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Summary of Significant Accounting Policies | 9 Months Ended
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Oct. 29, 2022
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Revenue Recognition Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income. The following table summarizes net sales from our retail stores and e-commerce (in thousands):
| Thirteen Weeks Ended |  | Thirty-Nine Weeks Ended
| October 29, 2022 |  | October 30, 2021 |  | October 29, 2022 |  | October 30, 2021
Retail stores | $ | 141,539 |  |  | $ | 165,255 |  |  | $ | 396,109 |  |  | $ | 457,557 |
E-commerce | 36,308 |  |  | 40,841 |  |  | 95,821 |  |  | 113,648 |
Total net sales | $ | 177,847 |  |  | $ | 206,096 |  |  | $ | 491,930 |  |  | $ | 571,205 |
The following table summarizes the percentage of net sales by department:
| Thirteen Weeks Ended |  | Thirty-Nine Weeks Ended
| October 29, 2022 |  | October 30, 2021 |  | October 29, 2022 |  | October 30, 2021
Mens | 36 | % |  | 37 | % |  | 36 | % |  | 36 | %
Womens | 25 | % |  | 25 | % |  | 26 | % |  | 27 | %
Accessories | 19 | % |  | 18 | % |  | 17 | % |  | 16 | %
Footwear | 11 | % |  | 10 | % |  | 12 | % |  | 11 | %
Boys | 4 | % |  | 5 | % |  | 4 | % |  | 5 | %
Girls | 4 | % |  | 4 | % |  | 4 | % |  | 4 | %
Hardgoods/Outdoor | 1 | % |  | 1 | % |  | 1 | % |  | 1 | %
Total net sales | 100 | % |  | 100 | % |  | 100 | % |  | 100 | %
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
| Thirteen Weeks Ended |  | Thirty-Nine Weeks Ended
| October 29, 2022 |  | October 30, 2021 |  | October 29, 2022 |  | October 30, 2021
Third-party | 69 | % |  | 68 | % |  | 69 | % |  | 70 | %
Proprietary | 31 | % |  | 32 | % |  | 31 | % |  | 30 | %
Total net sales | 100 | % |  | 100 | % |  | 100 | % |  | 100 | %
We accrue for estimated sales returns by customers based on historical sales return results. As of October 29, 2022, January 29, 2022 and October 30, 2021, our reserve for sales returns was $1.9 million, $1.9 million and $2.3 million, respectively, and is included in accrued expenses on the accompanying Consolidated Balance Sheets. We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift cards, the balance of which was $8.7 million, $11.2 million and $7.9 million as of October 29, 2022, January 29, 2022 and October 30, 2021, respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed, which we refer to as gift card breakage. Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Total revenue recognized from gift cards was $2.6 million and $2.9 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirteen weeks ended October 29, 2022 and October 30, 2021, the opening gift card balance was $8.9 million and $7.9 million, respectively, of which $0.7 million and $0.6 million respectively, was recognized as revenue during these periods. Total revenue recognized from gift cards was $9.9 million and $10.1 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirty-nine weeks ended October 29, 2022 and October 30, 2021, the opening gift card balance was $11.2 million and $9.6 million, respectively, of which $4.6 million and $4.0 million, respectively, was recognized as revenue during these periods. We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns an award that may be used towards the purchase of merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue, and awards redeemed by the member for merchandise are recorded as an increase to net sales. Our loyalty program allows customers to redeem their awards instantly or build up to additional awards over time. During the first quarter of fiscal 2022, we modified our expiration policy related to unredeemed awards and accumulated partial points from expiration at 365 days after the customer's last purchase activity to expiration at 365 days after the customer's original purchase date. As a result of this modification in expiration policy, the estimated liability was reduced by $0.5 million during the first quarter of fiscal 2022. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was $5.2 million, $5.9 million and $5.7 million as of October 29, 2022, January 29, 2022 and October 30, 2021, respectively. The value of points redeemed through our loyalty program was $2.2 million and $2.8 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirteen weeks ended October 29, 2022 and October 30, 2021, the opening loyalty program balance was $5.3 million and $5.1 million, respectively, of which $1.8 million and $1.4 million, respectively, was recognized as revenue during these periods. The value of points redeemed through our loyalty program was $6.5 million and $7.7 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. For the thirty-nine weeks ended October 29, 2022 and October 30, 2021, the opening loyalty program balance was $5.9 million and $3.9 million, respectively, of which $4.9 million and $3.7 million, respectively, was recognized as revenue during these periods. Leases We conduct all of our retail sales and corporate operations in leased facilities. Lease terms generally range up to ten years in duration (subject to elective extensions) and provide for escalations in base rents. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year, and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of net sales in excess of specified levels, is recognized as rent expense when the achievement of those specified net sales is probable. We lease approximately 172,000 square feet of office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. During each of the thirteen and thirty-nine week periods ended October 29, 2022 and October 30, 2021 we incurred rent expense of $0.5 million and $1.6 million, respectively, related to this lease. Our lease began on January 1, 2003 and terminates on December 31, 2027. We lease approximately 26,000 square feet of office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. During the thirteen and thirty-nine week periods ended October 29, 2022, we incurred rent expense of $0.2 million and $0.4 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October 30, 2021, we incurred rent expense of $0.1 million and $0.3 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on June 29, 2012 and was set to terminate on June 30, 2022. During June 2022, this lease was amended to, among other things, extend the term for an additional 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payments adjust annually based upon the greater of 5% or the Consumer Price Index, and the lease now terminates on June 30, 2032. We lease approximately 81,000 square feet of office and warehouse space (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce distribution center. During the thirteen and thirty-nine week periods ended October 29, 2022, we incurred rent expense of $0.4 million and $1.1 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October 30, 2021, we incurred rent expense of $0.3 million and $0.7 million, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on November 1, 2011 with a 10-year term ending on October 31, 2021. During October 2021, this lease was amended to, among other things, extend the term for an additional 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payment adjusts annually based upon the greater of 5% or the Consumer Price Index and now terminates on October 31, 2031. We sublease a portion of our office space, approximately 5,887 square feet, in the 17 Pasteur Irvine, California facility to Tilly's Life Center, ("TLC"), a related party and a charitable organization. The lease term is for 5 years and terminates January 31, 2027. Sublease income is recognized on a straight-line basis over the sublease agreement and is recorded as an offset within the selling, general and administrative section in the Consolidated Statements of Income. The maturity of operating lease liabilities and sublease income as of October 29, 2022 were as follows (in thousands):
Fiscal Year | Related Party | Other | Total | Sublease Income |
2022 | $ | 966 |  | $ | 17,011 |  | $ | 17,977 |  | $ | 22 |  |
2023 | 3,932 |  | 60,804 |  | 64,736 |  | 90 |  |
2024 | 4,085 |  | 50,941 |  | 55,026 |  | 95 |  |
2025 | 4,244 |  | 41,384 |  | 45,628 |  | 99 |  |
2026 | 4,411 |  | 30,148 |  | 34,559 |  | 104 |  |
Thereafter | 13,491 |  | 71,619 |  | 85,110 |  |  |
Total minimum lease payments | 31,129 |  | 271,907 |  | 303,036 |  | 410 |  |
Less: Amount representing interest | 5,229 |  | 45,239 |  | 50,468 |  | — |  |
Present value of operating lease liabilities | $ | 25,900 |  | $ | 226,668 |  | $ | 252,568 |  | $ | 410 |  |
As of October 29, 2022, additional operating lease contracts that have not yet commenced are approximately $2.3 million. Lease expense for the thirteen and thirty-nine week periods ended October 29, 2022 and October 30, 2021 was as follows (in thousands):
|  | Thirteen Weeks Ended October 29, 2022 |  | Thirteen Weeks Ended October 30, 2021
|  | Cost of goods sold |  | SG&A |  | Total |  | Cost of goods sold |  | SG&A |  | Total
Fixed operating lease expense |  | $ | 16,230 |  |  | $ | 331 |  |  | $ | 16,561 |  |  | $ | 15,092 |  |  | $ | 321 |  |  | $ | 15,413 |
Variable lease expense |  | 4,274 |  | 10 |  | 4,284 |  | 4,907 |  |  | 15 |  |  | 4,922 |
Total lease expense |  | $ | 20,504 |  |  | $ | 341 |  |  | $ | 20,845 |  |  | $ | 19,999 |  |  | $ | 336 |  |  | $ | 20,335 |
|  | Thirty-Nine Weeks Ended October 29, 2022 |  | Thirty-Nine Weeks Ended October 30, 2021
|  | Cost of goods sold |  | SG&A |  | Total |  | Cost of goods sold |  | SG&A |  | Total
Fixed operating lease expense |  | $ | 47,221 |  |  | $ | 972 |  |  | $ | 48,193 |  |  | $ | 45,338 |  |  | $ | 959 |  |  | $ | 46,297 |
Variable lease expense |  | 12,285 |  |  | 33 |  |  | 12,318 |  |  | 13,642 |  |  | 16 |  |  | 13,658 |
Total lease expense |  | $ | 59,506 |  |  | $ | 1,005 |  |  | $ | 60,511 |  |  | $ | 58,980 |  |  | $ | 975 |  |  | $ | 59,955 |
For the thirteen and thirty-nine weeks ended October 30, 2021, we corrected an immaterial error of $94 thousand and $283 thousand, respectively, which consisted solely of a reclassification of fixed operating lease expense from SG&A to cost of goods sold, on the table above. Supplemental lease information for the thirty-nine weeks ended October 29, 2022 and October 30, 2021 was as follows:
| Thirty-Nine Weeks Ended October 29, 2022 | Thirty-Nine Weeks Ended October 30, 2021
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) | $52,971 | $51,823
Weighted average remaining lease term (in years) | 5.8 years | 5.6 years
Weighted average interest rate (1) | 6.32% | 6.16%
(1) Since our leases do not provide an implicit rate, we use our incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification in determining the present value of future minimum payments. Common Stock Share Repurchases We may repurchase shares of our common stock from time to time pursuant to authorizations approved by our Board of Directors (see Note 9). As permitted under Delaware corporation law, shares repurchased are retired and, accordingly, are not presented separately as treasury stock in the consolidated financial statements. Instead, the value of repurchased shares is deducted from retained earnings. Income Taxes Our income tax expense was $3.7 million, or 27.2% of pre-tax income, compared to an income tax expense of $17.9 million, or 25.5% of pre-tax income, for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. The increase in the effective income tax rate was primarily due to the discrete tax effects of stock-based compensation. Reclassifications of Prior Year Presentation Certain prior year amounts on the Consolidated Balance Sheets, have been reclassified to conform with the current year presentation. These reclassifications had no effect on the reported results of operations. A reclassification has been made to last year's Consolidated Balance Sheet as of October 30, 2021 to identify deferred tax assets of $11.9 million and the long-term portion of credit facility costs of $0.2 million. This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows. New Accounting Standards Not Yet Adopted In November 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses which amends ("ASU") No. 2016-13 Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2019-11 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. This guidance will have no impact on our consolidated financial statements and related disclosures since the Company has no LIBOR based loans.

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