Tilly's has been on fire lately. In the past six months alone, the company’s stock price has rocketed 210%, reaching $4.34 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Tilly's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Tilly's Will Underperform?
We’re happy investors have made money, but we're swiping left on Tilly's for now. Here are three reasons why TLYS doesn't excite us and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
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 has been shrinking over the last two years as its same-store sales have averaged 2.8% annual declines.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Tilly's, its EPS declined by 55.2% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Restricted Access to Capital Increases 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 posted negative $7.11 million of EBITDA over the last 12 months, and its $215.5 million of debt exceeds the $46.31 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Tilly's if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Tilly's can improve its profitability and remain cautious until then.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Tilly's, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 93.9× forward EV-to-EBITDA (or $4.34 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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