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 241 stores, in 33 states as of April 30, 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 week period ended April 30, 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 three months ended April 30, 2022 and May 1, 2021 refer to the thirteen week period ended as of those dates, respectively.
Impact of the COVID-19 Pandemic on our Business
As of April 30, 2022, the ongoing COVID-19 pandemic (the "pandemic") and the impacts therefrom have continued to adversely impact our business, financial condition and results of operations. As we have seen over the past two years, there remain many uncertainties about the pandemic, including the anticipated duration and severity of the pandemic, particularly in light of ongoing vaccination efforts and emerging variant strains of the virus. To date, the pandemic has had far-reaching impacts on many aspects of the operations of the Company, directly and indirectly, including on consumer behavior, store traffic, operational capabilities and our operations generally, timing of deliveries, demands on our information technology and e-commerce capabilities, inventory and expense management, managing our workforce, and our people, which have materially disrupted our business and the market generally. The scope and nature of these impacts continue to evolve. We may experience adverse impacts in the future, including similar impacts to those we have previously experienced during the pandemic, such as regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, had, and may in the future continue to have, material adverse impacts on our business, financial condition and results of operations. This situation is continually evolving, and additional impacts may arise that we are not aware of currently, or current impacts may become magnified.
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. 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 Operations.
The following table summarizes net sales from our retail stores and e-commerce (in thousands):
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Retail stores | $ | 117,482 | | | $ | 127,675 | | | | | |
E-commerce | 28,293 | | | 35,482 | | | | | |
Total net sales | $ | 145,775 | | | $ | 163,157 | | | | | |
The following table summarizes the percentage of net sales by department:
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Mens | 35 | % | | 36 | % | | | | |
Womens | 29 | % | | 29 | % | | | | |
Accessories | 15 | % | | 14 | % | | | | |
Footwear | 12 | % | | 12 | % | | | | |
Boys | 4 | % | | 4 | % | | | | |
Girls | 4 | % | | 4 | % | | | | |
Hardgoods/Outdoor | 1 | % | | 1 | % | | | | |
Total net sales | 100 | % | | 100 | % | | | | |
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Third-party | 68 | % | | 71 | % | | | | |
Proprietary | 32 | % | | 29 | % | | | | |
Total net sales | 100 | % | | 100 | % | | | | |
We accrue for estimated sales returns by customers based on historical sales return results. As of April 30, 2022, January 29, 2022 and May 1, 2021, our reserve for sales returns was $2.1 million, $1.9 million and $2.2 million, respectively.
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 $9.8 million, $11.2 million and $8.4 million as of April 30, 2022, January 29, 2022 and May 1, 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 $4.0 million and $3.8 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively.
For the thirteen weeks ended April 30, 2022 and May 1, 2021, the opening gift card balance was $11.2 million and $9.6 million, respectively, of which $2.6 million and $2.3 million respectively, was recognized as revenue during the respective 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 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 thirteen weeks ended April 30, 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 thirteen weeks ended April 30, 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 $5.4 million, $5.9 million and $4.5 million as of April 30, 2022, January 29, 2022 and May 1, 2021, respectively. The value of points redeemed through our loyalty program was $2.1 million for each of the thirteen week periods ended April 30, 2022 and May 1, 2021. For the thirteen week periods ended April 30, 2022 and May 1, 2021, the opening loyalty program balance was $5.9 million and $3.9 million, respectively, of which $2.0 million and $0.9 million, respectively, was recognized as revenue during the respective 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 week periods ended April 30, 2022 and May 1, 2021, we incurred rent expense of $0.5 million 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 each of the thirteen week periods ended April 30, 2022 and May 1, 2021, we incurred rent expense of $0.1 million 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 terminates on June 30, 2022. We expect to have a fully negotiated renewal completed in advance of this lease expiration.
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 week period ended April 30, 2022, we incurred rent expense of $0.4 million related to this lease. During the thirteen week period ended May 1, 2021, we incurred rent expense of $0.2 million 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 Operations.
The maturity of operating lease liabilities and sublease income as of April 30, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | |
Fiscal Year | Related Party | Other | Total | Sublease Income |
2022 | $ | 2,513 | | $ | 49,271 | | $ | 51,784 | | $ | 65 | |
2023 | 3,416 | | 56,231 | | 59,647 | | 90 | |
2024 | 3,543 | | 45,717 | | 49,260 | | 95 | |
2025 | 3,676 | | 36,402 | | 40,078 | | 99 | |
2026 | 3,814 | | 25,000 | | 28,814 | | 104 | |
Thereafter | 9,768 | | 54,681 | | 64,449 | | — | |
Total minimum lease payments | 26,730 | | 267,302 | | 294,032 | | 453 | |
Less: Amount representing interest | 3,883 | | 41,764 | | 45,647 | | — | |
Present value of operating lease liabilities | $ | 22,847 | | $ | 225,538 | | $ | 248,385 | | $ | 453 | |
As of April 30, 2022, additional operating lease contracts that have not yet commenced are approximately $10.7 million. Further, additional operating lease contracts and modifications executed prior to the filing date of this Quarterly Report were immaterial.
Lease expense for the thirteen week period ended April 30, 2022 and May 1, 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended April 30, 2022 | | Thirteen Weeks Ended May 1, 2021 |
| | Cost of goods sold | | SG&A | | Total | | Cost of goods sold | | SG&A | | Total |
Fixed operating lease expense | | $ | 15,275 | | | $ | 321 | | | $ | 15,596 | | | $ | 15,311 | | | $ | 316 | | | $ | 15,627 | |
Variable lease expense (benefit) | | 3,786 | | | 14 | | | $ | 3,800 | | | 3,899 | | | (11) | | | 3,888 | |
Total lease expense | | $ | 19,061 | | | $ | 335 | | | $ | 19,397 | | | $ | 19,210 | | | $ | 305 | | | $ | 19,515 | |
For the thirteen weeks ended May 1, 2021, we corrected an immaterial error of $94 thousand, 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 thirteen weeks ended April 30, 2022 and May 1, 2021 was as follows:
| | | | | | | | |
| Thirteen Weeks Ended April 30, 2022 | Thirteen Weeks Ended May 1, 2021 |
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) | $17,166 | $17,168 |
Weighted average remaining lease term (in years) | 5.7 years | 5.6 years |
Weighted average interest rate (1) | 6.08% | 6.49% |
(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.
During the second quarter of fiscal 2021, we identified and corrected an immaterial error in our balance sheets whereby we previously presented our operating lease assets on a net basis rather than presenting any negative operating lease asset balances as a separate operating lease liability. As such, we have presented the corrected balances herein as of May 1, 2021, for which there was a $2.3 million gross-up of both operating lease assets and operating lease liabilities which is presented within other liabilities (current portion, in an amount of $0.8 million) and other liabilities (noncurrent portion, in an amount of $1.5 million). Further, we have presented the corrected Statement of Cash Flows for the thirteen weeks ended May 1, 2021 for which there was no net impact on net cash provided by operating activities.
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. 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 $0.3 million, or 26.9% of pre-tax income, compared to an income tax expense of $3.8 million, or 25.7% of pre-tax income, for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively.
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 for the quarter ended May 1, 2021 to identify deferred tax assets of $11.7 million and the long-term portion of credit facility costs of $0.4 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 June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 2016-13 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. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.
Note 3: Marketable Securities
Marketable securities as of April 30, 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.
The following table summarizes our investments in marketable securities at April 30, 2022, January 29, 2022 and May 1, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| April 30, 2022 |
| Cost or Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Estimated Fair Value |
Commercial paper | $ | 39,921 | | | $ | 19 | | | $ | (19) | | | $ | 39,921 | |
Fixed income securities | 11,076 | | | — | | | — | | | 11,076 | |
Total marketable securities | $ | 50,997 | | | $ | 19 | | | $ | (19) | | | $ | 50,997 | |
| | | | | | | |
| 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 | 32,794 | | | — | | | — | | | 32,794 | |
| | | | | | | |
Total marketable securities | $ | 97,029 | | | $ | 9 | | | $ | (11) | | | $ | 97,027 | |
| | | | | | | |
| May 1, 2021 |
| Cost or Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Estimated Fair Value |
Commercial paper | $ | 69,938 | | | $ | 32 | | | $ | (1) | | | $ | 69,969 | |
Fixed income securities | 6,664 | | | — | | | — | | | 6,664 | |
Total marketable securities | $ | 76,602 | | | $ | 32 | | | $ | (1) | | | $ | 76,633 | |
We recognized gains on investments for commercial paper that matured during the thirteen week periods ended April 30, 2022 and May 1, 2021. Upon recognition of the gains, we reclassified these amounts out of Accumulated Other Comprehensive Income and into “Other income (expense), net” on the Consolidated Statements of Operations.
The following table summarizes our gains on investments for commercial paper (in thousands):
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Gains on investments | $ | 25 | | | $ | 29 | | | | | |
Note 4: Credit Agreement
New Credit Agreement
On January 20, 2022, we entered into a senior secured credit agreement (the "Credit Agreement") and revolving line of credit note (the "Note") with Wells Fargo Bank, National Association (the “Bank”). The Credit Agreement provides for a senior secured revolving credit facility (“Revolving Facility”) of up to $25.0 million (“Revolving Commitment”) consisting of revolving loans, letters of credit and swing line loans, with a sub-limit on letters of credit outstanding at any time of $15.0 million. The Revolving Facility matures on January 20, 2024. The payment and performance in full of the secured obligations under the Revolving Facility are secured by a lien on and security interest in all of the assets of our company.
The payment and performance in full of the obligations under the Credit Agreement are guaranteed by the Company pursuant to a continuing guaranty (the "Guaranty") granted by the Company in favor of the Bank. The payment and performance of the
Company’s obligations under the Guaranty are secured by a lien on, and pledge of, all of the equity interests owned by the Company.
Borrowings under the Revolving Facility bear interest at a rate per annum equal to the daily simple Secured Overnight Financing Rate ("SOFR") plus 0.75%. Amounts available to be drawn under outstanding letters of credit accrue fees in an amount equal to 1.00% per annum. The unused portion of the Revolving Commitment is not subject to a commitment fee.
Under the Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in a cash-flow-based lending facility, including financial covenants that require maintenance of (1) a ratio of total funded debt to earnings before interest, taxes, depreciation, amortization and annual rent expenses no greater than 4.00 to 1.00 and (2) a fixed charge coverage ratio of not less than 1.25 to 1.00 (calculation of which takes into account dividends, distributions, redemptions and repurchases of the equity interests of the Company only if the Company’s cash on hand, net of any amounts outstanding under the Credit Agreement, is less than $50.0 million after giving effect to such dividends, distributions, redemptions or repurchases).
Events of default under the Credit Agreement include, among other things, failure to pay principal, interest, fees or other amounts; covenant defaults; material inaccuracy of representations and warranties; bankruptcy events with respect to the Company; actual or asserted invalidity of any of the loan documents; or a change of control of the Company.
In connection with the entry into the Credit Agreement, on January 20, 2022, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Bank (ii) a guaranty entered into by the Company, and (iii) a third party pledge agreement entered into by the Company in favor of the Bank. The security agreement, the guaranty and the pledge agreement replaced (i) the guaranty by the Company in favor of the Bank, dated November 9, 2020, and (ii) the security agreement dated as of November 9, 2020, among the Company and the Bank, which were both terminated concurrently with the termination of the Prior Credit Agreement.
As of April 30, 2022, we were in compliance with all of our covenants and had no outstanding borrowings under the Credit Agreement.
Prior Credit Agreement
The Credit Agreement replaced our previously existing asset-backed credit agreement (the “Prior Credit Agreement”), dated as of November 9, 2020, as amended, with the Bank, which had revolving commitments of up to $65.0 million, a sub-limit on letters of credit of $10.0 million and a sub-limit for swing-line loans of $7.5 million. The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. No borrowings were outstanding under the Prior Credit Agreement as of the closing date.
The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. The maximum borrowings permitted under the Prior Credit Agreement was equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base was equal to (a) 90% of the borrower's eligible credit card receivables, plus (b) 90% of the cost of the borrower's eligible inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible inventory, plus (c) 90% of the cost of the borrower's eligible in-transit inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the agent. As of the date the Prior Credit Agreement was terminated, we had no outstanding borrowings under the Credit Agreement and the only utilization of the letters of credit sub-limit under the Credit Agreement was a $2.025 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on such date to the Credit Agreement.
The unused portion of the revolving commitment under the Prior Credit Agreement accrued a commitment fee, which ranged from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. Borrowings under the Prior Credit Agreement bear interest at a rate per annum that ranged from the LIBOR rate plus 2.0% to the LIBOR rate plus 2.25%, or the base rate plus 1.0% to the base rate plus 1.25%, based on the average daily borrowing capacity under the Prior Credit Agreement over the applicable fiscal quarter. We were allowed to elect to apply either the LIBOR rate or base rate interest to borrowings at our discretion, other than in the case of swing line loans, to which the base rate shall apply.
Under the Prior Credit Agreement, we were subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the closing date, we were prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the closing date, we were allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.
Note 5: Commitments and Contingencies
Indemnifications, Commitments, and Guarantees
During the normal course of business, we have made certain indemnifications, commitments, and guarantees under which we may be required to make payments for certain transactions. These indemnifications include, but are not limited to, those given to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnifications to our directors and officers to the maximum extent permitted under the laws of the state of Delaware. The majority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make, and their duration may be indefinite. We have not recorded any liability for these indemnifications, commitments, and guarantees in the accompanying Consolidated Balance Sheets.
Legal Proceedings
From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We establish loss provisions for matters in which losses are probable and can be reasonably estimated. For some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. Although the case did not settle at the mediation, the parties have agreed to continue their settlement discussions with the assistance of the mediator. The court has not yet issued a trial date. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify us for all of our losses and expenses incurred in connection with this matter. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to this matter.
Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against us. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In February 2019, the Court of Appeal issued an opinion overturning the trial court’s decision, holding that the plaintiff’s allegations stated a claim. In March 2019, we filed a petition for review with the California Supreme Court seeking its discretionary review of the Court of Appeal’s decision. The California Supreme Court declined to review the Court of Appeal’s decision. Since the case was remanded back to the trial court, the parties have been engaged in discovery. In March 2020, the plaintiff filed a motion for class certification, which we opposed. In October 2020, the court denied plaintiff's motion for class certification. In December 2020, the plaintiff filed a notice of appeal of the court's order denying her motion for class certification. In October 2021, the plaintiff filed a request for dismissal of her appeal, which the Court of Appeal granted with a remittitur to return the case to the trial court where the case would proceed only with respect to the plaintiff’s individual claims. In March 2022, the parties executed a settlement agreement and in April 2022 the Company paid the settlement amount, which was originally accrued for during the fourth quarter of fiscal 2021. On May 11, 2022, the Court dismissed the case with prejudice.
Note 6: Fair Value Measurements
We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:
•Level 1 – Quoted prices in active markets for identical assets and liabilities.
•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 – Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities which are classified as available-for-sale securities, and certain cash equivalents, specifically money market securities, commercial paper, municipal bonds and certificates of deposits. The money market accounts are valued based on quoted market prices in active markets. The available-for-sale marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party entities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairments using Company-specific assumptions which would fall within Level 3 of the fair-value hierarchy.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the thirteen week period ended April 30, 2022 and May 1, 2021, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of April 30, 2022, January 29, 2022 and May 1, 2021, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Financial Assets
In accordance with the provisions of ASC 820, Fair Value Measurement, we categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 30, 2022 | | January 29, 2022 | | May 1, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents (1): | | | | | | | | | | | | | | | | | |
Money market securities | $51,843 | | $— | | $— | | $32,764 | | $— | | $— | | $70,477 | | $— | | $— |
| | | | | | | | | | | | | | | | | |
Commercial paper | $— | | $4,995 | | $— | | $— | | $4,999 | | $— | | $— | | $— | | $— |
Marketable securities: | | | | | | | | | | | | | | | | | |
Commercial paper | $— | | $ | 39,921 | | | $— | | $— | | 64,233 | | | $— | | $— | | 69,969 | | | $— |
| | | | | | | | | | | | | | | | | |
(1) Excluding cash.
Impairment of Long-Lived Assets
On at least a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. Based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each our stores, we determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover our investment in the respective stores. As a result, we recorded non-recurring, non-cash impairment charges of approximately $13.4 thousand in the period ending April 30, 2022, to write-down the carrying value of certain long-lived store assets to their estimated fair values. There were no such impairment charges in the period ended May, 1, 2021.
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
| ($ in thousands) |
| | | | | | | |
Carrying value of assets with impairment | $13 | | $— | | | | |
Fair value of assets impaired | $— | | $— | | | | |
Number of stores tested for impairment | 2 | | 9 | | | | |
Number of stores with impairment | 1 | | — | | | | |
Note 7: Share-Based Compensation
The Tilly's, Inc. 2012 Second Amended and Restated Equity and Incentive Plan, as amended in June 2020 (the "2012 Plan"), authorizes up to 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of April 30, 2022, there were 1,797,665 shares available for future issuance under the 2012 Plan.
Stock Options
We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The non qualified options vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten years from the date of grant.
The following table summarizes stock option activity for the thirteen weeks ended April 30, 2022 (aggregate intrinsic value in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Grant Date Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (in Years) | | Aggregate Intrinsic Value (1) |
Outstanding at January 29, 2022 | 1,570,211 | | | $ | 9.02 | | | | | |
Granted | 502,500 | | | $ | 9.45 | | | | | |
Exercised | (4,750) | | | $ | 4.13 | | | | | |
Forfeited | (2,000) | | | $ | 9.45 | | | | | |
Expired | — | | | $ | — | | | | | |
Outstanding at April 30, 2022 | 2,065,961 | | | $ | 9.14 | | | 7.9 | | $ | 2,231 | |
Exercisable at April 30, 2022 | 815,761 | | | $ | 9.84 | | | 6.0 | | $ | 853 | |
(1)Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal period and the weighted average exercise price of in-the-money stock options outstanding at the end of the fiscal period. The market value per share was $8.82 at April 30, 2022.
The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We issue shares of Class A common stock when stock option awards are exercised.
The fair values of stock options granted during the thirteen weeks ended April 30, 2022 and May 1, 2021 were estimated on the grant date using the following assumptions:
| | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended |
| | | | | April 30, 2022 | | May 1, 2021 |
Weighted average grant-date fair value per option granted | | | | | $4.98 | | $5.64 |
Expected option term (1) | | | | | 5.2 years | | 5.4 years |
Weighted average expected volatility factor (2) | | | | | 58.6% | | 59.9% |
Weighted average risk-free interest rate (3) | | | | | 2.3% | | 0.9% |
Expected annual dividend yield (4) | | | | | —% | | —% |
(1)The expected option term of the awards represents the estimated time that options are expected to be outstanding based upon historical option data.
(2)Stock volatility for each grant is measured using the historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.
(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.
(4)We do not currently have a dividend policy.
Restricted Stock Awards
Restricted stock awards ("RSAs") represent restricted shares issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are vested, whereas restricted stock units ("RSUs") represent shares issuable in the future upon vesting. Under the 2012 Plan, we grant RSAs to independent members of our Board of Directors and RSUs to certain employees. RSAs granted to Board members vest at a rate of 50% on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates. The RSUs granted to certain employees vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the respective recipient continues to be employed by us through each of those vesting dates. We determine the fair value of restricted stock underlying the RSAs and RSUs based upon the closing price of our Class A common stock on the date of grant.
The following table summarizes the status of RSAs as of April 30, 2022 and January 29, 2022:
| | | | | | | | | | | |
| Restricted Stock | | Weighted Average Grant-Date Fair Value |
| | | |
| | | |
| | | |
Nonvested at April 30, 2022 and January 29, 2022 | 45,464 | | | $ | 10.56 | |
There were no RSAs granted, vested, or forfeited during the thirteen weeks ended April 30, 2022.
Share-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. The following table summarizes share-based compensation expense recorded in the Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Cost of goods sold (1) | $ | 89 | | | $ | (38) | | | | | |
Selling, general, and administrative | 474 | | | 404 | | | | | |
Total share-based compensation | $ | 563 | | | $ | 366 | | | | | |
| | | | | | | |
| | | | | | | |
(1)Share-based compensation expense for the thirteen weeks ended May 1, 2021 includes forfeiture credits due to the departure of the Company's prior Chief Merchandising Officer effective March 19, 2021.
At April 30, 2022, there was $5.7 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock. This cost has a weighted average remaining recognition period of 3.0 years.
Note 8: Earnings Per Share
Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential shares of common stock (i.e., in-the-money outstanding stock options as well as RSAs) outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us to purchase shares of common stock at the average market price during the period.
The components of basic and diluted earnings per share were as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Net income | $ | 813 | | | $ | 10,959 | | | | | |
Weighted average basic shares outstanding | 30,762 | | | 29,878 | | | | | |
Dilutive effect of in-the-money stock options and RSAs | 284 | | | 651 | | | | | |
Weighted average shares for diluted earnings per share | 31,046 | | | 30,529 | | | | | |
Basic earnings per share of Class A and Class B common stock | $ | 0.03 | | | $ | 0.37 | | | | | |
Diluted earnings per share of Class A and Class B common stock | $ | 0.03 | | | $ | 0.36 | | | | | |
The following stock options have been excluded from the calculation of diluted earnings per share as the effect of including these stock options would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | |
| April 30, 2022 | | May 1, 2021 | | | | |
Stock options | 1,445 | | | 1,204 | | | | | |
| | | | | | | |
| | | | | | | |
Note 9: Share Repurchase Program
On March 14, 2022 we announced that our Board of Directors had authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 2,000,000 million shares of our Class A common stock through, March 14, 2023, in open market transactions through a broker-dealer at prevailing market prices, in block trades, or by any other means in accordance with federal securities laws. For the quarter ended April 30, 2022, we repurchased 892,033 shares at a weighted average price of $9.14 per share for a total of $8.2 million under the program. At April 30, 2022, the remaining repurchase authorization totaled 1,107,967 shares.
During May 2022, we repurchased an additional 95,394 shares at a weighted average price of $8.76 per share for a total of $0.8 million. Since the inception of the repurchase program, we have repurchased 987,427 shares at a weighted average price of $9.10 per share for a total of $9.0 million. The remaining repurchase authorization as of the date of this filing was 1,012,573 shares.
We are not obligated to repurchase any specific number or amount of shares of Class A common stock pursuant to the Program, and we may modify, suspend or discontinue the Program at any time. We will determine the timing and amount of repurchased shares, if any, in our discretion based on a variety of factors, such as the market price of our Class A common stock, corporate requirements, general market economic conditions, and applicable legal requirements.