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Summary of Significant Accounting Policies | 3 Months Ended
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Apr. 29, 2023
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 28, 2023. Revenue Recognition Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns and taxes collected from our customers. 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 Operations. The following table summarizes net sales from our retail stores and e-commerce (in thousands):
| Thirteen Weeks Ended |  |
| April 29, 2023 |  | April 30, 2022 |  |  |  |
Retail stores | $ | 97,819 |  |  | $ | 117,482 |  |  |  |  |
E-commerce | 25,818 |  |  | 28,293 |  |  |  |  |
Total net sales | $ | 123,637 |  |  | $ | 145,775 |  |  |  |  |
The following table summarizes the percentage of net sales by department:
| Thirteen Weeks Ended |  |
| April 29, 2023 |  | April 30, 2022 |  |  |  |
Mens | 35 | % |  | 35 | % |  |  |  |
Womens | 29 | % |  | 29 | % |  |  |  |
Accessories | 14 | % |  | 15 | % |  |  |  |
Footwear | 14 | % |  | 12 | % |  |  |  |
Girls | 4 | % |  | 4 | % |  |  |  |
Boys | 3 | % |  | 4 | % |  |  |  |
Outdoor | 1 | % |  | 1 | % |  |  |  |
Total net sales | 100 | % |  | 100 | % |  |  |  |
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
| Thirteen Weeks Ended |  |
| April 29, 2023 |  | April 30, 2022 |  |  |  |
Third-party | 68 | % |  | 68 | % |  |  |  |
Proprietary | 32 | % |  | 32 | % |  |  |  |
Total net sales | 100 | % |  | 100 | % |  |  |  |
We accrue for estimated sales returns by customers based on historical sales return results. As of April 29, 2023, January 28, 2023 and April 30, 2022, our reserve for sales returns was $1.8 million, $1.6 million and $2.1 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 card balances. The customer liability balance was $9.9 million, $11.1 million and $9.8 million as of April 29, 2023, January 28, 2023 and April 30, 2022, 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. Revenue recognized from gift cards was $3.4 million and $4.0 million for the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively. For the thirteen weeks ended April 29, 2023 and April 30, 2022, the opening gift card balance was $11.1 million and $11.2 million, respectively, of which $2.2 million and $2.6 million, respectively, were recognized as revenue during the period. 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 points earned and expected future redemptions. The deferred revenue for this program was $4.9 million, $5.0 million and $5.4 million as of April 29, 2023, January 28, 2023 and April 30, 2022, respectively. The value of points redeemed through our loyalty program was $1.6 million and $2.1 million for the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively. For the thirteen weeks ended April 29, 2023 and April 30, 2022, the opening loyalty program balance was $5.0 million and $5.9 million, respectively, of which $1.3 million and $2.0 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. Many of our store leases contain one or more options to renew the lease at our sole discretion. 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 week periods ended April 29, 2023 and April 30, 2022 we incurred rent expense of $0.5 million related to this lease. The 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 week periods ended April 29, 2023 and April 30, 2022, we incurred rent expense of $0.2 million and $0.1 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, not to exceed 7%, but a minimum of 3%, 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 each of the thirteen week periods ended April 29, 2023, and April 30, 2022 we incurred rent expense of $0.4 million related to this lease. The lease payment adjusts annually based upon the greater of 5% or the Consumer Price Index. The lease began on November 1, 2011 and 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 five years and terminates on 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 Operations. The maturity of operating lease liabilities and sublease income as of April 29, 2023 were as follows (in thousands):
Fiscal Year | Related Party | Other | Total | Sublease Income |
2023 | $ | 2,961 |  | $ | 48,194 |  | $ | 51,155 |  | $ | 68 |  |
2024 | 4,085 |  | 55,005 |  | 59,090 |  | 95 |  |
2025 | 4,245 |  | 45,335 |  | 49,580 |  | 99 |  |
2026 | 4,411 |  | 34,170 |  | 38,581 |  | 104 |  |
2027 | 4,167 |  | 26,738 |  | 30,905 |  | — |  |
Thereafter | 9,324 |  | 53,718 |  | 63,042 |  | — |  |
Total minimum lease payments | 29,193 |  | 263,160 |  | 292,353 |  | 366 |  |
Less: Amount representing interest | 4,652 |  | 43,802 |  | 48,454 |  | — |  |
Present value of operating lease liabilities | $ | 24,541 |  | $ | 219,358 |  | $ | 243,899 |  | $ | 366 |  |
As of April 29, 2023, additional operating lease contracts that have not yet commenced are approximately $4.3 million. Further, additional operating lease contracts and modifications executed subsequent to the balance sheet date, but prior to the report date, are approximately $8.3 million. Lease expense for the thirteen week period ended April 29, 2023 and April 30, 2022 was as follows (in thousands):
|  | Thirteen Weeks Ended
|  | April 29, 2023 |  | April 30, 2022
|  | Cost of goods sold |  | SG&A |  | Total |  | Cost of goods sold |  | SG&A |  | Total
Fixed operating lease expense |  | $ | 15,425 |  |  | $ | 328 |  |  | $ | 15,753 |  |  | $ | 15,275 |  |  | $ | 322 |  |  | $ | 15,597 |
Variable lease expense |  | 5,749 |  | 28 |  | 5,777 |  | 3,786 |  |  | 14 |  |  | 3,800 |
Total lease expense |  | $ | 21,174 |  |  | $ | 356 |  |  | $ | 21,530 |  |  | $ | 19,061 |  |  | $ | 336 |  |  | $ | 19,397 |
Supplemental lease information for the thirteen weeks ended April 29, 2023 and April 30, 2022 was as follows:
| Thirteen Weeks Ended
| April 29, 2023 |  | April 30, 2022
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) | $17,300 |  | $17,166
Weighted average remaining lease term (in years) | 5.7 years |  | 5.7 years
Weighted average interest rate (1) | 6.47% |  | 6.08%
(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. Income Taxes Our income tax benefit was $(4.2) million, or 26.1% of pre-tax loss, compared to an income tax expense of $0.3 million, or 26.9% of pre-tax income, for the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively. The decrease in the effective income tax rate was primarily attributable to a decrease in pre-tax income. New Accounting Standards 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") and 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. We adopted ASU 2019-11 in the first quarter of fiscal 2023, which applied to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. The adoption of this accounting standard did not have a material effect on our consolidated financial statements and related disclosures.

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