Tilly's Inc: Apparel retailer with a good quality business
US-listed low EV/EBIT + quality.
Also good rank in the international low EV/EBIT + quality list.
high payouts.
Tilly's Inc (TLYS) (filings) is a "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."
See the annual report over the year ending on 30 January 2021, the proxy/circular for the annual meeting in 2021 and last quarterly report (30 October 2021).
On page 45 of the annual report the auditor mentions 2 critical audit matters: "Cash Flow Projections Used In Impairment of Long-Lived Assets" and "Determination of Incremental Borrowing Rates for Leases".
The company operates about 240 stores in 33 states. The most important state is California with about 100 stores. Other important states are Arizona, Florida, and Texas with 15-20 stores each. About 20-30% of the revenue is from online sales. Close to 40% of the revenue is from apparel sales for men.
The balance sheet is somewhat leveraged with Tangible Book/Tangible Equity nearly 3. There is no debt but there are substantial current and non-current lease liabilities. The cash and current marketable securities (commercial paper and fixed income securities) is enough to cover the current lease liabilities plus about half of the non-current lease liabilities. Furthermore the company has an unused credit facility for up to 65 million USD. Also because the company is very profitable I do not see any financial distress here.
Governance
A search on the company name and keyword "fraud" revealed relevant information. In 2019 the company lost part of a lawsuit for not paying employees when being on call. I do not think this is a big issue. The case is still in litigation and the company has not made a provision yet. A future provision could be significant though.
Red flag: According to a court document from 2014 the company has mandatory arbitration clauses in its contracts with employees.
In 2017 someone started a class action against the company for using an automatic phone dialing system. I could not find this class action in the annual report. Therefore I suppose it was dismissed.
Small board with 6 directors including the executive chairman and the CEO. Small boards statistically predict higher returns.
Red flag: the 4 other directors apart from the CEO and the executive chairman occupy their seat already since 2011, when the company went public. They are formally independent. Although it does not affect this formal status such a long time may conflict with their independency.
During the last 5 financial years, including the current financial year, the company paid dividends. The company raised much smaller sums, probably from option exercises.
I do not think the company does quarterly dividend payments though. On 9 July 2021 and on 15 December 2021 the company paid a special dividend of 1 USD per share, so 2 USD per share in total. I estimate the company has enough cash for 2 more special dividends of 1 USD per share each.
Red flag: there are 2 types of shares. Class A shares have one vote and class B shares have 10 votes per share. 24% of the shares are class B shares. In total there are 31.14 million shares. Between 31 October 2020 and 30 October 2021 the share count has increased with 1.18 million. This almost entirely from option exercises.
Substantial shareholders: The controlling shareholder is executive chairman Hezy Shaked with 76% of the vote and about 24% economic ownership, together with his wife. He owns 85% all class B shares and his wife, Tilly Levine, owns the remaining 15%. Most directors own 500k USD or more in shares. The 3 quantitative funds (Dimensional Fund Advisors, BlackRock and Renaissance Technologies) own significant stakes.
Related party transactions: Tilly Levine is Vice President of Vendor Relations for 17k USD in financial year 2020. The company donates 200k USD per year to her charity, Tilly's Life Center. The company rents a building from the executive chairman for almost 1 million USD per year. I also suspect she occasionally converts class B shares into class A shares and then either sells them or donates them.
See page 23 of the proxy document for a summary of executive compensation. Unlike with most other American companies most compensation is fixed salary. My impression is key executives are treated fair but do not get excessively high compensation. Unlike many other American companies, it takes care key executive compensation does not eats unnecessarily much into shareholder returns.
My opinion on Tilly’s Inc
Cheap American apparel company based on EV/EBIT, EV/Revenue and P/E. Multi-year metrics suggest good earnings quality and/or good asset allocation. At the current share price of 13.19 USD it is also a good stock compared stocks in my international low EV/EBIT + quality list. Shareholder friendly. I have not found any major governance issues. Good for country diversification. I do not like the high volatility of the share price.
I think this is a good stock for a small position.