Tilly's has been on fire lately. In the past six months alone, the company’s stock price has rocketed 197%, reaching $4.22 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Tilly's, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Tilly's Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why there are better opportunities than TLYS, plus one stock we’d rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Tilly’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.1% per year.
2. Operating Losses Sound the Alarm
Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. Unfortunately, Tilly's was one of them over the last two years as its high expenses contributed to an average operating margin of negative 3.9%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Tilly’s $225 million of debt exceeds the $41.12 million of cash on its balance sheet. Furthermore, its 28× net-debt-to-EBITDA ratio (based on its EBITDA of $6.47 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Tilly's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Tilly's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Tilly's, we’re out. Following the recent rally, the stock trades at 43.4× forward EV-to-EBITDA (or $4.22 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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