Shareholders of Tilly's would probably like to forget the past six months even happened. The stock dropped 28.5% and now trades at $3.56. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Tilly's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why you should be careful with TLYS and a stock we'd rather own.
Why Do We Think Tilly's Will Underperform?
With an emphasis on skate and surf culture, Tilly’s (NYSE:TLYS) is a specialty retailer that sells clothing, footwear, and accessories geared towards fashion-forward teens and young adults.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Tilly’s demand has been shrinking over the last two years as its same-store sales have averaged 8.9% annual declines.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Tilly's, its EPS declined by 32.7% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Tilly's burned through $44.57 million of cash over the last year, and its $209.1 million of debt exceeds the $51.73 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Tilly’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Tilly's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Tilly's, we’re out. After the recent drawdown, the stock trades at $3.56 per share (or 0.2× forward price-to-sales). The market typically values companies like Tilly's based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward CrowdStrike, the most entrenched endpoint security platform.
Stocks We Like More Than Tilly's
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