UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

__________________________________________________

FORM 10-Q

__________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October ~~30, 2021~~29, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35535

__________________________________________________

TILLY’S, INC.

(Exact name of Registrant as specified in its charter)

__________________________________________________


Delaware						45-2164791
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

10 Whatney

Irvine, CA 92618

(Address of principal executive offices)

(949) 609-5599

(Registrant’s telephone number, including area code)

__________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share	TLYS	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated Filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒

As of December ~~6, 2021,~~2, 2022, the registrant had the following shares of common stock outstanding:


Class A common stock $0.001 par value			~~23,659,523~~22,537,461
Class B common stock $0.001 par value			7,306,108

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TILLY’S, INC.

FORM 10-Q

For the Quarterly Period Ended October ~~30, 2021~~29, 2022

Index


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	6
	Consolidated Balance Sheets as of ~~October~~ 3 0 ~~, 2021,~~October 29, 2022, January 29, 2022 and October 30, 2021 ~~andOctober~~ 31 ~~, 2020~~	6
	Consolidated Statements of ~~Operations~~Income for the Thirteen and Thirty-Nine Weeks Ended October 3 0 ,29, 2022 and October 30, 2021 ~~and~~ ~~October~~3 ~~1, 2020~~	7
	Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the Thirteen and Th ~~irty-Nine~~ Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021 ~~and~~ ~~October~~ 3 ~~1, 2020~~	8
	Consolidated Statement of Stockholders’ Equity as of October 29, 2022 and October 30,, 2021 ~~and~~ ~~October~~3 ~~1, 2020~~	9
	Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2022 and October 30,, 2021 ~~and~~ ~~October~~3 ~~1, 2020~~	11
	Notes to the Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits	3334

	Signatures	3435

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Forward-Looking Statements

This Quarterly Report on Form 10-Q ("this "Report") contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this Report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, comparable store sales, operating income, earnings per share, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

•the impacts of inflation on consumer spending generally and on our expense management, operating results and financial condition;

•the continued impacts of the COVID-19 pandemic generally ~~(including any future surges in the number of cases or new variants or strains related thereto)~~and on our operations, future financial or operational ~~results;~~

•results, including with respect to our expense management, our ability to ~~produce acceptable~~reduce costs, and our ability to effectively manage inventory levels ofon an ongoing basis relative to net sales ~~amid the ongoing global supply chain delays that are,~~performance and ~~have been, negatively impacting the timing of receiving new product deliveries;~~changing market conditions;

•our ability to adapt to ~~changes~~downward trends in ~~foot~~ traffic ~~trends~~ for our stores and changes in our customers' purchasing patterns;

•our ability to successfully open new stores and profitably operate our existing stores;

•our ability to attract customers to our e-commerce ~~website;~~website and generate acceptable levels of return from our digital marketing efforts and other e-commerce growth initiatives;

•increases in costs of energy, transportation or utility costs and in the costs of labor and employment;

•our ability to efficiently utilize our e-commerce fulfillment center;

•effectively adapting to new challenges associated with our expansion into new geographic markets;

•our ability to establish, maintain and enhance a strong brand image;

•~~generating~~our ability to generate adequate cash from our existing stores and e-commerce to support our growth;

•~~identifying~~our ability to identify and ~~responding~~respond to new and changing customer fashion preferences and fashion-related trends;

•~~competing~~our ability to compete effectively in an environment of intense competition both in stores and online;

•our ability to adjust to increasing costs of mailing catalogs, paper and printing;

•the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located;

•our ability to attract customers in the various retail venues and geographies in which our stores are located;

•~~adapting~~our ability to ~~periods of decline~~adapt to declines in consumer confidence and decreases in consumer spending;

•our ability to adapt to significant changes in sales due to the seasonality of our business;

•our ability to compete inon social media marketing platforms;

•~~price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold;~~

•natural disasters, unusually adverse weather conditions, port delays, boycotts, epidemics, pandemics, acts of war, terrorism, civil unrest and other unanticipated events;

•our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable ~~prices;~~

•~~increases in costs of energy, transportation or utility costs~~prices and ~~in the costs of labor and employment;~~on time;

•our ability to balance proprietary branded merchandise with the third-party branded merchandise we sell;

•~~adjusting to increasing costs of mailing catalogs, paper and printing;~~

•most of our merchandise is made in foreign countries, making price and availability of our merchandise susceptible to international trade conditions;

•failure of our vendors and their manufacturing sources to use acceptable labor or other practices;

•our dependence upon key executive management or our inability to hire or retain the talent required for our business;

•our ability to effectively adapt to our planned expansion;

•our ability to secure desirable lease arrangements and other economics to support the rate of our planned store growth.

•failure of our information technology systems to support our current and growing business, before and after our planned upgrades;

•disruptions in our supply chain and distribution center;

•our indebtedness and lease obligations, including restrictions ~~on our operations~~ contained therein;

•~~our reliance upon independent third-party transportation providers for certain of our product shipments;~~

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•our reliance upon independent third-party transportation providers for certain of our product shipments;

•our ability to increase comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile;

•disruptions to our information systems in the ordinary course of business or as a result of systems upgrades;

•our inability to protect our trademarks or other intellectual property rights;

•the impact of governmental laws and regulations and the outcomes of legal proceedings;

•our ability to secure our data and comply with privacy laws and the security standards for the credit card industry;

•our failure to maintain adequate internal controls over our financial and management systems; and

•continuing costs incurred as a result of being a public company.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

See “Risk Factors” within our most recent Annual Report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this Report and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the disclosures and forward-looking statements included in this Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

TILLY’S, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


		October 30, 2021		January 30, 2021		October 31, 2020			October 29, 2022		January 29, 2022		October 30, 2021
ASSETS	ASSETS							ASSETS
Current assets:	Current assets:							Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	59,392	$	76,184	$	99,309	Cash and cash equivalents	$	75,786	$	42,201	$	59,392
Marketable securities	Marketable securities	96,237		64,955		25,987		Marketable securities	29,985		97,027		96,237
Receivables	Receivables	8,881		8,724		11,397		Receivables	11,352		6,705		8,881
Merchandise inventories	Merchandise inventories	86,692		55,698		65,936		Merchandise inventories	81,589		65,645		86,692
Prepaid expenses and other current assets	Prepaid expenses and other current assets	9,926		6,595		5,557		Prepaid expenses and other current assets	16,036		16,400		9,682
Total current assets	Total current assets	261,128		212,156		208,186		Total current assets	214,748		227,978		260,884
Operating lease assets	Operating lease assets	226,547		229,864		236,443		Operating lease assets	222,664		216,508		226,547
Property and equipment, net	Property and equipment, net	49,392		52,639		54,756		Property and equipment, net	51,279		47,530		49,392
Deferred tax assets								Deferred tax assets	10,261		11,446		11,894
Other assets	Other assets	13,170		12,797		9,150		Other assets	1,488		1,361		1,520
Total assets		$	550,237	$	507,456	$	508,535
TOTAL ASSETS								TOTAL ASSETS	$	500,440	$	504,823	$	550,237

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:							Current liabilities:
Accounts payable	Accounts payable	$	46,378	$	24,983	$	36,245	Accounts payable	$	30,225	$	28,144	$	46,378
Accrued expenses	Accrued expenses	20,084		30,682		21,984		Accrued expenses	17,239		19,073		20,084

Deferred revenue	Deferred revenue	13,568		13,492		11,051		Deferred revenue	13,859		17,096		13,568
Accrued compensation and benefits	Accrued compensation and benefits	17,106		9,899		10,096		Accrued compensation and benefits	9,756		17,056		17,106

Current portion of operating lease liabilities	Current portion of operating lease liabilities	54,299		54,503		62,747		Current portion of operating lease liabilities	50,047		51,504		51,717
Other		727		632		316
Current portion of operating lease liabilities, related party								Current portion of operating lease liabilities, related party	2,771		2,533		2,582
Other liabilities								Other liabilities	806		761		727
Total current liabilities	Total current liabilities	152,162		134,191		142,439		Total current liabilities	124,703		136,167		152,162
Noncurrent operating lease liabilities		204,325		211,292		214,052
Other		1,112		1,351		838
Noncurrent portion of operating lease liabilities								Noncurrent portion of operating lease liabilities	176,621		171,965		182,700
Noncurrent portion of operating lease liabilities, related party								Noncurrent portion of operating lease liabilities, related party	23,129		21,000		21,625
Other liabilities								Other liabilities	455		978		1,112
Total long-term liabilities								Total long-term liabilities	200,205		193,943		205,437
Total liabilities	Total liabilities	357,599		346,834		357,329		Total liabilities	324,908		330,110		357,599
Commitments and contingencies (Notes 2 and 5)	Commitments and contingencies (Notes 2 and 5)	0		0		0		Commitments and contingencies (Notes 2 and 5)
Stockholders’ equity:	Stockholders’ equity:							Stockholders’ equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 23,658, 22,477 and 22,474 shares issued and outstanding, respectively		24		22		22
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,537, 23,719 and 23,658 shares issued and outstanding, respectively								Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,537, 23,719 and 23,658 shares issued and outstanding, respectively	23		24		24
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,306 shares issued and outstanding, respectively	Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,306 shares issued and outstanding, respectively	7		8		8		Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,306 shares issued and outstanding, respectively	7		7		7
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding	Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding	—		—		—		Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding	—		—		—
Additional paid-in capital	Additional paid-in capital	165,983		155,437		154,894		Additional paid-in capital	168,749		166,929		165,983
Retained earnings (Accumulated deficit)		26,616		5,135		(3,736)
Accumulated other comprehensive income		8		20		18
Retained earnings								Retained earnings	6,634		7,754		26,616
Accumulated other comprehensive income (loss)								Accumulated other comprehensive income (loss)	119		(1)		8
Total stockholders’ equity	Total stockholders’ equity	192,638		160,622		151,206		Total stockholders’ equity	175,532		174,713		192,638
Total liabilities and stockholders’ equity		$	550,237	$	507,456	$	508,535
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY								TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	500,440	$	504,823	$	550,237

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except per share data)

(Unaudited)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Net sales $ 206,096 $ 140,275 $ 571,205 $ 353,409
Cost of goods sold (includes buying, distribution, and occupancy costs) 129,357 99,615 364,900 269,481
Gross profit 76,739 40,660 206,305 83,928
Selling, general and administrative expenses 47,742 37,122 136,007 101,082
Operating income (loss) 28,997 3,538 70,298 (17,154)
Other (expense) income, net (1) (28) (219) 692
Income (loss) before income taxes 28,996 3,510 70,079 (16,462)
Income tax expense (benefit) 8,162 1,397 17,888 (6,446)
Net income (loss) $ 20,834 $ 2,113 $ 52,191 $ (10,016)
Basic earnings (loss) per share of Class A and Class B common stock $ 0.67 $ 0.07 $ 1.72 $ (0.34)
Diluted earnings (loss) per share of Class A and Class B common stock $ 0.66 $ 0.07 $ 1.68 $ (0.34)
Weighted average basic shares outstanding 30,915 29,708 30,429 29,693
Weighted average diluted shares outstanding 31,352 29,810 31,016 29,693


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net sales	$	177,847	$	206,096	$	491,930	$	571,205

Cost of goods sold (includes buying, distribution, and occupancy costs)	122,346		128,612		338,870		362,751
Rent expense, related party	918		745		2,680		2,149
Total cost of goods sold (includes buying, distribution, and occupancy costs)	123,264		129,357		341,550		364,900
Gross profit	54,583		76,739		150,380		206,305

Selling, general and administrative expenses	48,134		47,609		137,405		135,607
Rent expense, related party	134		133		400		400
Total selling, general, and administrative expenses	48,268		47,742		137,805		136,007

Operating income	6,315		28,997		12,575		70,298
Other income (expense), net	675		(1)		862		(219)
Income before income taxes	6,990		28,996		13,437		70,079
Income tax expense	1,841		8,162		3,656		17,888
Net income	$	5,149	$	20,834	$	9,781	$	52,191
Basic earnings per share of Class A and Class B common stock	$	0.17	$	0.67	$	0.32	$	1.72
Diluted earnings per share of Class A and Class B common stock	$	0.17	$	0.66	$	0.32	$	1.68
Weighted average basic shares outstanding	29,894		30,915		30,226		30,429
Weighted average diluted shares outstanding	30,050		31,352		30,428		31,016

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(In thousands)

(Unaudited)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Net income (loss) $ 20,834 $ 2,113 $ 52,191 $ (10,016)
Other comprehensive income (loss), net of tax:
Net change in unrealized (loss) gain on available-for-sale securities, net of tax (4) 17 (12) (196)
Other comprehensive (loss) income, net of tax (4) 17 (12) (196)
Comprehensive income (loss) $ 20,830 $ 2,130 $ 52,179 $ (10,212)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net income	$	5,149	$	20,834	$	9,781	$	52,191
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on available-for-sale securities, net of tax	73		(4)		120		(12)
Other comprehensive income (loss), net of tax	73		(4)		120		(12)
Comprehensive income	$	5,222	$	20,830	$	9,901	$	52,179

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at July 31, 2021 23,651 7,306 $ 31 $ 165,407 $ 5,782 $ 12 $ 171,232
Net income — — — — 20,834 — 20,834
Share-based compensation expense — — — 521 — — 521
Exercises of stock options 7 — — 55 — — 55
Net change in unrealized gain on available-for-sale securities — — — — — (4) (4)
Balance at October 30, 2021 23,658 7,306 $ 31 $ 165,983 $ 26,616 $ 8 $ 192,638


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at July 30, 2022	22,805	7,306	$	30	$	168,120	$	3,372	$	46	$	171,568
Net income	—	—	—		—		5,149		—		5,149




Share-based compensation expense	—	—	—		613		—		—		613
Employee stock option exercises	3	—	—		16		—		—		16
Repurchase of common stock	(271)	—	—		—		(1,887)		—		(1,887)
Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		73		73
Balance at October 29, 2022	22,537	7,306	$	30	$	168,749	$	6,634	$	119	$	175,532

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital Retained
Earnings (Accumulated Deficit) Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at August 1, 2020 22,414 7,366 $ 30 $ 154,386 $ (5,849) $ 1 $ 148,568
Net income — — — — 2,113 — 2,113
Class B common stock converted to Class A common stock 60 (60) — — — — —
Share-based compensation expense — — — 508 — — 508
Net change in unrealized gain on available-for-sale securities — — — — — 17 17
Balance at October 31, 2020 22,474 7,306 $ 30 $ 154,894 $ (3,736) $ 18 $ 151,206

~~The accompanying notes are an integral part of these consolidated financial statements.~~


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total Stockholders’ Equity
Balance at July 31, 2021	23,651	7,306	$	31	$	165,407	$	5,782	$	12	$	171,232
Net income	—	—	—		—		20,834		—		20,834




Share-based compensation expense	—	—	—		521		—		—		521
Employee stock option exercises	7	—	—		55		—		—		55
Net change in unrealized loss on available-for-sale securities	—	—	—		—		—		(4)		(4)
Balance at October 30, 2021	23,658	7,306	$	31	$	165,983	$	26,616	$	8	$	192,638

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TILLY’S, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


		Number of Shares													Number of Shares
		Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total Stockholders’ Equity
Balance at January 30, 2021		22,477	7,306	$	30	$	155,437	$	5,135	$	20	$	160,622
Balance at January 29, 2022														Balance at January 29, 2022	23,719	7,306	$	31	$	166,929	$	7,754	$	(1)	$	174,713
Net income	Net income	—	—	—		—		52,191		—		52,191		Net income	—	—	—		—		9,781		—		9,781
Dividends paid ($1.00 per share)		—	—	—		—		(30,710)		—		(30,710)

Restricted stock	Restricted stock	20	—	—		—		—		—		—		Restricted stock	63	—	—		—		—		—		—

Share-based compensation expense	Share-based compensation expense	—	—	—		1,417		—		—		1,417		Share-based compensation expense	—	—	—		1,764		—		—		1,764
Exercises of stock options		1,161	—	1		9,129		—		—		9,130
Employee stock option exercises														Employee stock option exercises	13	—	—		56		—		—		56
Repurchase of common stock														Repurchase of common stock	(1,258)	—	(1)		—		(10,901)		—		(10,902)
Net change in unrealized gain on available-for-sale securities	Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		(12)		(12)		Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		120		120
Balance at October 30, 2021		23,658	7,306	$	31	$	165,983	$	26,616	$	8	$	192,638
Balance at October 29, 2022														Balance at October 29, 2022	22,537	7,306	$	30	$	168,749	$	6,634	$	119	$	175,532

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital Retained
Earnings (Accumulated Deficit) Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at February 1, 2020 22,323 7,406 $ 30 $ 153,377 $ 6,280 $ 214 $ 159,901
Net loss — — — — (10,016) — (10,016)
Restricted stock 51 — — — — — —
Class B common stock converted to Class A common stock 100 (100) — — — — —
Share-based compensation expense — — — 1,517 — — 1,517
Net change in unrealized gain on available-for-sale securities — — — — — (196) (196)
Balance at October 31, 2020 22,474 7,306 $ 30 $ 154,894 $ (3,736) $ 18 $ 151,206


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at January 30, 2021	22,477	7,306	$	30	$	155,437	$	5,135	$	20	$	160,622
Net income	—	—	—		—		52,191		—		52,191
Dividends paid ($1.00 per share)	—	—	—		—		(30,710)		—		(30,710)
Restricted stock	20	—	—		—		—		—		—

Share-based compensation expense	—	—	—		1,417		—		—		1,417

Employee stock option exercises	1,161	—	1		9,129		—		—		9,130
Net change in unrealized loss on available-for-sale securities	—	—	—		—		—		(12)		(12)
Balance at October 30, 2021	23,658	7,306	$	31	$	165,983	$	26,616	$	8	$	192,638

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Thirty-Nine Weeks Ended					Thirty-Nine Weeks Ended
		October 30, 2021		October 31, 2020			October 29, 2022		October 30, 2021
Cash flows from operating activities
Net income (loss)		$	52,191	$	(10,016)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cash flows from operating activities:						Cash flows from operating activities:
Net income						Net income	$	9,781	$	52,191
Adjustments to reconcile net income to net cash (used in) provided by operating activities:						Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	Depreciation and amortization	13,123		14,571		Depreciation and amortization	10,515		13,123
Insurance proceeds from casualty loss	Insurance proceeds from casualty loss	117		—		Insurance proceeds from casualty loss	—		117
Share-based compensation expense	Share-based compensation expense	1,417		1,517		Share-based compensation expense	1,764		1,417
Impairment of long-lived assets		136		929
Impairment of assets						Impairment of assets	14		136
Loss on disposal of assets	Loss on disposal of assets	52		67		Loss on disposal of assets	64		52
Gain on sales and maturities of marketable securities	Gain on sales and maturities of marketable securities	(101)		(685)		Gain on sales and maturities of marketable securities	(230)		(101)
Deferred income taxes	Deferred income taxes	57		(1,142)		Deferred income taxes	1,167		57
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Receivables	Receivables	1,847		(3,912)		Receivables	(705)		1,847
Merchandise inventories	Merchandise inventories	(31,111)		(9,035)		Merchandise inventories	(15,944)		(31,111)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(3,698)		1,912		Prepaid expenses and other current assets	557		(3,698)
Accounts payable	Accounts payable	21,402		16,130		Accounts payable	2,068		21,402
Accrued expenses	Accrued expenses	(9,804)		2,392		Accrued expenses	(4,253)		(9,804)
Deferred revenue		76		(710)
Accrued compensation and benefits	Accrued compensation and benefits	7,207		2,906		Accrued compensation and benefits	(7,300)		7,207
Operating lease liabilities	Operating lease liabilities	(5,205)		6,224		Operating lease liabilities	(4,637)		(5,205)
Deferred revenue						Deferred revenue	(3,237)		76
Other liabilities	Other liabilities	(856)		(115)		Other liabilities	(706)		(856)
Net cash provided by operating activities		46,850		21,033
Cash flows from investing activities
Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(11,082)		46,850

Cash flows from investing activities:						Cash flows from investing activities:
Proceeds from marketable securities						Proceeds from marketable securities	117,189		95,224
Purchases of marketable securities						Purchases of marketable securities	(49,779)		(126,420)
Purchases of property and equipment	Purchases of property and equipment	(10,911)		(6,395)		Purchases of property and equipment	(11,897)		(10,911)

Proceeds from sale of property and equipment	Proceeds from sale of property and equipment	17		—		Proceeds from sale of property and equipment	—		17
Insurance proceeds from casualty loss	Insurance proceeds from casualty loss	29		—		Insurance proceeds from casualty loss	—		29
Purchases of marketable securities		(126,420)		(30,946)
Maturities of marketable securities		95,224		75,157
Net cash (used in) provided by investing activities		(42,061)		37,816
Cash flows from financing activities
Proceeds from line of credit		—		23,675
Repayment of line of credit		—		(23,675)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	55,513		(42,061)

Cash flows from financing activities:						Cash flows from financing activities:

Share repurchases						Share repurchases	(10,902)		—
Proceeds from exercise of stock options						Proceeds from exercise of stock options	56		9,129
Dividends paid	Dividends paid	(30,710)		(29,677)		Dividends paid	—		(30,710)
Proceeds from exercise of stock options		9,129		—
Net cash used in financing activities	Net cash used in financing activities	(21,581)		(29,677)		Net cash used in financing activities	(10,846)		(21,581)
Change in cash and cash equivalents	Change in cash and cash equivalents	(16,792)		29,172		Change in cash and cash equivalents	33,585		(16,792)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	76,184		70,137		Cash and cash equivalents, beginning of period	42,201		76,184
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	59,392	$	99,309	Cash and cash equivalents, end of period	$	75,786	$	59,392
Supplemental disclosures of cash flow information
Interest paid		$	—	$	182

Supplemental disclosures of cash flow information:						Supplemental disclosures of cash flow information:

Income taxes paid	Income taxes paid	$	26,493	$	857	Income taxes paid	$	1,440	$	26,493
Supplemental disclosure of non-cash activities
Supplemental disclosure of non-cash activities:						Supplemental disclosure of non-cash activities:
Unpaid purchases of property and equipment	Unpaid purchases of property and equipment	$	1,702	$	2,246	Unpaid purchases of property and equipment	$	3,511	$	1,702
Leased assets obtained in exchange for new operating lease liabilities		$	32,787	$	11,999
Operating lease liabilities arising from obtaining operating lease assets						Operating lease liabilities arising from obtaining operating lease assets	$	47,092	$	32,787

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Company and Basis of Presentation

Tillys is a leading destination specialty retailer of casual apparel, footwear, accessories and ~~accessories~~hardgoods for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated ~~243~~247 stores, in 33 states as of October ~~30, 2021.~~29, 2022. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.

The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.

The consolidated financial statements include the accounts of Tilly's, Inc. and WOJT. All intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", ~~"World of Jeans and Tops", "WOJT",~~ "we", "our", "us" and "Tillys" refer to ~~WOJT before our initial public offering, and to~~ Tilly's, Inc. and its subsidiary, ~~after our initial public offering.~~WOJT.

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the thirteen and thirty-nine week periods ended October ~~30, 2021~~29, 2022 are not necessarily indicative of results to be expected for the full fiscal year, especially in light of the favorable impact of federal stimulus checks on consumer spending earlier in fiscal 2021 and the atypical back-to-school timing that occurred amid the pandemic during fiscal 2020 and early fiscal 2021.year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021~~29, 2022 ("fiscal ~~2020"~~2021").

Fiscal Periods

Our fiscal year ends on the Saturday closest to January 31. References to fiscal ~~2021~~2022 refer to the fiscal year ending January 29,
2022.28, 2023. References to the fiscal quarters or first nine months ended October ~~30, 2021~~29, 2022 and October ~~31, 2020~~30, 2021 refer to the thirteen and thirty-nine week periods ended as of those dates, respectively.

~~Impact~~Economic Impacts of the COVID-19 Pandemic on our Business

~~As of~~The economic impacts resulting from the ~~date of filing this Quarterly Report on Form 10-Q (this "Report"), there remain many uncertainties regarding the ongoing~~ COVID-19 pandemic (the "pandemic"), have had, and may continue to have, a material effect on our business, financial condition and results of operations, as well as on the market generally, including ~~the anticipated duration and severity of the pandemic, particularly in light of ongoing vaccination efforts and emerging variant strains of the virus. To date, the pandemic has had far-reaching~~its impacts on ~~many aspects~~inflationary cost pressures, supply chain disruptions, competition for and availability of ~~the operations~~labor, management of ~~the Company, directly and indirectly, including on~~our workforce, consumer behavior, store traffic, ~~operational capabilities and our operations generally, timing of deliveries,~~ demands on our information technology and e-commerce capabilities, and inventory and expense ~~management, managing our workforce, our storefront configurations and operations upon reopening, and our people, which have materially disrupted our business and the market generally.~~ management.The scope and nature of these impacts continue to ~~evolve. With the current resurgence of COVID-19,~~evolve, and we may continue to experience similar or new adverse impacts in the future ~~including similar impacts we have previously experienced during~~arising from the pandemic such as regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, had, andthat may ~~in the future continue to~~ have material adverse ~~impacts~~effects on our future business, financial condition and results of

operations.

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~~operations. This situation is continually evolving, and additional impacts may arise that we are not aware of currently, or current impacts may become magnified.~~

Note 2: 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 ~~30, 2021.~~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.

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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.~~Income.

The following table summarizes net sales from our retail stores and e-commerce (in thousands):


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		October 30, 2021		October 31, 2020		October 30, 2021		October 31, 2020			October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Retail stores	Retail stores	$	165,255	$	104,546	$	457,557	$	235,358	Retail stores	$	141,539	$	165,255	$	396,109	$	457,557
E-commerce	E-commerce	40,841		35,729		113,648		118,051		E-commerce	36,308		40,841		95,821		113,648
Total net sales	Total net sales	$	206,096	$	140,275	$	571,205	$	353,409	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					Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		October 30, 2021		October 31, 2020		October 30, 2021		October 31, 2020			October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Mens	Mens	37	%	36	%	36	%	35	%	Mens	36	%	37	%	36	%	36	%
Womens	Womens	25	%	26	%	27	%	27	%	Womens	25	%	25	%	26	%	27	%
Accessories	Accessories	18	%	16	%	16	%	16	%	Accessories	19	%	18	%	17	%	16	%
Footwear	Footwear	10	%	12	%	11	%	13	%	Footwear	11	%	10	%	12	%	11	%
Boys	Boys	5	%	5	%	5	%	5	%	Boys	4	%	5	%	4	%	5	%
Girls	Girls	4	%	4	%	4	%	4	%	Girls	4	%	4	%	4	%	4	%
Hardgoods		1	%	1	%	1	%	—	%
Hardgoods/Outdoor										Hardgoods/Outdoor	1	%	1	%	1	%	1	%
Total net sales	Total net sales	100	%	100	%	100	%	100	%	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					Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		October 30, 2021		October 31, 2020		October 30, 2021		October 31, 2020			October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Third-party	Third-party	68	%	73	%	70	%	75	%	Third-party	69	%	68	%	69	%	70	%
Proprietary	Proprietary	32	%	27	%	30	%	25	%	Proprietary	31	%	32	%	31	%	30	%
Total net sales	Total net sales	100	%	100	%	100	%	100	%	Total net sales	100	%	100	%	100	%	100	%

We accrue for estimated sales returns by customers based on historical sales return results. As of October ~~30, 2021,~~29, 2022, January ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, our reserve for sales returns was $1.9 million, $1.9 million and $2.3 million, ~~$1.4 million~~respectively, and ~~$1.5 million, respectively.~~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~~cards, the balance of which was ~~$7.9~~$8.7 million, ~~$9.6~~$11.2 million and ~~$7.4~~$7.9 million as of October ~~30, 2021,~~29, 2022, January ~~30, 2021~~29, 2022 and October ~~31, 2020,~~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~~which we refer to as gift card ~~“breakage”).~~breakage. Based

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on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. ~~Revenue~~Total revenue recognized from gift cards was ~~$2.9~~$2.6 million and ~~$2.7~~$2.9 million for the thirteen weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, respectively. For the thirteen weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, the opening gift card balance was ~~$7.9~~$8.9 million and ~~$7.7~~$7.9 million, respectively, of which ~~$0.6~~$0.7 million and ~~$1.2~~$0.6 million respectively, was recognized as revenue during ~~the respective~~these periods. ~~Revenue~~Total revenue recognized from gift cards was ~~$10.1~~$9.9 million and ~~$8.1~~$10.1 million for the thirty-nine weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, respectively. For the thirty-nine weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, the opening gift card balance was ~~$9.6~~$11.2 million and ~~$9.3~~$9.6 million, respectively, of which ~~$4.0~~$4.6 million and ~~$3.7~~$4.0 million, respectively, was recognized as revenue during ~~the respective~~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

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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. ~~We currently expire~~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.~~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 ~~$5.7~~$5.2 million, ~~$3.9~~$5.9 million and ~~$3.6~~$5.7 million as of October ~~30, 2021,~~29, 2022, January ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, respectively. The value of points redeemed through our loyalty program was ~~$2.8~~$2.2 million and ~~$1.9~~$2.8 million for the thirteen weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, respectively. For the thirteen weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, the opening loyalty program balance was ~~$5.1~~$5.3 million and ~~$1.7~~$5.1 million, respectively, of which ~~$1.4~~$1.8 million and ~~$0.5~~$1.4 million, respectively, was recognized as revenue during ~~the respective~~these periods. The value of points redeemed through our loyalty program was ~~$7.7~~$6.5 million and ~~$4.2~~$7.7 million for the thirty-nine weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, respectively. For the thirty-nine weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, the opening loyalty program balance was ~~$3.9~~$5.9 million and ~~$2.4~~$3.9 million, respectively, of which ~~$3.7~~$4.9 million and ~~$1.6~~$3.7 million, respectively, was recognized as revenue during ~~the respective~~these periods.

Leases

We conduct all of our retail sales and corporate operations in leased facilities. Lease terms ~~for our stores are~~ generally ~~for~~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 ~~the~~those specified net sales ~~that triggers the contingent rent~~ is probable.

In response to stores being closed to the public as a result of the COVID-19 pandemic, we elected to withhold payment of our contractual lease obligations with respect to certain stores for the periods we were unable to operate such stores. We have substantially completed negotiating COVID-19 related lease concessions for most of our stores, with less than 10 stores and $0.4 million of withheld rents remaining unresolved as of October 30, 2021. These agreements have generally resulted in a combination of rent abatements and/or rent deferrals. With respect to all of our stores, we continue to have ongoing conversations with our landlords generally regarding what we believe to be commercially reasonable lease concessions given the current environment. We have considered the Financial Accounting Standards Board's (“FASB”) guidance regarding COVID-19 lease concessions and have elected to account for the lease concessions that have been granted as lease modifications.

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 $1.5 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October 31, 2020,~~ we incurred rent expense of $0.5 million and $1.6 million, respectively, related to this lease. Our lease began inon 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 ~~each~~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, ~~and October 31, 2020,~~ we incurred rent expense of $0.1 million and $0.3 million, respectively, related to this lease.

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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, ~~2022.~~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 ~~30, 2021,~~29, 2022, we incurred rent expense of ~~$0.3~~$0.4 million and ~~$0.7~~$1.1 million, respectively, related to this lease. During the thirteen and thirty-nine week periods ended October ~~31, 2020,~~30, 2021, we incurred rent expense of ~~$0.2~~$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 ~~period of 10 years~~10-year term and ~~now terminates on October 31, 2031.~~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.~~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.

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The maturity of operating lease liabilities and sublease income as of October ~~30, 2021~~29, 2022 were as follows (in thousands):


Fiscal Year	Fiscal Year	Related Party		Other		Total		Fiscal Year	Related Party		Other		Total		Sublease Income
2021		$	917	$	16,786	$	17,703
2022	2022	3,434		63,734		67,168		2022	$	966	$	17,011	$	17,977	$	22
2023	2023	3,416		53,211		56,627		2023	3,932		60,804		64,736		90
2024	2024	3,543		42,667		46,210		2024	4,085		50,941		55,026		95
2025	2025	3,676		33,484		37,160		2025	4,244		41,384		45,628		99
2026								2026	4,411		30,148		34,559		104
Thereafter	Thereafter	13,582		69,115		82,697		Thereafter	13,491		71,619		85,110
LeaseAndRentalExpense		28,568		278,997		307,565
Total minimum lease payments								Total minimum lease payments	31,129		271,907		303,036		410
Less: Amount representing interest	Less: Amount representing interest	4,361		44,580		48,941		Less: Amount representing interest	5,229		45,239		50,468		—
Present value of operating lease liabilities	Present value of operating lease liabilities	$	24,207	$	234,417	$	258,624	Present value of operating lease liabilities	$	25,900	$	226,668	$	252,568	$	410

As of October ~~30, 2021,~~29, 2022, additional operating lease ~~contract modifications executed subsequent to the balance sheet date, but prior to the filing date,~~contracts that have not yet commenced are approximately $2.3 million.

Lease expense for the thirteen and thirty-nine week periods ended October ~~30, 2021~~29, 2022 and October ~~31, 2020~~30, 2021 was as follows (in thousands):


		Thirteen Weeks Ended October 30, 2021						Thirteen Weeks Ended October 31, 2020							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			Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	Fixed operating lease expense	$	14,998	$	415	$	15,413	$	14,829	$	409	$	15,238	Fixed operating lease expense	$	16,230	$	331	$	16,561	$	15,092	$	321	$	15,413
Variable lease expense	Variable lease expense	4,907		15		$	4,922	4,663		12		4,675		Variable lease expense	4,274		10		4,284		4,907		15		4,922
Total lease expense	Total lease expense	$	19,905	$	430	$	20,335	$	19,492	$	421	$	19,913	Total lease expense	$	20,504	$	341	$	20,845	$	19,999	$	336	$	20,335


		Thirty-Nine Weeks Ended October 30, 2021						Thirty-Nine Weeks Ended October 31, 2020							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			Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	Fixed operating lease expense	$	45,055	$	1,240	$	46,295	$	45,229	$	1,212	$	46,441	Fixed operating lease expense	$	47,221	$	972	$	48,193	$	45,338	$	959	$	46,297
Variable lease expense	Variable lease expense	13,642		16		13,658		12,907		62		12,969		Variable lease expense	12,285		33		12,318		13,642		16		13,658
Total lease expense	Total lease expense	$	58,697	$	1,256	$	59,953	$	58,136	$	1,274	$	59,410	Total lease expense	$	59,506	$	1,005	$	60,511	$	58,980	$	975	$	59,955

~~Table~~For the thirteen and thirty-nine weeks ended October 30, 2021, we corrected an immaterial error of ~~Contents~~

$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 ~~30, 2021~~29, 2022 and October ~~31, 2020~~30, 2021 was as follows:

Thirty-Nine Weeks Ended
October 30, 2021

Thirty-Nine Weeks Ended
October 31, 2020

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)

$51,823

$36,694

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)

5.6 years

5.8 years

Weighted average remaining lease term (in years)

5.8 years

5.6 years

Weighted average interest rate (1)

6.16%

4.64%

Weighted average interest rate (1)

6.32%

6.16%

(1) Since our leases do not provide an implicit rate, we ~~used~~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.

~~During~~15

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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 ~~second quarter~~consolidated financial statements. Instead, the value of fiscal 2021, we identified and corrected an immaterial error in our balance sheets whereby we previously presented our operating lease assets on a net basis rather than presenting any negative operating lease asset balances as a separate operating lease liability. As such, during the third quarter of fiscal 2021, we have presented the corrected balances herein as of January 30, 2021 and October 31, 2020, for which there was a $2.0 million and $1.1 million gross-up of both operating lease assets and operating lease liabilities as of the respective dates. Further, we have presented the corrected Statement of Cash Flows for the thirty-nine weeks ended October 31, 2020 for which there was no net impact on net cash provided by operating activities.repurchased shares is deducted from retained earnings.

Income Taxes

Our income tax expense was ~~$17.9~~$3.7 million, or ~~25.5%~~27.2% of pre-tax income, compared to an income tax ~~benefit~~expense of ~~$(6.4)~~$17.9 million, or ~~39.2%~~25.5% of pre-tax ~~loss,~~income, for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, ~~and October 31, 2020,~~ respectively. The ~~decrease~~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 ~~income~~ tax ~~benefits~~assets of ~~$1.0~~$11.9 million ~~derived from employee stock option exercise activity in fiscal 2021,~~ and the ~~prior year impact~~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 ~~CARES Act which provided for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates.~~Consolidated Statements of Cash Flows.

New Accounting Standards Not Yet Adopted

In ~~June 2016,~~November 2019, the ~~FASB~~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 ~~2016-13~~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 December 2019, the FASB issued ASU No. 2019-12,~~ ~~Simplifying the Accounting of Income Taxes~~ ("ASU 2019-12"), which enhances and simplifies various aspects of income tax accounting guidance. The guidance is effective for annual periods after December 15, 2020. The Company adopted ASU 2019-12 in the first quarter of fiscal 2021. The impact this guidance has on our consolidated financial statements and related disclosures is immaterial.

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. ~~We are currently evaluating the~~This guidance will have no impact ~~this guidance may have~~ on our consolidated financial statements and related ~~disclosures.~~disclosures since the Company has no LIBOR based loans.

Note 3: Marketable Securities

Marketable securities as of October ~~30, 2021~~29, 2022 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity, as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.

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The following table summarizes our investments in marketable securities at October ~~30, 2021,~~29, 2022, January ~~30, 2021~~29, 2022 and October ~~31, 2020~~30, 2021 (in thousands):


		October 30, 2021									October 29, 2022
		Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value			Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	Commercial paper	$	64,261	$	12	$	(1)	$	64,272	Commercial paper	$	24,789	$	136	$	—	$	24,925
Fixed income securities	Fixed income securities	31,965		—		—		31,965		Fixed income securities	5,060		—		—		5,060
Total marketable securities	Total marketable securities	$	96,226	$	12	$	(1)	$	96,237	Total marketable securities	$	29,849	$	136	$	—	$	29,985

		January 30, 2021									January 29, 2022
		Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value			Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	Commercial paper	$	64,928	$	28	$	(1)	$	64,955	Commercial paper	$	64,235	$	9	$	(11)	$	64,233
Fixed income securities										Fixed income securities	32,794		—		—		32,794

Total marketable securities	Total marketable securities	$	64,928	$	28	$	(1)	$	64,955	Total marketable securities	$	97,029	$	9	$	(11)	$	97,027

		October 31, 2020									October 30, 2021
		Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value			Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	Commercial paper	$	24,950	$	25	$	—	$	24,975	Commercial paper	$	64,261	$	12	$	(1)	$	64,272
Fixed income securities	Fixed income securities	1,012		—		—		1,012		Fixed income securities	31,965		—		—		31,965
Total marketable securities	Total marketable securities	$	25,962	$	25	$	—	$	25,987	Total marketable securities	$	96,226	$	12	$	(1)	$	96,237

We recognized gains on investments for commercial paper that matured during the thirteen and thirty-nine week periods ended October ~~30, 2021~~29, 2022 and October ~~31, 2020.~~30, 2021. Upon recognition of the gains, we reclassified these amounts out of ~~Accumulated~~"Accumulated Other Comprehensive ~~Income~~Income" and into “Other income (expense) ~~income,~~, net” on the Consolidated Statements of ~~Operations.~~Income.

The following table summarizes our gains on investments for commercial paper (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Gains on investments $ 19 $ — $ 91 $ 554


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Gains on investments	$	109	$	19	$	174	$	91

Note 4: ~~Asset-Backed~~ Credit ~~Facility~~Agreement

New Credit Agreement

On ~~November 9, 2020 (the “Closing Date”),~~January 20, 2022, we entered into ~~an asset-backed~~a senior secured credit agreement (the ~~“Credit Agreement”~~"Credit Agreement") and revolving line of credit note (the "Note") with Wells Fargo Bank, National Association ~~("Bank"), as lender, administrative agent and collateral agent~~ (the ~~“Agent”~~“Bank”). ~~The Credit Agreement replaced our then-existing amended and restated credit agreement (the “Prior Credit Agreement”), dated as of May 3, 2012, as amended, with the Agent.~~

The Credit Agreement provides for ~~an asset-based,~~a senior secured revolving credit facility (“Revolving Facility”) of up to ~~$65.0~~$25.0 million (“Revolving Commitment”) consisting of revolving loans, letters of credit and swing line loans, ~~provided by lenders,~~ with a ~~sub limit~~sub-limit on letters of credit outstanding at any time of ~~$10.0 million and a sub limit for swing line loans of $7.5~~$15.0 million.The ~~Credit Agreement also includes an uncommitted accordion feature whereby we may increase the revolving commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions.The revolving facility~~Revolving Facility matures on ~~November 9, 2023.~~January 20, 2024. The payment and performance in full of the secured obligations under the ~~revolving facility~~Revolving Facility are secured by a lien on and security interest in all of the assets of our company.

The payment and performance in full of the obligations under the Credit Agreement are guaranteed by the Company pursuant to a continuing guaranty (the "Guaranty") granted by the Company in favor of the Bank. The payment and performance of the Company’s obligations under the Guaranty are secured by a lien on, and pledge of, all of the equity interests owned by the Company.

Borrowings under the Revolving Facility bear interest at a rate per annum equal to the daily simple Secured Overnight Financing Rate ("SOFR") plus 0.75%. Amounts available to be drawn under outstanding letters of credit accrue fees in an amount equal to 1.00% per annum. The unused portion of the Revolving Commitment is not subject to a commitment fee.

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Under the Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in a cash-flow-based lending facility, including financial covenants that require maintenance of (1) a ratio of total funded debt to earnings before interest, taxes, depreciation, amortization and annual rent expenses no greater than 4.00 to 1.00 and (2) a fixed charge coverage ratio of not less than 1.25 to 1.00 (calculation of which takes into account dividends, distributions, redemptions and repurchases of the equity interests of the Company only if the Company’s cash on hand, net of any amounts outstanding under the Credit Agreement, is less than $50.0 million after giving effect to such dividends, distributions, redemptions or repurchases).

Events of default under the Credit Agreement include, among other things, failure to pay principal, interest, fees or other amounts; covenant defaults; material inaccuracy of representations and warranties; bankruptcy events with respect to the Company; actual or asserted invalidity of any of the loan documents; or a change of control of the Company.

In connection with the entry into the Credit Agreement, on January 20, 2022, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Bank (ii) the Guaranty entered into by the Company, and (iii) a third party pledge agreement entered into by the Company in favor of the Bank. The security agreement, the guaranty and the pledge agreement replaced (i) the guaranty by the Company in favor of the Bank, dated November 9, 2020, and (ii) the security agreement dated as of November 9, 2020, between the Company and the Bank, which were both terminated concurrently with the termination of the Prior Credit Agreement (as defined below).

As of October 29, 2022, we were in compliance with all of our covenants and had no outstanding borrowings under the Credit Agreement.

Prior Credit Agreement

The Credit Agreement replaced our previously existing asset-backed credit agreement (the “Prior Credit Agreement”), dated as of November 9, 2020, as amended, with the Bank, which had revolving commitments of up to $65.0 million, a sub-limit on letters of credit of $10.0 million and a sub-limit for swing-line loans of $7.5 million.

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established by the ~~Agent,~~agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the ~~Agent.~~agent. As of the date the Prior Credit Agreement was terminated, we had no outstanding borrowings under the Credit Agreement, and the only utilization of the letters of credit sub-limit under the Credit Agreement was a $2.025 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on such date to the Credit Agreement.

The unused portion of the revolving commitment ~~accrues~~under the Prior Credit Agreement accrued a commitment fee, which ~~ranges~~ranged from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. Borrowings under the ~~revolving facility~~Prior Credit Agreement bear interest at a rate per annum that ~~ranges~~ranged from the LIBOR rate plus 2.0% to the LIBOR rate plus 2.25%, or the base rate plus 1.0% to the base rate plus 1.25%, based on the average daily borrowing capacity under the ~~revolving facility~~Prior Credit Agreement over the applicable fiscal quarter. We ~~may~~were allowed to elect to apply either the LIBOR rate or base rate interest to borrowings at our discretion, other than in the case of swing line loans, to which the base rate shall apply.

Under the Prior Credit Agreement, we ~~are~~were subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the ~~Closing Date,~~closing date, we were prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the ~~Closing Date,~~closing date, we ~~are~~were allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto, ~~and~~ certain minimum availability and minimum projected availability tests are satisfied.

On June 8, 2021, we entered into a Consent Agreement authorizing us to declare and pay cash dividends to our shareholders of up to $31 million in the aggregate on or before July 31, 2021. We paid a one-time special cash dividend of $1.00 per share on July 9, 2021, to all holders of record of issued and outstanding common stock in the aggregate of $30.7 million.

In connection with the entry into the Credit Agreement, on November 9, 2020, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Agent, and (ii) a guaranty by us in favor of the Agent. The security agreement and the guaranty replaced (i) the general pledge agreement, dated as of May 3, 2012, by us in favor of the bank, (ii) the continuing guaranty by us in favor of the Agent, dated May 3, 2012, and (iii) the amended and restated security agreement with respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, 2012.

~~As of October 30, 2021, we were in compliance with all of our covenants, were eligible to borrow up to a total of $63.0 million, and had no outstanding borrowings under the Credit Agreement.~~

The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. The interest rate charged on borrowings under the Prior Credit Agreement was selected at our discretion at the time of draw between LIBOR plus 0.75%, or at the Bank’s prime rate. The Prior Credit Agreement was secured by substantially all of our assets. In March 2020, we borrowed $23.7 million under our Prior Credit Agreement, which represented the maximum borrowings permitted thereunder, and which were subsequently repaid in September 2020.

Note 5: Commitments and Contingencies

Indemnifications, Commitments, and Guarantees

During the normal course of business, we have made certain indemnifications, commitments, and guarantees under which we may be required to make payments for certain transactions. These indemnifications include, but are not limited to, those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnifications to our directors and officers to the maximum extent permitted under the laws of the state of Delaware. The majority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make, and their duration may be indefinite. We have not recorded any liability for these indemnifications, commitments, and guarantees in the accompanying Consolidated Balance Sheets.

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Legal Proceedings

From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We establish loss provisions for matters in which losses are probable and can be reasonably estimated. For some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the ~~incurrence,~~occurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.

Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. ~~Although the~~The case did not settle ~~at the~~during mediation ~~the parties have agreed to continue their settlement discussions with the assistance of the mediator.~~nor during ensuing negotiations. The court has not yet issued a trial date. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify us for all of our losses and expenses incurred in connection with this matter. To reduce our indemnifiable losses and expenses in this matter, we have requested that BaronHR enforce its arbitration agreement in light of recent developments in applicable case law, and move to compel the individual PAGA claim to arbitration and dismiss the representative PAGA claims. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under FASB Accounting Standards Codification ("ASC") 450, “Contingencies,” and no accrual has been made with regard to this matter.

Allison B. Johnson, on behalf of herself and others similarly situated, v. World of Jeans & Tops, Inc. dba Tilly’s et al, Superior Court of California, County of Fresno, Case No. 22CECG03658. In November 2022, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. We have also been served with a notice to the California Labor and Workforce Development Agency regarding the plaintiff’s intention to file a representative action pursuant to PAGAagainst us seeking penalties on behalf of herself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We are at the preliminary stages of investigating the allegations made in the complaint and intend to defend this case vigorously. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to ~~the verdict.~~

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~~Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405.~~ In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against us and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In February 2019, the Court of Appeal issued an opinion overturning the trial court’s decision, holding that the plaintiff’s allegations stated a claim. In March 2019, we filed a petition for review with the California Supreme Court seeking its discretionary review of the Court of Appeal’s decision. The California Supreme Court declined to review the Court of Appeal’s decision. Since the case was remanded back to the trial court, the parties have been engaged in discovery. In March 2020, the plaintiff filed a motion for class certification. In July 2020, we filed our opposition to the motion for class certification. In September 2020, the plaintiff filed her reply brief in support of the motion for class certification. In October 2020, the court denied plaintiff's motion for class certification. In December 2020, the plaintiff filed a notice of appeal of the court's order denying her motion for class certification. On October 15, 2021, the plaintiff filed a request for dismissal of her appeal. On October 20, 2021, the Court of Appeal dismissed plaintiff’s appeal and issued a remittitur to return the case to the trial court. As a result, the case currently consists solely of the plaintiff’s individual claims. We have defended this ~~case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.~~matter.

Note 6: Fair Value Measurements

We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:

•Level 1 – Quoted prices in active markets for identical assets and liabilities.

•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 – Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We measure certain financial assets at fair value on a recurring basis, including our marketable securities which are classified as available-for-sale securities, and certain cash equivalents, specifically money market securities, commercial paper, municipal bonds and ~~commercial paper.~~certificates of deposits. The money market accounts are valued based on quoted market prices in active ~~markets (Level 1).~~markets. The available-for-sale marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent ~~third-party entities (Level 2).~~third party entities.

From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for ~~impairment~~impairments using ~~Company specific~~Company-specific assumptions which would fall within Level 3 of the ~~fair value~~fair-value hierarchy.

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Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.

During the thirteen and thirty-nine week periods ended October ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of October ~~30, 2021,~~29, 2022, January ~~30, 2021~~29, 2022 and October ~~31, 2020,~~30, 2021, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

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Financial Assets

~~We have~~In accordance with the provisions of ASC 820, Fair Value Measurement, we categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):


		October 30, 2021						January 30, 2021						October 31, 2020							October 29, 2022						January 29, 2022						October 30, 2021
		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3			Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash equivalents (1):	Cash equivalents (1):																			Cash equivalents (1):
Money market securities	Money market securities	$	52,532	$	—	$	—	$	67,115	$	—	$	—	$	93,045	$	—	$	—	Money market securities	$	62,848	$	—	$	—	$32,764		$	—	$	—	$52,532		$	—	$	—

Commercial paper																				Commercial paper	$	—	$9,948		$	—	$	—	$4,999		$	—	$	—	$	—	$	—
Marketable securities:	Marketable securities:																			Marketable securities:
Commercial paper	Commercial paper	$	—	$	64,272	$	—	$	—	$	64,955	$	—	$	—	$	24,975	$	—	Commercial paper	$	—	$	24,925	$	—	$	—	$	64,233	$	—	$	—	$	64,272	$	—

(1) Excluding cash.

Impairment of Long-Lived Assets

An impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts for such asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets, a decision to relocate or permanently close a store, or significant changes in our business strategies.

An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures, computer hardware and software, and operating lease assets, we consider the assetsOn at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.

Onleast a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. ~~During the thirty-nine weeks ended October 30, 2021, based~~Based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that ~~1 of our~~certain stores would not be able to generate sufficient cash flows over the remaining term of the related ~~lease~~leases to recover our investment in the respective ~~store.~~stores. As a result, we recorded non-recurring, non-cash impairment charges of less than $0.1 million ~~impairment charges~~and $0.1 million in the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively, to write-down the carrying value of certain long-lived store assets to their estimated fair values.

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
($ in thousands)
Carrying value of assets with impairment $— $26 $176 $929
Fair value of assets impaired $— $— $40 $—
Number of stores tested for impairment 1 34 12 52
Number of stores with impairment — 2 1 12


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
	($ in thousands)

Carrying value of assets with impairment	$	1	$	—	$	14	$	176
Fair value of assets impaired	$	—	$	—	$	—	$	40
Number of stores tested for impairment	8		1		9		12
Number of stores with impairment	1		—		2		1

Note 7: Share-Based Compensation

The Tilly's, Inc. 2012 Second Amended and Restated Equity and Incentive Plan, as amended in June 2020 (the "2012 Plan"), authorizes up to 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of October ~~30, 2021,~~29, 2022, there were ~~2,282,115~~1,778,595 shares available for future issuance under the 2012 Plan.

Stock Options

We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The ~~non qualified~~

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non-qualified options vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates and expire ten years from the date of grant.

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The following table summarizes stock option activity for the thirty-nine weeks ended October ~~30, 2021~~29, 2022 (aggregate intrinsic value in thousands):


		Stock Options	Grant Date Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (1)			Stock Options	Grant Date Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (1)
Outstanding at January 31, 2021		2,602,212	$	8.19
Outstanding at January 29, 2022								Outstanding at January 29, 2022	1,570,211	$	9.02
Granted	Granted	513,700	$	10.84				Granted	522,500	$	9.37
Exercised	Exercised	(1,161,571)	$	7.86				Exercised	(13,500)	$	4.13
Forfeited	Forfeited	(273,479)	$	9.24				Forfeited	(35,500)	$	9.66
Expired	Expired	(32,000)	$	16.26				Expired	(60,468)	$	14.63
Outstanding at October 30, 2021		1,648,862	$	8.91	7.6	$	8,383
Exercisable at October 30, 2021		486,792	$	10.50	4.8	$	1,844
Outstanding at October 29, 2022								Outstanding at October 29, 2022	1,983,243	$	8.96	7.6	$	2,211
Exercisable at October 29, 2022								Exercisable at October 29, 2022	759,043	$	9.52	5.9	$	836

(1)Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal period and the weighted average exercise price of in-the-money stock options outstanding at the end of the fiscal period. The market value per share was ~~$13.88~~$8.85 at October ~~30, 2021.~~29, 2022.

The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We issue shares of Class A common stock when stock option awards are exercised.

The fair values of stock options granted during the thirteen and thirty-nine weeks ended October ~~30, 2021~~29, 2022 and October ~~31, 2020~~30, 2021 were estimated on the grant date using the following assumptions:


		Thirteen Weeks Ended		Thirty-Nine Weeks Ended			Thirteen Weeks Ended		Thirty-Nine Weeks Ended
		October 30, 2021	October 31, 2020	October 30, 2021	October 31, 2020		October 29, 2022	October 30, 2021	October 29, 2022	October 30, 2021
Weighted average grant-date fair value per option granted	Weighted average grant-date fair value per option granted	$7.96	$4.04	$5.69	$2.19	Weighted average grant-date fair value per option granted	$3.82	$7.96	$4.94	$5.69
Expected option term (1)	Expected option term (1)	5.3 years	5.7 years	5.4 years	5.3 years	Expected option term (1)	5.2 years	5.3 years	5.2 years	5.4 years
Weighted average expected volatility factor (2)	Weighted average expected volatility factor (2)	59.4%	59.9%	59.9%	57.5%	Weighted average expected volatility factor (2)	58.6%	59.4%	58.6%	59.9%
Weighted average risk-free interest rate (3)	Weighted average risk-free interest rate (3)	1.0%	0.3%	0.9%	0.4%	Weighted average risk-free interest rate (3)	3.6%	1.0%	2.4%	0.9%
Expected annual dividend yield (4)	Expected annual dividend yield (4)	—%	—%	—%	—%	Expected annual dividend yield (4)	—%	—%	—%	—%

(1)The expected option term of the awards represents the estimated time that options are expected to be outstanding based upon historical option data.

(2)Stock volatility for each grant is measured using the historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.

(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.

(4)We do not currently have a dividend policy.

Restricted Stock Awards

Restricted stock awards ("RSAs") represent restricted shares ~~of our common stock~~ issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are ~~vested.~~vested, whereas restricted stock units ("RSUs") represent shares issuable in the future upon vesting. Under the 2012 Plan, we grant RSAs to independent members of our Board of ~~Directors.~~Directors and RSUs to certain employees. RSAs granted to ~~our~~ Board ~~of Directors~~members vest at a rate of 50% on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates. The RSUs granted to certain employees vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the respective recipient continues to be employed by us through each of those vesting dates. We determine the fair value of restricted stock underlying the RSAs and RSUs based upon the closing price of our Class A common stock on the date of grant.

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The following table summarizes the status of non-vested RSAs changes during the thirty-nine weeks ended October ~~30, 2021:~~29, 2022:


		Restricted Stock	Weighted Average Grant-Date Fair Value			Restricted Stock	Weighted Average Grant-Date Fair Value
Nonvested at January 30, 2021		71,548	$	6.71
Nonvested at January 29, 2022					Nonvested at January 29, 2022	45,464	$	10.56
Granted	Granted	19,988	$	16.01	Granted	63,492	$	7.56
Vested	Vested	(46,072)	$	6.95	Vested	(35,472)	$	9.02
Nonvested at October 30, 2021		45,464	$	10.56
Nonvested at October 29, 2022					Nonvested at October 29, 2022	73,484	$	8.71

Share-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. The following table summarizes share-based compensation expense recorded in the Consolidated Statements of ~~Operations~~Income (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Cost of goods sold (1)
$ 75 $ 147 $ 119 $ 434
Selling, general and administrative expenses 446 361 1,298 1,083
Total share-based compensation expense $ 521 $ 508 $ 1,417 $ 1,517


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Cost of goods sold (1)	$	100	$	75	$	280	$	119
Selling, general, and administrative	513		446		1,484		1,298
Total share-based compensation	$	613	$	521	$	1,764	$	1,417

(1)Share-based compensation expense for the thirty-nine weeks ended October 30, 2021 includes forfeiture credits due to the departure of the Company's prior Chief Merchandising Officer effective March 19, 2021.

At October ~~30, 2021,~~29, 2022, there was ~~$4.4~~$4.9 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock. This cost has a weighted average remaining recognition period of ~~2.7~~2.6 years.

Note 8: Earnings ~~(Loss)~~ Per Share

Earnings ~~(loss)~~ per share is computed under the provisions of ASC 260, Earnings Per Share. Basic ~~income (loss)~~earnings per share is computed based on the weighted average number of shares of common ~~shares~~stock outstanding during the period. Diluted ~~income (loss)~~earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential shares of common ~~shares~~stock (i.e., in-the-money outstanding stock options as well as RSAs) outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us to purchase ~~the~~shares of common ~~shares~~stock at the average market price during the period.

The components of basic and diluted earnings ~~(loss)~~ per share were as follows (in thousands, except per share amounts):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Net income (loss) $ 20,834 $ 2,113 $ 52,191 $ (10,016)
Weighted average basic shares outstanding 30,915 29,708 30,429 29,693
Dilutive effect of stock options and restricted stock 437 102 587 —
Weighted average shares for diluted earnings per share 31,352 29,810 31,016 29,693
Basic earnings (loss) per share of Class A and Class B common stock $ 0.67 $ 0.07 $ 1.72 $ (0.34)
Diluted earnings (loss) per share of Class A and Class B common stock $ 0.66 $ 0.07 $ 1.68 $ (0.34)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net income	$	5,149	$	20,834	$	9,781	$	52,191
Weighted average basic shares outstanding	29,894		30,915		30,226		30,429
Dilutive effect of in-the-money stock options and RSAs	156		437		202		587
Weighted average shares for diluted earnings per share	30,050		31,352		30,428		31,016
Basic earnings per share of Class A and Class B common stock	$	0.17	$	0.67	$	0.32	$	1.72
Diluted earnings per share of Class A and Class B common stock	$	0.17	$	0.66	$	0.32	$	1.68

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The following stock options have been excluded from the calculation of diluted earnings ~~(loss)~~ per share as the effect of including these stock options would have been anti-dilutive (in thousands):


		Thirteen Weeks Ended		Thirty-Nine Weeks Ended			Thirteen Weeks Ended		Thirty-Nine Weeks Ended
		October 30, 2021	October 31, 2020	October 30, 2021	October 31, 2020		October 29, 2022	October 30, 2021	October 29, 2022	October 30, 2021
Stock options	Stock options	677	1,503	800	2,597	Stock options	1,529	677	1,408	800
Restricted stock	Restricted stock	—	—	20	72	Restricted stock	10	—	10	20
Total	Total	677	1,503	820	2,669	Total	1,539	677	1,418	820

Note 9: ~~Subsequent Events~~Share Repurchase Program

On ~~November 18, 2021,~~March 14, 2022, our Board of Directors ~~declared~~authorized a ~~special cash dividend~~share repurchase program, pursuant to which we are authorized to repurchase up to 2,000,000 shares of ~~$1.00~~our Class A common stock through March 14, 2023, in open market transactions through a broker-dealer at prevailing market prices, in block trades or by any other means in accordance with federal securities laws. During the thirty-nine weeks ended October 29, 2022, we repurchased 1,258,330 shares of our Class A common stock at a weighted average price of $8.63 per share for a total of $10.9 million under the program. At October 29, 2022, the remaining repurchase authorization totaled 741,670 shares.

We are not obligated to ~~all holders~~repurchase any specific number or amount of ~~issued and outstanding~~ shares of ~~both~~ Class A ~~and Class B~~ common stock pursuant to the program, and we may modify, suspend or discontinue the program at any time. We will determine the timing and amount of repurchased shares, if any, in our discretion based on a variety of factors, such as the market price of ~~the close of business on December 7, 2021. Payment of the dividend will be made on December 15, 2021.~~our Class A common stock, corporate requirements, general market and economic conditions and applicable legal requirements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Tilly’s, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q (this "Report") and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021.~~29, 2022. As used in this ~~Quarterly~~ Report, ~~on Form 10-Q,~~ except where the context otherwise requires or where otherwise indicated, the terms “the Company”, “World of Jeans & Tops”, “we”, “our”, “us”, "Tillys" and “Tilly’s” refer to Tilly’s, Inc. and its subsidiary.

Overview

Tillys is a destination specialty retailer of casual apparel, footwear, accessories and hardgoods for men, women, boys and girls. We believe we bring together an unparalleled selection of iconic global, emerging, and proprietary brands rooted in an active and outdoor lifestyle. The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened our first store in Orange County, California. As of October ~~30, 2021,~~29, 2022, we operated ~~243~~247 stores in 33 states, averaging approximately ~~7,300~~7,286 square feet per store, compared to ~~238~~243 total stores last year at this time. We also sell our products through our e-commerce website, www.tillys.com.

Known or Anticipated Trends

~~COVID-19 Pandemic~~Economic and Operational Trends

AsEconomic and Operational Impacts of the ~~date of filing this Report, there remain many uncertainties regarding~~COVID-19 Pandemic. The economic impacts resulting from the ~~ongoing~~ COVID-19 pandemic (the "pandemic")~~, including~~ have had, and may continue to have, a material effect on our business, financial condition and results of operations, as well as on the ~~anticipated duration~~market generally. We may experience adverse impacts in the future, particularly related to broader economic conditions that result in significant part from pandemic-related factors. Further, we believe our operating results for fiscal 2021 were significantly aided by the considerable pent-up consumer demand exiting 2020 pandemic restrictions and ~~severity~~the impact of federal stimulus payments. Additionally, the ~~pandemic, particularly in light of ongoing vaccination efforts~~factors noted below have had, and ~~emerging variant strains of~~are expected to continue to have, an adverse impact on our operating results during fiscal 2022. As a result, we expect our fiscal 2022 fourth quarter operating results will remain below fiscal 2021 levels. In addition to the ~~virus. To date,~~economic impacts on us, the pandemic has had, and may continue to have, far-reaching impacts on many aspects of ~~the~~our operations, ~~of the Company,~~ directly and indirectly, including on consumer behavior, store traffic, ~~operational capabilities and our operations generally, timing of deliveries, demands on our information technology and e-commerce capabilities,~~ inventory and expense management, ~~managing~~and management of our ~~workforce, our storefront configurations and operations upon reopening, and our people, which have materially disrupted our business and~~workforce.

Inflationary Cost Pressures. As of the ~~market generally. The scope and nature~~date of ~~these impacts continue to evolve. With~~this filing, the ~~continued challenges posed by~~macro-economic environment arising out of the pandemic, we may experience adverse impacts in the future, including similar impacts we have previously experienced during the pandemic, such as regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply ~~chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity~~chain disruptions and ~~overall economic instability, which,~~certain geo-political matters have resulted in ~~many cases,~~significant price increases for the merchandise we purchase for sale to our customers as well as for gasoline, food and other consumables across the economy. We believe that these price increases have had, and ~~may in the future~~will likely continue to have, ~~material adverse impacts~~a negative impact on consumer behavior and, by extension, our ~~business,~~results of operations and financial condition and results of operations. This situation is continually evolving, and additional impacts may arise that we are not aware of currently, or current impacts may become magnified. As a result, we cannot reliably predict future business trends with any certainty at this time.during fiscal 2022.

Supply Chain ~~Disruptions~~

Disruptions.We source a significant portion of our merchandise assortment from third parties who manufacture their products in countries that have experienced widespread issues with the ~~COVID-19~~ pandemic and resulting macro-economic environment, thereby significantly impacting the global supply chain for merchandise inventories. Additionally, disruptions in the global transportation network have intensified recently, particularly in certain Southern California receiving ports which handle a significant portion of United States merchandise imports. These issues have resulted in, and are ~~resulting~~continuing to result in, shipping delays and increased shipping costs throughout the retail industry, including for ~~us. Any untimely delivery of merchandise could have a negative impact on~~us, which negatively affects both our ability to ~~serve~~meet our ~~customers with the specific merchandise they want in the quantities they wish~~customers' expectations timely and our results of operations. As a result, we have had to purchase in a timely manner, including for the 2021 holiday season, thereby potentially resulting in lost sales. These supply chain issues, and the media attention surrounding them, appear to be changing consumer shopping patterns to some extent, and are causing us tocontinuously adjust our merchandise planning, allocation and pricing strategies from historical practices, among other ~~impacts. We have been monitoring the situation very closely and have been in frequent contact with our key brand partners to acquire as much priority inventory as we can~~impacts, especially in anticipation of this year's holiday season.

Labor Challenges and Wage Inflation.The pandemic and the ~~holiday season~~resulting factors above have also created challenges related to the availability of sufficient labor from time to time, and ~~potential additional delivery delays. However, we are unable~~have caused a significant increase in the competition for labor among consumer facing companies. This competition for labor has driven significant increases in wages beyond government-mandated increases in minimum wages in order to ~~predict~~compete for sufficient labor availability and/or to prevent the ~~specific effects~~loss of existing workforce in our stores, distribution centers and corporate offices. We expect these ~~factors will have on our~~pressures to continue through the end of fiscal ~~2021 fourth quarter net sales, results of operations, and our inventory position ending fiscal 2021.~~2022.

Preliminary Fiscal ~~2022~~2023 New Store Openings and Capital Expenditure Plans

During fiscal ~~2022,~~2023, we currently ~~plan~~expect to open ~~approximately~~up to 15 ~~to 20~~ new stores within existing markets, primarily in California, Texas and the Northeast, assuming we are able to negotiate what we believe to be acceptable lease economics. We expect our total capital expenditures for fiscal ~~2022~~2023 not to ~~be in the range of approximately~~exceed $25 ~~million to $30~~ million, inclusive of our new store plans ~~investments in website~~ and ~~mobile app~~ upgrades to certain distribution ~~efficiencies,~~ and ~~other~~ information technology infrastructure ~~investments.~~systems.

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How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are net sales, comparable store sales, gross profit, selling, general and administrative ("SG&A") expenses and operating income.

Net Sales

Net sales reflect revenue from the sale of our merchandise at store locations and through e-commerce, net of sales taxes. Store sales are reflected in sales when the merchandise is received by the customer. For e-commerce sales, we recognize revenue, and the related cost of goods sold at the time the merchandise is shipped to the customer. Net sales also include shipping and handling fees for e-commerce shipments that have been shipped to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns expected in the future stemming from current period sales. 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. 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 ~~"breakage"~~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. ~~Net sales are also adjusted for the unredeemed awards and accumulated partial points on our customer loyalty program.~~

Our business is seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected by a number of factors including the timing of holidays and weather patterns. The third and fourth quarters of the fiscal year, which include the back-to-school and holiday sales seasons, have historically produced stronger sales and disproportionately stronger operating results than have the first two quarters of the fiscal year.

Comparable Store Net Sales

Comparable store net sales is a measure that indicates the change in year-over-year comparable store net sales which allows us to evaluate how our store base (including our e-commerce platform) is performing. Numerous factors affect our comparable store sales, including:

•overall economic trends;

•our ability to attract traffic to our stores and ~~e-commerce~~online platform;

•our ability to identify and respond effectively to consumer preferences and fashion trends;

•competition;

•the timing of our releases of new and seasonal styles;

•changes in our product mix;

•pricing;

•the level of customer service that we provide in ~~stores and through our e-commerce platform;~~stores;

•our ability to source and distribute products efficiently;

•calendar shifts of holiday or seasonal periods;

•the number and timing of ~~new~~ store openings and the relative proportion of new stores to mature stores; and

•the timing and success of promotional and advertising efforts.

~~Historically, our~~Our comparable store ~~net~~ sales are sales have included net sales from our e-commerce platform and stores open at least 12 full fiscal months as of the end of the current reporting period. However, as a result of the COVID-19 pandemic, our comparable store net sales for fiscal 2021 are defined as ~~net~~ sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates of ~~last~~the prior year. A remodeled, relocated or ~~relocated~~refreshed store is included in comparable store ~~net~~ sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% ~~and the store was not closed for remodel for more than five days~~ in any fiscal month. We include ~~net~~ sales from our e-commerce platform as part of comparable store ~~net~~ sales as we manage and analyze our business on ana single omni-channel basis and have substantially integrated our investments and operations for our stores and e-commerce platform to give our customers seamless access and increased ease of shopping. Comparable store sales exclude gift card breakage income and e-commerce shipping and handling fee revenue. Some of our competitors and other retailers may calculate comparable or “same store” sales differently than we do. As a result, data in this ~~report~~Report regarding our comparable store sales may not be comparable to similar data made available by other retailers.

Gross Profit

Gross profit is equal to our net sales less our cost of goods sold. Cost of goods sold reflects the direct cost of purchased merchandise as well as buying, distribution, and occupancy costs. Buying costs include compensation and benefit expense for our internal buying organization. Distribution costs include costs for receiving, processing and warehousing our store ~~and e-commerce~~ merchandise and shipping of merchandise to ~~our stores, customers,~~ or ~~between~~from our distribution and e-commerce fulfillment ~~centers.~~centers and to our e-commerce customers and between store locations. Occupancy costs include the rent, common area maintenance, utilities, property taxes, security and

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depreciation costs of all store locations. These costs are significant and can be expected to continue to increase as our company grows. The components of our reported cost of goods sold may not be comparable to those of other retail companies.

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We regularly analyze the components of gross profit as well as gross profit as a percentage of net sales. Specifically we look at the initial markup on purchases, markdowns and reserves, shrinkage, buying costs, distribution costs and occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the buying, distribution, and occupancy components of cost of goods sold could have an adverse impact on our gross profit and results of operations.

Gross profit is also impacted by shifts in the proportion of sales of proprietary branded products compared to third-party branded products, as well as by sales mix shifts within and between brands and between major product departments such as ~~mens apparel, womens~~young men's and women's apparel, footwear or accessories. A substantial shift in the mix of products could have a material impact on our results of operations. In addition, gross profit and gross profit as a ~~percentage~~percent of ~~net~~ sales have historically been higher in the third and fourth quarters of the fiscal year, as these periods include the back-to-school and winter holiday selling seasons. ~~In those periods,~~This reflects that various costs, ~~such as~~including occupancy costs, generally do not increase in proportion to the seasonal sales increase.

Selling, General and Administrative Expenses

Our selling, general and administrative, or SG&A, expenses are ~~composed~~comprised of store selling expenses and corporate-level general and administrative expenses. Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-commerce receiving and processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functions such as executive management, legal, accounting, information systems, human resources, impairment charges and other centralized ~~services, and impairment charges.~~services. Store selling expenses generally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to net sales and store growth but will be expected to increase over time to support the needs of our growing company. SG&A expenses as a percentage of net sales are usually higher in ~~lower volume~~lower-volume periods and lower in ~~higher volume~~higher-volume periods.

Operating Income ~~(Loss)~~

Operating income ~~(loss)~~ equals gross profit less SG&A expenses. Operating income ~~(loss)~~ excludes interest income, interest expense and income taxes. Operating income ~~(loss)~~ percentage measures operating income ~~(loss)~~ as a percentage of our net sales.

We believe that drawing specific conclusions from comparative financial performance against fiscal 2020 results may be misleading given the various impacts of the COVID-19 pandemic. Further, it is challenging to predict future performance trends with any certainty due to many continuing unknowable factors in the current environment. These factors include but are not limited to:

•~~how the pandemic may continue to impact consumer habits and global supply chains;~~

•~~how the continuation or cessation of federal or state/local stimulus payments may continue to impact consumer spending;~~

•~~how store performance will continue to evolve over a longer period of time, particularly against the strong operating results from stores during fiscal 2021; and~~

•~~how our e-commerce business will perform relative to the significant increases in store net sales we have experienced during fiscal 2021.~~

The extent to which the COVID-19 pandemic and our response thereto may impact our business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. For more details, see Item 1A. “Risk Factors - Risks Related to Our Business” within our most recently filed Annual Report on Form 10-K and the discussions elsewhere in this Report.

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Results of Operations

The following tables summarize key components of our unaudited results of operations for the periods indicated, both in dollars (in thousands) and as a percentage of our net sales:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020 October 30,
2021 October 31,
2020
Statements of Operations Data:
Net sales $ 206,096 $ 140,275 $ 571,205 $ 353,409
Cost of goods sold 129,357 99,615 364,900 269,481
Gross profit 76,739 40,660 206,305 83,928
Selling, general and administrative expenses 47,742 37,122 136,007 101,082
Operating income (loss) 28,997 3,538 70,298 (17,154)
Other (expense) income, net (1) (28) (219) 692
Income (loss) before income taxes 28,996 3,510 70,079 (16,462)
Income tax expense (benefit) 8,162 1,397 17,888 (6,446)
Net income (loss) $ 20,834 $ 2,113 $ 52,191 $ (10,016)
Percentage of Net Sales:
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 62.8 % 71.0 % 63.9 % 76.3 %
Gross profit 37.2 % 29.0 % 36.1 % 23.7 %
Selling, general and administrative expenses 23.2 % 26.5 % 23.8 % 28.6 %
Operating income (loss) 14.1 % 2.5 % 12.3 % (4.9) %
Other (expense) income, net 0.0 % 0.0 % 0.0 % 0.2 %
Income (loss) before income taxes 14.1 % 2.5 % 12.3 % (4.7) %
Income tax expense (benefit) 4.0 % 1.0 % 3.1 % (1.8) %
Net income (loss) 10.1 % 1.5 % 9.1 % (2.8) %


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021
Statements of Income Data:
Net sales	$	177,847		$	206,096		$	491,930		$	571,205
Cost of goods sold	122,346			128,612			338,870			362,751
Rent expense, related party	918			745			2,680			2,149
Total cost of goods sold	123,264			129,357			341,550			364,900
Gross profit	54,583			76,739			150,380			206,305
Selling, general and administrative expenses	48,134			47,609			137,405			135,607
Rent expense, related party	134			133			400			400
Total selling, general and administrative expenses	48,268			47,742			137,805			136,007
Operating income	6,315			28,997			12,575			70,298
Other income (expense), net	675			(1)			862			(219)
Income before income taxes	6,990			28,996			13,437			70,079
Income tax expense	1,841			8,162			3,656			17,888
Net income	$	5,149		$	20,834		$	9,781		$	52,191

Percentage of Net Sales:
Net sales	100.0		%	100.0		%	100.0		%	100.0		%
Cost of goods sold	68.8		%	62.4		%	68.9		%	63.5		%
Rent expense, related party	0.5		%	0.4		%	0.5		%	0.4		%
Total cost of goods sold	69.3		%	62.8		%	69.4		%	63.9		%
Gross profit	30.7		%	37.2		%	30.6		%	36.1		%
Selling, general and administrative expenses	27.1		%	23.1		%	27.9		%	23.7		%
Rent expense, related party	0.1		%	0.1		%	0.1		%	0.1		%
Total selling, general and administrative expenses	27.1		%	23.2		%	28.0		%	23.8		%
Operating income	3.6		%	14.1		%	2.6		%	12.3		%
Other income (expense), net	0.4		%	0.0		%	0.2		%	0.0		%
Income before income taxes	3.9		%	14.1		%	2.7		%	12.3		%
Income tax expense	1.0		%	4.0		%	0.7		%	3.1		%
Net income	2.9		%	10.1		%	2.0		%	9.1		%

The following table presents store operating data for the periods indicated:


		Thirteen Weeks Ended						Thirty-Nine Weeks Ended							Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		October 30, 2021			October 31, 2020			October 30, 2021			October 31, 2020				October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021
Operating Data:	Operating Data:													Operating Data:
Stores operating at end of period	Stores operating at end of period	243			238			243			238			Stores operating at end of period	247			243			247			243
Comparable store net sales change (1)	Comparable store net sales change (1)	31.3		%	(1.4)		%	18.2		%	4.3		%	Comparable store net sales change (1)	(14.9)		%	31.3		%	(14.9)		%	18.2		%
Total square feet at end of period (in '000s)	Total square feet at end of period (in '000s)	1,781			1,753			1,781			1,753			Total square feet at end of period (in '000s)	1,800			1,781			1,800			1,781
Average net sales per physical store (in '000s) (2)	Average net sales per physical store (in '000s) (2)	$	678		$	439		$	1,892		$	987		Average net sales per physical store (in '000s) (2)	$	578		$	678		$	1,635		$	1,892
Average net sales per square foot (2)	Average net sales per square foot (2)	$	93		$	60		$	258		$	134		Average net sales per square foot (2)	$	79		$	93		$	224		$	258
E-commerce revenues (in '000s) (3)		$	40,841		$	35,729		$	113,648		$	118,051
E-commerce revenues as a percentage of net sales		19.8		%	25.5		%	19.9		%	33.4		%
E-commerce net sales (in '000s) (3)														E-commerce net sales (in '000s) (3)	$	36,308		$	40,841		$	95,821		$	113,648
E-commerce net sales as a percentage of net sales														E-commerce net sales as a percentage of net sales	20.4		%	19.8		%	19.5		%	19.9		%

(1)~~Historically,~~Our comparable store net sales have included net sales from our e-commerce platform and stores open at least 12 full fiscal months as of the end of the current reporting period. However, as a result of the COVID-19 pandemic, our comparable store net sales for fiscal 2021 are defined as sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates ~~last~~of the prior year. A remodeled or relocated store is included in comparable store net sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% ~~and the store was not closed for remodel for more than five days~~ in any fiscal month. We include sales from our e-commerce platform as part of our comparable store net sales as we manage and analyze our business on an omni-channel basis and have substantially integrated our investments and

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operations for our stores and e-commerce platform to give our customers seamless access and increased ease orof shopping. Comparable store net sales exclude gift card breakage income, and e-commerce shipping and handling fee revenue.

(2)The number of stores and the amount of square footage reflect the number of days during the period that stores were open. E-commerce sales, e-commerce shipping and handling fee revenue and gift card breakage income are excluded from net sales in deriving average net sales per retail store and average net sales per square foot.

(3)E-commerce ~~revenues~~net sales include e-commerce sales and e-commerce shipping and handling fee revenue.

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Third Quarter (13 Weeks) Ended October ~~30, 2021~~29, 2022 Compared to Third Quarter (13 Weeks) Ended October ~~31, 2020~~30, 2021

Net Sales

Total net sales were ~~$206.1~~$177.8 million, ~~an increase~~a decrease of ~~$65.8~~$28.2 million, or ~~46.9%~~13.7%, compared to ~~$140.3~~$206.1 million ~~for~~last year, primarily due to the ~~corresponding period~~impacts of last ~~year.~~year's pent-up consumer demand and stimulus payments resulting from the pandemic.

•Net sales from physical stores were ~~$165.3~~$141.5 million, ~~an increase~~a decrease of ~~$60.7~~$23.7 million or ~~58.1%~~14.4%, compared to ~~$104.6~~$165.3 million last ~~year with a much more normalized back-to-school season this year and no pandemic-forced store closures during the quarter.~~year. Net sales from physical stores represented ~~80.2%~~79.6% of total net sales compared to ~~74.5%~~80.2% of total net sales last year. ~~The Company~~We ended the third quarter with ~~243~~247 total stores compared to ~~238~~243 total stores at the end of the third quarter last year.

•Net sales from e-commerce were ~~$40.8~~$36.3 million, ~~an increase~~a decrease of ~~$5.1~~$4.5 million or ~~14.3%~~11.1%, compared to ~~$35.7~~$40.8 million last year. E-commerce net sales represented ~~19.8%~~20.4% of total net sales compared to ~~25.5%~~19.8% of total net sales last year.

Gross Profit

Gross profit was ~~$76.7~~$54.6 million, or ~~37.2%~~30.7% of net sales, compared to ~~$40.7~~$76.7 million, or ~~29.0%~~37.2% of net sales, last year. Buying, distribution and occupancy costs ~~improved~~deleveraged by ~~690~~360 basis points collectively ~~despite increasing by $2.7 million in total,~~ due to ~~leveraging~~carrying these costs against ~~higher~~a significantly lower level of net ~~sales. Occupancy costs improved~~sales this year. Product margins declined by ~~540~~300 basis points despite increasing by $0.5 million with 5 net new stores. Distribution costs improved by 110 basis points despite increasing by $2.1 million. Buying costs improved by 40 basis points despite increasing by $0.1 million. Product margins improved by 130 basis points versusprimarily due to an increased markdown rate compared to last year, ~~due to lower markdowns.~~during which we experienced record full price selling with an abnormally low markdown rate.

Selling, General and Administrative Expenses

SG&A expenses were $48.3 million or 27.1% of net sales, compared to $47.7 million, or 23.2% of net sales, ~~compared to $37.1 million, or 26.5% of net sales,~~ last year. The primary components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:
% $ millions Primarily Attributable to
0.3% $7.6 Increase in store payroll and related benefits due to operating all stores for the entirety of this year’s third quarter and serving higher net sales.
0.9% 1.8 Corporate bonus accruals due to strong operating performance to date in fiscal 2021.
(0.5)% 1.2 Increase in marketing expenses.
(4.0)% — Net change in all other SG&A expenses.
(3.3)% $10.6 Total


%	$ millions	Primarily Attributable to
2.1%	$0.6	Increase in store payroll and related benefits as a result of having four net additional stores along with higher hourly wage rates.
0.7%	0.5	Increase in corporate payroll primarily due to wage inflation.
(0.9)%	(1.8)	Decrease in corporate bonus expense due to lack of a bonus accrual in fiscal 2022.
0.1%	(0.6)	Decrease in marketing expenses.



2.0%	1.8	Net change in all other SG&A expenses.
4.0%	$0.5	Total

Operating Income

Operating income ~~improved~~was $6.3 million, or 3.6% of net sales, compared to $29.0 million, or 14.1% of net sales, ~~compared to $3.5 million, or 2.5% of net sales, for the corresponding period~~ last year. ~~The increase in operating income was primarily due to the factors noted above.~~

Income Tax Expense

Income tax expense was ~~$8.2~~$1.8 million, or ~~28.1%~~26.3% of pre-tax income, compared to ~~$1.4~~$8.2 million, or ~~39.8%~~28.1% of pre-tax income, last year. The decrease in the effective income tax rate was primarily due to the ~~prior year impact~~discrete tax effects of ~~the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which provided for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates.~~stock-based compensation.

Net Income and Income Per Diluted Share

Net income ~~improved~~was $5.1 million, or $0.17 per diluted share, compared to $20.8 million, or $0.66 per diluted share, ~~compared to $2.1 million, or $0.07 per diluted share, last year as a result of the factors noted above.~~

~~Thirty-Nine Weeks Ended October 30, 2021 Compared to Thirty-Nine Weeks Ended October 31, 2020~~

~~Net Sales~~

~~Total net sales were $571.2 million, an increase of $217.8 million or 61.6%, compared to $353.4 million~~ last year.

•

Net sales from physical stores were $457.6 million, an increase of $222.2 million or 94.4%, compared to $235.4 million last year, primarily due to the various periods of pandemic-forced store closures during the first thirty-nine weeks of last year. Net sales from stores represented 80.1% of total net sales compared to 66.6% of total net sales last year.

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Thirty-Nine Weeks Ended October 29, 2022 Compared to Thirty-Nine Weeks Ended October 30, 2021

Net Sales

Total net sales were $491.9 million, a decrease of $79.3 million or 13.9%, compared to $571.2 million last year, primarily due to the impacts of last year's pent-up consumer demand and stimulus impacts resulting from the pandemic.

•Net sales from physical stores were $396.1 million, a decrease of $61.4 million or 13.4%, compared to $457.6 million last year. Net sales from stores represented 80.5% of total net sales compared to 80.1% of total net sales last year.

•Net sales from e-commerce were ~~$113.6~~$95.8 million, a decrease of ~~$(4.4)~~$17.8 million or ~~(3.7)%~~15.7%, compared to ~~$118.1~~$113.6 million last ~~year, primarily due to the anniversary of last year's substantial increase in e-commerce net sales during the period of pandemic-forced store closures.~~year. E-commerce net sales represented ~~19.9%~~19.5% of total net sales compared to ~~33.4%~~19.9% of total net sales last year.

Gross Profit

Gross profit was ~~$206.3~~$150.4 million, or ~~36.1%~~30.6% of net sales, compared to ~~$83.9~~$206.3 million, or ~~23.7%~~36.1% of net sales, last year. Buying, distribution, and occupancy costs ~~improved~~deleveraged by ~~1050~~300 basis points collectively despite ~~increasing by $5.9~~being $0.9 million ~~in total, due to leveraging these costs against higher net sales. Product margins improved by 190 basis points versus~~lower than last year due to carrying these costs against a significantly lower ~~markdowns.~~level of net sales this year. Product margins declined by 250 basis points primarily due to an increased markdown rate compared to last year, during which we experienced record full price selling with an abnormally low markdown rate.

Selling, General and Administrative Expenses

SG&A expenses were $137.8 million or 28.0% of net sales, compared to $136.0 million, or 23.8% of net sales, ~~compared to $101.1 million, or 28.6% of net sales,~~ last year. The primary components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:

% $ millions Primarily Attributable to
(0.1)% $24.0 Increase in store payroll and related benefits due to operating all stores for the entirety of fiscal 2021 and serving higher net sales.
1.0% 6.0 Corporate bonus accruals due to strong operating performance to date in fiscal 2021.
—% 2.4 Increase in credit card fees associated with higher net sales.
(1.2)% 2.2 Increase in marketing expenses.
(1.2)% 2.2 Increase in corporate payroll and related benefits due to being more fully staffed this year compared to significant furloughs and temporary management pay reductions last year.
(0.8)% (3.4) Net year-to-year decrease attributable to a $1.7 million disputed California sales tax assessment originally recorded in the third quarter of fiscal 2020 which was subsequently resolved in the company's favor and reversed in the first quarter of fiscal 2021.
(2.5)% 1.5 Net change in all other SG&A expenses.
(4.8)% $34.9 Total


%	$ millions	Primarily Attributable to
2.4%	$3.1	Increase in store payroll and related benefits as a result of having four net additional stores along with higher hourly wage rates.
0.3%	1.7	Credit from the reversal of a disputed California sales tax assessment in last year's first quarter.
0.3%	1.0	Increase in software as a service costs.
(1.1)%	(6.1)	Decrease in corporate bonus expense due to lack of a bonus accrual in fiscal 2022.
0.2%	(1.0)	Decrease in e-commerce marketing expense.
2.1%	3.1	Net change in all other SG&A expenses.
4.2%	$1.8	Total

Operating Income ~~(Loss)~~

Operating income ~~improved~~was $12.6 million, or 2.6% of net sales, compared to $70.3 million, or 12.3% of net sales, ~~compared to an operating loss of $(17.2) million, or (4.9)% of net sales, for the corresponding period~~ last year. ~~The increase in operating income was due to the factors noted above.~~

Income Tax Expense ~~(Benefit)~~

Income tax expense was $3.7 million, or 27.2% of pre-tax income, compared to $17.9 million, or 25.5% of pre-tax income, ~~compared to an income tax benefit of $(6.4) million, or 39.2% of pre-tax loss,~~ last year. The ~~decrease~~increase in the effective income tax rate was primarily due to ~~deferred income~~the discrete tax ~~benefits~~effects of $1.0 million derived from employee stock option exercise activity in fiscal 2021, and the prior year impact of the CARES Act, which provided for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates.stock-based compensation.

Net Income ~~(Loss)~~ and Income ~~(Loss)~~ Per Diluted Share

Net income ~~improved~~was $9.8 million, or $0.32 per diluted share, compared to $52.2 million, or $1.68 per diluted share, ~~compared to a net loss of $(10.0) million, or $(0.34) per share,~~ last ~~year as a result of the factors noted above.~~year.

Liquidity and Capital Resources

Our business relies on cash flows from operating activities as well as cash on hand as our primary sources of liquidity. We currently expect to finance company operations, store growth and remodels and all of our planned capital expenditures with existing cash on hand, marketable securities and cash flows from operations.

In addition to cash and cash equivalents and marketable securities, the most significant components of our working capital are merchandise inventories, accounts payable and accrued expenses. We believe that cash flows from operating activities, our cash and marketable securities on hand, and credit facility availability will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months from the filing of this Report. If cash flows from operations are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our stockholders.

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Working Capital

Working capital at October ~~30, 2021,~~29, 2022, was ~~$109.0~~$90.0 million compared to ~~$78.0~~$91.8 million at January ~~30, 2021, an increase~~29, 2022, a decrease of ~~$31.0~~$1.8 million. The primary changes in our working capital during the first three quarters of fiscal ~~2021~~2022 were as follows:


$ millions			Description
$~~78.0~~91.8			Working capital at January ~~30, 2021~~29, 2022
~~45.2~~(22.6)			~~Increase~~Decrease in cash, cash equivalents, and marketable securities primarily due to ~~higher~~lower net ~~income.~~income and payment of fiscal 2021 corporate bonus.
~~9.6~~(10.9)			Repurchase of shares under our share repurchase program.
13.9			Increase in merchandise inventories, net of accounts payable.
~~8.6~~7.3			Increase primarily due to ~~timing~~a decrease in accrued compensation and benefits, including payment of ~~income tax payments.~~fiscal 2021 corporate bonus.
~~(30.7)~~4.6			~~Payment~~Increase in receivables, primarily due to timing of ~~special cash dividend.~~credit and debit card receivables.
~~(7.2)~~3.2			~~Decrease~~Increase primarily due to ~~corporate bonus accruals and timing of accrued compensation and benefits.~~a decrease in gift card liability.
1.8			Increase primarily due to a decrease in accrued expenses.
~~5.5~~0.9			Other net increases.
$~~109.0~~90.0			Working capital at October ~~30, 2021~~29, 2022

~~Asset-Backed~~ Cash Flow Analysis

A summary of operating, investing and financing activities for the thirty-nine weeks ended October 29, 2022 compared to the thirty-nine weeks ended October 30, 2021 is shown in the following table (in thousands):


	Thirty-Nine Weeks Ended
	October 29, 2022		October 30, 2021
Net cash (used in) provided by operating activities	$	(11,082)	$	46,850
Net cash provided by (used in) investing activities	55,513		(42,061)
Net cash used in financing activities	(10,846)		(21,581)
Net change in cash and cash equivalents	$	33,585	$	(16,792)

Net Cash (Used in) Provided by Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items that include depreciation, asset impairment write-downs, deferred income taxes and share-based expense, plus the effect on cash of changes during the period in our assets and liabilities.

Net cash used in operating activities was $11.1 million this year compared to net cash provided of $46.9 million last year. The $57.9 million decrease in cash provided by operating activities was primarily due to lower net sales in fiscal 2022 compared to record net sales in fiscal 2021. The net sales decline was primarily due to the impacts of pent-up customer demand following the winding down of the 2020 pandemic restrictions and the pandemic-related federal stimulus payments on fiscal 2021 operations, coupled with the negative impact of a highly inflationary consumer environment in fiscal 2022.

Net Cash Provided by (Used In) Investing Activities

Cash flows from investing activities consist primarily of capital expenditures and maturities and purchases of marketable securities.

Net cash provided by investing activities was $55.5 million this year compared to $42.1 million in net cash used last year. Net cash provided by investing activities in the first three quarters of fiscal 2022 consisted of maturities of marketable securities of $117.2 million, partially offset by the purchases of marketable securities of $49.8 million and capital expenditures totaling $11.9 million. Net cash used in investing activities during the first three quarters of fiscal 2021 consisted of purchases of marketable securities of $126.4 million and capital expenditures totaling $10.9 million, partially offset by the maturities of marketable securities of $95.2 million.

Net Cash Used in Financing Activities

Financing activities primarily consist of cash dividend payments, borrowings and repayments of our line of credit, taxes paid in lieu of shares issued for share based compensation, share repurchases and proceeds from employee exercises of stock options.

Net cash used in financing activities was $10.8 million this year compared to net cash used of $21.6 million last year. Financing activities in the first three quarters of fiscal 2022 consisted of cash used to repurchase shares of our common stock of

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$10.9 million, partially offset by proceeds from the exercise of stock options of $56 thousand. Financing activities in the first three quarters of fiscal 2021 consisted of dividends paid of $30.7 million, partially offset by proceeds from the exercise of stock options of $9.1 million.

Credit ~~Facility~~Agreement

New Credit Agreement

On ~~November 9, 2020 (the “Closing Date”),~~January 20, 2022, we entered into a senior secured credit agreement (the ~~“Credit Agreement”~~"Credit Agreement") and revolving line of credit note (the "Note") with Wells Fargo Bank, National Association ~~("Bank"), as lender, administrative agent and collateral agent~~ (the ~~“Agent”~~“Bank”). ~~The Credit Agreement replaced our existing amended and restated credit agreement (the “Prior Credit Agreement”), dated as of May 3, 2012, as amended, with the Agent.~~

In connection with the entry into the Credit Agreement, on January 20, 2022, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Bank (ii) the Guaranty entered into by the Company and (iii) a third party pledge agreement entered into by the Company in favor of the Bank. The security agreement, the guaranty and the pledge agreement replaced (a) the guaranty by the Company in favor of the Bank, dated November 9, 2020, and (b) the security agreement dated as of November 9, 2020, between the Company and the Bank, which were both terminated concurrently with the termination of the Prior Credit Agreement.

As of October 29, 2022, we were in compliance with all of our covenants and had no outstanding borrowings under the Credit Agreement.

Prior Credit Agreement

The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. The maximum borrowings permitted under the ~~revolving facility is~~Prior Credit Agreement was equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base iswas equal to (a) 90% of the borrower's eligible credit card receivables, plus (b) 90% of the cost of the borrower's eligible inventory, less inventory reserves established by the ~~Agent,~~agent, and adjusted by the appraised value of such eligible inventory, plus (c) 90% of the cost of the borrower's eligible in-transit inventory, less inventory reserves established by the ~~Agent,~~agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the ~~Agent.~~agent. As of the date the Prior Credit Agreement was terminated, we had no outstanding borrowings under the Credit Agreement and the only utilization of the letters of credit sub-limit under the Credit Agreement was a $2.025 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on such date to the Credit Agreement.

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Under the Prior Credit Agreement, we ~~are~~were subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the ~~Closing Date,~~closing date, we were prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the ~~Closing Date,~~closing date, we ~~are~~were allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.

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~~respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, 2012.~~

The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. No borrowings were outstanding under the Prior Credit Agreement as of the Closing Date. The interest rate charged on borrowings under the Prior Credit Agreement was selected at our discretion at the time of draw between LIBOR plus 0.75%, or at the Bank’s prime rate. The Prior Credit Agreement was secured by substantially all of our assets. In March 2020, we borrowed $23.7 million under our Prior Credit Agreement, which represented the maximum borrowings permitted thereunder, and which were subsequently repaid in September 2020.

~~As of October 30, 2021, we were in compliance with all of our covenants, were eligible to borrow up to a total of $63.0 million and had no outstanding borrowings under the Credit Agreement.~~

~~Impact of CARES Act on Company Liquidity~~

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes tax provisions applicable to businesses, such as net operating losses, enhanced interest deductibility, optional deferral of deposits of payroll taxes, a refundable employee retention payroll tax credit and changes to the depreciation rules for qualified improvement property. As of October 30, 2021, pursuant to the CARES Act, we have deferred the deposit of certain payroll taxes, applied for certain tax credits and accelerated depreciation on qualified improvement property.

~~Cash Flow Analysis~~

~~A summary of operating, investing and financing activities for the thirty-nine weeks of fiscal 2021 compared to the thirty-nine weeks of fiscal 2020 is shown in the following table (in thousands):~~

Thirty-Nine Weeks Ended
October 30,
2021 October 31,
2020
Net cash provided by operating activities $ 46,850 $ 21,033
Net cash (used in) provided by investing activities (42,061) 37,816
Net cash used in financing activities (21,581) (29,677)
Net (decrease) increase in cash and cash equivalents $ (16,792) $ 29,172

~~Net Cash Provided by Operating Activities~~

~~Operating activities consist primarily of net income (loss) adjusted for non-cash items, plus the effect on cash of changes during the period in our assets and liabilities.~~

Net cash flows provided by operating activities were $46.9 million this year compared to $21.0 million last year. The $25.8 million increase in cash provided by operating activities was due to higher net sales in fiscal 2021, which was primarily attributable to the closure of all stores from mid-March to mid-May in fiscal 2020 as a result of the COVID-19 pandemic and the varying periods of ongoing store closures for certain stores that continued into October 2020.

~~Net Cash (Used In) Provided By Investing Activities~~

~~Cash flows from investing activities consist primarily of capital expenditures and maturities and purchases of marketable securities.~~

Net cash used in investing activities was $42.1 million this year compared to $37.8 million provided by investing activities last year. Net cash used in investing activities in the first three quarters of fiscal 2021 consisted of purchases of marketable securities of $126.4 million and capital expenditures totaling $10.9 million, partially offset by the maturities of marketable securities of $95.2 million. Net cash provided by investing activities during the first three quarters of fiscal 2020 consisted of proceeds from the maturities of marketable securities of $75.2 million, partially offset by purchases of marketable securities of $30.9 million and capital expenditures totaling $6.4 million.

~~Net Cash Used in Financing Activities~~

Financing activities primarily consist of cash dividend payments, borrowings and repayments of our line of credit, taxes paid in lieu of shares issued for share based compensation and proceeds from employee exercises of stock options.

Net cash used in financing activities was $21.6 million this year compared to $29.7 million last year. Financing activities in the first three quarters of fiscal 2021 consisted of dividends paid of $30.7 million, partially offset by proceeds from the exercise of stock options of $9.1 million. Financing activities in the first three quarters of fiscal 2020 consisted of dividends paid of $29.7 million and $23.7 million in both borrowings and repayments under the Prior Credit Agreement.

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Contractual Obligations

As of October ~~30, 2021,~~29, 2022, there were no material changes to our contractual obligations as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021.~~

~~Off-Balance Sheet Arrangements~~

~~We are not a party to any off-balance sheet arrangements, except for purchase obligations and our revolving credit facility.~~29, 2022.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates. As noted elsewhere in this Report, the COVID-19 pandemic has had significant impacts on our business and the economy generally, making estimates and assumptions about future events far more difficult, if not impossible. A summary of our significant accounting policies is included in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021.~~29, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of October ~~30, 2021,~~29, 2022, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosure ofAbout Market Risks” section of our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021.~~29, 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and our Chief Financial Officer, with the participation of our Disclosure Committee, evaluated the effectiveness of our disclosure controls and procedures as of October ~~30, 2021.~~29, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of October ~~30, 2021,~~29, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the ~~period covered by this Quarterly Report on Form 10-Q~~thirteen weeks ended October 29, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure

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controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because

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of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. Other Information

Item 1. Legal Proceedings

The information contained in “Note 5: Commitments and Contingencies” to our consolidated financial statements included in this Report is incorporated by reference into this Item.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. In addition to the other information set forth in this ~~Quarterly~~ Report, ~~on Form 10-Q,~~ please refer to the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January ~~30, 2021~~29, 2022 for a detailed discussion of the risks that affect our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents our repurchases of Class A common stock during each of the fiscal months during our first nine months of fiscal 2022:


Fiscal Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs (1)
January 30, 2022 - February 26, 2022	—	$	—	—	—
February 27, 2022 - April 2, 2022	428,089	9.36		428,089	1,571,911
April 3, 2022 - April 30, 2022	463,944	8.93		892,033	1,107,967
May 1, 2022 - May 28, 2022	95,394	8.76		987,427	1,012,573
May 29, 2022 - July 2, 2022	—	—		987,427	1,012,573
July 3, 2022 - July 30, 2022	—	—		987,427	1,012,573
July 31, 2022 - August 27, 2022	—	—		987,427	1,012,573
August 28, 2022 - October 1, 2022	270,903	6.93		1,258,330	741,670
October 2, 2022 - October 29, 2022	—	—		1,258,330	741,670
Total	1,258,330	$	8.63	1,258,330	741,670

(1) On March 14, 2022, our Board of Directors authorized a share repurchase program, pursuant to which we are authorized to repurchase up to 2,000,000 shares of our Class A common stock through March 14, 2023, in open market transactions through a broker-dealer at prevailing market prices, in block trades or by any other means in accordance with federal securities laws.

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Item 6. Exhibits


Exhibit No.						Description of Exhibit




~~10.1~~3.1						~~First Amendment~~Third Amended and Restated Bylaws of the Company (incorporated by reference to ~~Lease between Amnet Holdings~~Form 8-K filed by the Company with the Securities and ~~World of Jeans & Tops, dated as of October 2~~1 , 2021 (17 Pasteur, Irvine, California) *Exchange Commission on November 22, 2022)

31.1*						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**						Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						Interactive data files from Tilly’s, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October ~~30, 2021,~~29, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of ~~Operations;~~Income; (iii) the Consolidated Statements of Comprehensive ~~Income (Loss);~~Income; (iv) the Consolidated Statement of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			Filed herewith.


**			Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this ~~report~~Report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Tilly’s, Inc.
Date:	December 7, ~~2021~~2022
		/s/ Edmond Thomas
		Edmond Thomas
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date:	December 7, ~~2021~~2022
		/s/ Michael Henry
		Michael Henry
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)

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%	$ millions	Primarily Attributable to
(0.1)%	$24.0	Increase in store payroll and related benefits due to operating all stores for the entirety of fiscal 2021 and serving higher net sales.
1.0%	6.0	Corporate bonus accruals due to strong operating performance to date in fiscal 2021.
—%	2.4	Increase in credit card fees associated with higher net sales.
(1.2)%	2.2	Increase in marketing expenses.
(1.2)%	2.2	Increase in corporate payroll and related benefits due to being more fully staffed this year compared to significant furloughs and temporary management pay reductions last year.
(0.8)%	(3.4)	Net year-to-year decrease attributable to a $1.7 million disputed California sales tax assessment originally recorded in the third quarter of fiscal 2020 which was subsequently resolved in the company's favor and reversed in the first quarter of fiscal 2021.
(2.5)%	1.5	Net change in all other SG&A expenses.
(4.8)%	$34.9	Total