adapt to declines in consumer confidence and decreases in consumer spending;

•our ability to adapt to significant changes in sales due to the seasonality of our business;

•our ability to compete on social media marketing platforms;

•natural disasters, unusually adverse weather conditions, port delays, boycotts, epidemics, pandemics, acts of war, terrorism, civil unrest and other unanticipated events;

•our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices and on time;

•our ability to balance proprietary branded merchandise with the third-party branded merchandise we sell;

•most of our merchandise is made in foreign countries, making price and availability of our merchandise susceptible to international trade conditions;

•failure of our vendors and their manufacturing sources to use acceptable labor or other practices;

•our dependence upon key executive management or our inability to hire or retain the talent required for our business;

•our ability to effectively adapt to our planned expansion;

•our ability to secure desirable lease arrangements and other economics to support the rate of our planned store growth.

•failure of our information technology systems to support our current and growing business, before and after our planned upgrades;

•disruptions in our supply chain and distribution center;

•our indebtedness and lease obligations, including restrictions contained therein;

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•our reliance upon independent third-party transportation providers for certain of our product shipments;

•our ability to increase comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile;

•disruptions to our information systems in the ordinary course of business or as a result of systems upgrades;

•our inability to protect our trademarks or other intellectual property rights;

•the impact of governmental laws and regulations and the outcomes of legal proceedings;

•our ability to secure our data and comply with privacy laws and the security standards for the credit card industry;

•our failure to maintain adequate internal controls over our financial and management systems; and

•continuing costs incurred as a result of being a public company.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

See “Risk Factors” within our most recent Annual Report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this Report and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the disclosures and forward-looking statements included in this Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

TILLY’S, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	October 29, 2022		January 29, 2022		October 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	75,786	$	42,201	$	59,392
Marketable securities	29,985		97,027		96,237
Receivables	11,352		6,705		8,881
Merchandise inventories	81,589		65,645		86,692
Prepaid expenses and other current assets	16,036		16,400		9,682
Total current assets	214,748		227,978		260,884
Operating lease assets	222,664		216,508		226,547
Property and equipment, net	51,279		47,530		49,392
Deferred tax assets	10,261		11,446		11,894
Other assets	1,488		1,361		1,520
TOTAL ASSETS	$	500,440	$	504,823	$	550,237

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	30,225	$	28,144	$	46,378
Accrued expenses	17,239		19,073		20,084

Deferred revenue	13,859		17,096		13,568
Accrued compensation and benefits	9,756		17,056		17,106

Current portion of operating lease liabilities	50,047		51,504		51,717
Current portion of operating lease liabilities, related party	2,771		2,533		2,582
Other liabilities	806		761		727
Total current liabilities	124,703		136,167		152,162
Noncurrent portion of operating lease liabilities	176,621		171,965		182,700
Noncurrent portion of operating lease liabilities, related party	23,129		21,000		21,625
Other liabilities	455		978		1,112
Total long-term liabilities	200,205		193,943		205,437
Total liabilities	324,908		330,110		357,599
Commitments and contingencies (Notes 2 and 5)
Stockholders’ equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,537, 23,719 and 23,658 shares issued and outstanding, respectively	23		24		24
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,306 shares issued and outstanding, respectively	7		7		7
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding	—		—		—
Additional paid-in capital	168,749		166,929		165,983
Retained earnings	6,634		7,754		26,616
Accumulated other comprehensive income (loss)	119		(1)		8
Total stockholders’ equity	175,532		174,713		192,638
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	500,440	$	504,823	$	550,237

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net sales	$	177,847	$	206,096	$	491,930	$	571,205

Cost of goods sold (includes buying, distribution, and occupancy costs)	122,346		128,612		338,870		362,751
Rent expense, related party	918		745		2,680		2,149
Total cost of goods sold (includes buying, distribution, and occupancy costs)	123,264		129,357		341,550		364,900
Gross profit	54,583		76,739		150,380		206,305

Selling, general and administrative expenses	48,134		47,609		137,405		135,607
Rent expense, related party	134		133		400		400
Total selling, general, and administrative expenses	48,268		47,742		137,805		136,007

Operating income	6,315		28,997		12,575		70,298
Other income (expense), net	675		(1)		862		(219)
Income before income taxes	6,990		28,996		13,437		70,079
Income tax expense	1,841		8,162		3,656		17,888
Net income	$	5,149	$	20,834	$	9,781	$	52,191
Basic earnings per share of Class A and Class B common stock	$	0.17	$	0.67	$	0.32	$	1.72
Diluted earnings per share of Class A and Class B common stock	$	0.17	$	0.66	$	0.32	$	1.68
Weighted average basic shares outstanding	29,894		30,915		30,226		30,429
Weighted average diluted shares outstanding	30,050		31,352		30,428		31,016

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net income	$	5,149	$	20,834	$	9,781	$	52,191
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on available-for-sale securities, net of tax	73		(4)		120		(12)
Other comprehensive income (loss), net of tax	73		(4)		120		(12)
Comprehensive income	$	5,222	$	20,830	$	9,901	$	52,179

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at July 30, 2022	22,805	7,306	$	30	$	168,120	$	3,372	$	46	$	171,568
Net income	—	—	—		—		5,149		—		5,149




Share-based compensation expense	—	—	—		613		—		—		613
Employee stock option exercises	3	—	—		16		—		—		16
Repurchase of common stock	(271)	—	—		—		(1,887)		—		(1,887)
Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		73		73
Balance at October 29, 2022	22,537	7,306	$	30	$	168,749	$	6,634	$	119	$	175,532


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total Stockholders’ Equity
Balance at July 31, 2021	23,651	7,306	$	31	$	165,407	$	5,782	$	12	$	171,232
Net income	—	—	—		—		20,834		—		20,834




Share-based compensation expense	—	—	—		521		—		—		521
Employee stock option exercises	7	—	—		55		—		—		55
Net change in unrealized loss on available-for-sale securities	—	—	—		—		—		(4)		(4)
Balance at October 30, 2021	23,658	7,306	$	31	$	165,983	$	26,616	$	8	$	192,638

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TILLY’S, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total Stockholders’ Equity
Balance at January 29, 2022	23,719	7,306	$	31	$	166,929	$	7,754	$	(1)	$	174,713
Net income	—	—	—		—		9,781		—		9,781

Restricted stock	63	—	—		—		—		—		—


Share-based compensation expense	—	—	—		1,764		—		—		1,764
Employee stock option exercises	13	—	—		56		—		—		56
Repurchase of common stock	(1,258)	—	(1)		—		(10,901)		—		(10,902)
Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		120		120
Balance at October 29, 2022	22,537	7,306	$	30	$	168,749	$	6,634	$	119	$	175,532


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at January 30, 2021	22,477	7,306	$	30	$	155,437	$	5,135	$	20	$	160,622
Net income	—	—	—		—		52,191		—		52,191
Dividends paid ($1.00 per share)	—	—	—		—		(30,710)		—		(30,710)
Restricted stock	20	—	—		—		—		—		—

Share-based compensation expense	—	—	—		1,417		—		—		1,417

Employee stock option exercises	1,161	—	1		9,129		—		—		9,130
Net change in unrealized loss on available-for-sale securities	—	—	—		—		—		(12)		(12)
Balance at October 30, 2021	23,658	7,306	$	31	$	165,983	$	26,616	$	8	$	192,638

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021
Cash flows from operating activities:
Net income	$	9,781	$	52,191
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	10,515		13,123
Insurance proceeds from casualty loss	—		117
Share-based compensation expense	1,764		1,417
Impairment of assets	14		136
Loss on disposal of assets	64		52
Gain on sales and maturities of marketable securities	(230)		(101)
Deferred income taxes	1,167		57
Changes in operating assets and liabilities:
Receivables	(705)		1,847
Merchandise inventories	(15,944)		(31,111)
Prepaid expenses and other current assets	557		(3,698)
Accounts payable	2,068		21,402
Accrued expenses	(4,253)		(9,804)
Accrued compensation and benefits	(7,300)		7,207
Operating lease liabilities	(4,637)		(5,205)
Deferred revenue	(3,237)		76
Other liabilities	(706)		(856)
Net cash (used in) provided by operating activities	(11,082)		46,850

Cash flows from investing activities:
Proceeds from marketable securities	117,189		95,224
Purchases of marketable securities	(49,779)		(126,420)
Purchases of property and equipment	(11,897)		(10,911)


Proceeds from sale of property and equipment	—		17
Insurance proceeds from casualty loss	—		29
Net cash provided by (used in) investing activities	55,513		(42,061)

Cash flows from financing activities:


Share repurchases	(10,902)		—
Proceeds from exercise of stock options	56		9,129
Dividends paid	—		(30,710)
Net cash used in financing activities	(10,846)		(21,581)
Change in cash and cash equivalents	33,585		(16,792)
Cash and cash equivalents, beginning of period	42,201		76,184
Cash and cash equivalents, end of period	$	75,786	$	59,392

Supplemental disclosures of cash flow information:

Income taxes paid	$	1,440	$	26,493
Supplemental disclosure of non-cash activities:
Unpaid purchases of property and equipment	$	3,511	$	1,702
Operating lease liabilities arising from obtaining operating lease assets	$	47,092	$	32,787

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Company and Basis of Presentation

Tillys is a leading destination specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 247 stores, in 33 states as of October 29, 2022. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.

The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.

The consolidated financial statements include the accounts of Tilly's, Inc. and WOJT. All intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "we", "our", "us" and "Tillys" refer to Tilly's, Inc. and its subsidiary, WOJT.

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the thirteen and thirty-nine week periods ended October 29, 2022 are not necessarily indicative of results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 ("fiscal 2021").

Fiscal Periods

Our fiscal year ends on the Saturday closest to January 31. References to fiscal 2022 refer to the fiscal year ending January 28, 2023. References to the fiscal quarters or first nine months ended October 29, 2022 and October 30, 2021 refer to the thirteen and thirty-nine week periods ended as of those dates, respectively.

Economic Impacts of the COVID-19 Pandemic on our Business

The economic impacts resulting from the COVID-19 pandemic (the "pandemic") have had, and may continue to have, a material effect on our business, financial condition and results of operations, as well as on the market generally, including its impacts on inflationary cost pressures, supply chain disruptions, competition for and availability of labor, management of our workforce, consumer behavior, store traffic, demands on our information technology and e-commerce capabilities, and inventory and expense management. The scope and nature of these impacts continue to evolve, and we may continue to experience similar or new adverse impacts in the future arising from the pandemic that may have material adverse effects on our future business, financial condition and results of operations.

Note 2: Summary of Significant Accounting Policies

Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

Revenue Recognition

Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer.

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Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income.

The following table summarizes net sales from our retail stores and e-commerce (in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Retail stores	$	141,539	$	165,255	$	396,109	$	457,557
E-commerce	36,308		40,841		95,821		113,648
Total net sales	$	177,847	$	206,096	$	491,930	$	571,205

The following table summarizes the percentage of net sales by department:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Mens	36	%	37	%	36	%	36	%
Womens	25	%	25	%	26	%	27	%
Accessories	19	%	18	%	17	%	16	%
Footwear	11	%	10	%	12	%	11	%
Boys	4	%	5	%	4	%	5	%
Girls	4	%	4	%	4	%	4	%
Hardgoods/Outdoor	1	%	1	%	1	%	1	%
Total net sales	100	%	100	%	100	%	100	%

The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Third-party	69	%	68	%	69	%	70	%
Proprietary	31	%	32	%	31	%	30	%
Total net sales	100	%	100	%	100	%	100	%

We accrue for estimated sales returns by customers based on historical sales return results. As of October 29, 2022, January 29, 2022 and October 30, 2021, our reserve for sales returns was $1.9 million, $1.9 million and $2.3 million, respectively, and is included in accrued expenses on the accompanying Consolidated Balance Sheets.

We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift cards, the balance of which was $8.7 million, $11.2 million and $7.9 million as of October 29, 2022, January 29, 2022 and October 30, 2021, respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed, which we refer to as gift card breakage. Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Total revenue recognized from gift cards was $2.6 million and $2.9 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirteen weeks ended October 29, 2022 and October 30, 2021, the opening gift card balance was $8.9 million and $7.9 million, respectively, of which $0.7 million and $0.6 million respectively, was recognized as revenue during these periods. Total revenue recognized from gift cards was $9.9 million and $10.1 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirty-nine weeks ended October 29, 2022 and October 30, 2021, the opening gift card balance was $11.2 million and $9.6 million, respectively, of which $4.6 million and $4.0 million, respectively, was recognized as revenue during these periods.

We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns an award that may be used towards the purchase of merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue, and awards redeemed by the member for merchandise

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are recorded as an increase to net sales. Our loyalty program allows customers to redeem their awards instantly or build up to additional awards over time. During the first quarter of fiscal 2022, we modified our expiration policy related to unredeemed awards and accumulated partial points from expiration at 365 days after the customer's last purchase activity to expiration at 365 days after the customer's original purchase date. As a result of this modification in expiration policy, the estimated liability was reduced by $0.5 million during the first quarter of fiscal 2022. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was $5.2 million, $5.9 million and $5.7 million as of October 29, 2022, January 29, 2022 and October 30, 2021, respectively. The value of points redeemed through our loyalty program was $2.2 million and $2.8 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirteen weeks ended October 29, 2022 and October 30, 2021, the opening loyalty program balance was $5.3 million and $5.1 million, respectively, of which $1.8 million and $1.4 million, respectively, was recognized as revenue during these periods. The value of points redeemed through our loyalty program was $6.5 million and $7.7 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirty-nine weeks ended October 29, 2022 and October 30, 2021, the opening loyalty program balance was $5.9 million and $3.9 million, respectively, of which $4.9 million and $3.7 million, respectively, was recognized as revenue during these periods.

Leases

We conduct all of our retail sales and corporate operations in leased facilities. Lease terms generally range up to ten years in duration (subject to elective extensions) and provide for escalations in base rents. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year, and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of net sales in excess of specified levels, is recognized as rent expense when the achievement of those specified net sales is probable.

We lease approximately 172,000 square feet of office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. During each of the thirteen and thirty-nine week periods ended October 29, 2022 and October 30, 2021 we incurred rent expense of $0.5 million and $1.6 million, respectively, related to this lease. Our lease began on January 1, 2003 and terminates on December 31, 2027.

We lease approximately 26,000 square feet of office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. During the thirteen and thirty-nine week periods ended October 29, 2022, we incurred rent expense of $0.2 million and $0.4 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October 30, 2021, we incurred rent expense of $0.1 million and $0.3 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on June 29, 2012 and was set to terminate on June 30, 2022. During June 2022, this lease was amended to, among other things, extend the term for an additional 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payments adjust annually based upon the greater of 5% or the Consumer Price Index, and the lease now terminates on June 30, 2032.

We lease approximately 81,000 square feet of office and warehouse space (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce distribution center. During the thirteen and thirty-nine week periods ended October 29, 2022, we incurred rent expense of $0.4 million and $1.1 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October 30, 2021, we incurred rent expense of $0.3 million and $0.7 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on November 1, 2011 with a 10-year term ending on October 31, 2021. During October 2021, this lease was amended to, among other things, extend the term for an additional 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payment adjusts annually based upon the greater of 5% or the Consumer Price Index and now terminates on October 31, 2031.

We sublease a portion of our office space, approximately 5,887 square feet, in the 17 Pasteur Irvine, California facility to Tilly's Life Center, ("TLC"), a related party and a charitable organization. The lease term is for 5 years and terminates January 31, 2027. Sublease income is recognized on a straight-line basis over the sublease agreement and is recorded as an offset within the selling, general and administrative section in the Consolidated Statements of Income.

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The maturity of operating lease liabilities and sublease income as of October 29, 2022 were as follows (in thousands):


Fiscal Year	Related Party		Other		Total		Sublease Income
2022	$	966	$	17,011	$	17,977	$	22
2023	3,932		60,804		64,736		90
2024	4,085		50,941		55,026		95
2025	4,244		41,384		45,628		99
2026	4,411		30,148		34,559		104
Thereafter	13,491		71,619		85,110
Total minimum lease payments	31,129		271,907		303,036		410
Less: Amount representing interest	5,229		45,239		50,468		—
Present value of operating lease liabilities	$	25,900	$	226,668	$	252,568	$	410

As of October 29, 2022, additional operating lease contracts that have not yet commenced are approximately $2.3 million.

Lease expense for the thirteen and thirty-nine week periods ended October 29, 2022 and October 30, 2021 was as follows (in thousands):


	Thirteen Weeks Ended October 29, 2022						Thirteen Weeks Ended October 30, 2021
	Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	$	16,230	$	331	$	16,561	$	15,092	$	321	$	15,413
Variable lease expense	4,274		10		4,284		4,907		15		4,922
Total lease expense	$	20,504	$	341	$	20,845	$	19,999	$	336	$	20,335


	Thirty-Nine Weeks Ended October 29, 2022						Thirty-Nine Weeks Ended October 30, 2021
	Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	$	47,221	$	972	$	48,193	$	45,338	$	959	$	46,297
Variable lease expense	12,285		33		12,318		13,642		16		13,658
Total lease expense	$	59,506	$	1,005	$	60,511	$	58,980	$	975	$	59,955

For the thirteen and thirty-nine weeks ended October 30, 2021, we corrected an immaterial error of $94 thousand and $283 thousand, respectively, which consisted solely of a reclassification of fixed operating lease expense from SG&A to cost of goods sold, on the table above.

Supplemental lease information for the thirty-nine weeks ended October 29, 2022 and October 30, 2021 was as follows:


	Thirty-Nine Weeks Ended October 29, 2022	Thirty-Nine Weeks Ended October 30, 2021
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)	$52,971	$51,823
Weighted average remaining lease term (in years)	5.8 years	5.6 years
Weighted average interest rate (1)	6.32%	6.16%

(1) Since our leases do not provide an implicit rate, we use our incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification in determining the present value of future minimum payments.

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Common Stock Share Repurchases

We may repurchase shares of our common stock from time to time pursuant to authorizations approved by our Board of Directors (see Note 9). As permitted under Delaware corporation law, shares repurchased are retired and, accordingly, are not presented separately as treasury stock in the consolidated financial statements. Instead, the value of repurchased shares is deducted from retained earnings.

Income Taxes

Our income tax expense was $3.7 million, or 27.2% of pre-tax income, compared to an income tax expense of $17.9 million, or 25.5% of pre-tax income, for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. The increase in the effective income tax rate was primarily due to the discrete tax effects of stock-based compensation.

Reclassifications of Prior Year Presentation

Certain prior year amounts on the Consolidated Balance Sheets, have been reclassified to conform with the current year presentation. These reclassifications had no effect on the reported results of operations. A reclassification has been made to last year's Consolidated Balance Sheet as of October 30, 2021 to identify deferred tax assets of $11.9 million and the long-term portion of credit facility costs of $0.2 million. This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows.

New Accounting Standards Not Yet Adopted

In November 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses which amends ("ASU") No. 2016-13 Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2019-11 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. This guidance will have no impact on our consolidated financial statements and related disclosures since the Company has no LIBOR based loans.

Note 3: Marketable Securities

Marketable securities as of October 29, 2022 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity, as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.

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The following table summarizes our investments in marketable securities at October 29, 2022, January 29, 2022 and October 30, 2021 (in thousands):


	October 29, 2022
	Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	$	24,789	$	136	$	—	$	24,925
Fixed income securities	5,060		—		—		5,060
Total marketable securities	$	29,849	$	136	$	—	$	29,985

	January 29, 2022
	Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	$	64,235	$	9	$	(11)	$	64,233
Fixed income securities