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No. of Recommendations: 2
What worries me about Tilly's is that if you take a quick look at the past 5+ years of results, they've almost doubled store count (from 125 in Jan '11 to 224 in Jan this year) yet gross profit has increased at a slower rate ($102M to $167M), and operating income hasn't really budged ($24M to $18 this year and $23 last). Same picture with operating cash flow - so you can't attribute this to impairments or one time charges.

The culprits seems to be:

1) Lower gross profit per store - i.e. they are opening less profitable stores. Sales per square foot has moved down from 326 to 290, and average store size has ticked down slightly.

but MOST IMPORTANTLY

2) A near doubling of SG&A from $77M to $149.

When you double stores, you're going to increase payroll. But this indicates they've been getting NO operating leverage as they scale. In fact, they've been demonstrating negative leverage with SG&A as a % of sales going from 23.5% to 27.1%.

This indicates to me mis-management - i.e. inadequate attention paid to the expense side.

The most favorable way to construe this would be that they've been focused on expanding and let costs get a bit out of control, but have an opportunity to reign them in now and increase cash flow.

But without any way to know that they will do so, and with an ownership structure that doesn't allow for accountability (completely family controlled through share structure) - this is the type of investment I would steer clear of.
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