Negative Points

• Footwear was the only department that did not post a double-digit comp sales gain in Q2, indicating a specific weakness in that category.

• The company's Q3 guidance accounts for a potential deceleration in comp sales after back-to-school, as three of the last four years saw September comps slow by about eight points relative to August.

• SG&A expenses increased by $3.5 million in Q2, driven by $1.5 million in bonus accruals and $0.8 million in higher marketing expenses, which could pressure margins if sales growth slows.

• Total net sales from physical stores increased only 5.1% in Q2, despite a 12.1% total comp increase, due to operating 12 fewer stores year-over-year, reflecting a reduced physical footprint.

• The company expects to end fiscal 2026 with 218 total stores, a net decrease from the prior year, and faces 60 to 65 lease decisions in fiscal 2027, creating potential for further closures.

• Income tax expense remains impacted by a full non-cash deferred tax asset valuation allowance, which could limit future tax benefits despite returning to profitability.

Q & A Highlights

Q: Can you discuss the acceleration in August comps to nearly 15% despite tougher year-over-year comparisons, and what is driving this momentum? A: Michael Henry (CFO): The acceleration is broad-based, with almost all departments posting double-digit positive comps in the second quarter, a trend that continued through August. All departments except footwear were up double-digits, and the performance was consistent across geographies, reflecting strong momentum through the back-to-school season.

Q: How do you feel about your inventory and assortment setup heading into the fall and holiday seasons, and are you in "chase mode"? A: Nathan Smith (CEO): We feel very strong about our positioning. During back-to-school, we were largely where we needed to be, with only a slight gap in footwear that we chased. Heading into fall and holiday, we feel good about our inventory levels, especially given that sales were up 8% while inventory dollars were down 1% in Q2. Our team is continually sharpening the assortment to stay well-positioned.

Q: What is the single biggest swing factor that could determine whether you land at the top or bottom of your Q3 guidance range? A: Michael Henry (CFO): Most scenarios point toward the upper end of the range. However, in three of the last four years, comps decelerated by about 8 points in September after the back-to-school need-based period ended. We are allowing for a potential deceleration in September-October, and we acknowledge that October will be the toughest comparison of the quarter, as it had the strongest performance last year.

Q: Given the strong two-year stack, can you hold a double-digit comp against the tough Q4 comparison from last year? A: Michael Henry (CFO): We haven't issued specific Q4 guidance yet, but the two-year stack suggests we can comp the 10% from last year. Whether it's single-digit or double-digit remains to be seen during the holiday season. We are planning for and expecting a positive comp in Q4, but it's too early to specify the extent.

Q: With e-commerce growing and its mix increasing, does buying, distribution, and occupancy still leverage on a positive comp? A: Michael Henry (CFO): Yes, it has been leveraging as we've produced strong comps. Occupancy is mostly recognized on a straight-line basis, so dollars remain stable with a consistent store count. Distribution has relatively fixed elements, but e-commerce shipping costs are variable and move with volume. Buying costs remain consistent quarter-to-quarter as they are primarily salaries.

Q: How many leases are up for renewal in the next 12 months, and what does the renewal spread look like versus expiring rent? A: Nathan Smith (CEO) & Michael Henry (CFO): We have 20 lease decisions left for this fiscal year and anticipate keeping all 20 stores. For fiscal 2027, we have roughly 60 to 65 lease decisions to make, and we've already begun conversations and agreed to certain terms. We don't currently know of any additional closures, though some may arise. Most leases expire toward the end of the fiscal year, so many 2027 decisions are still 15-16 months out.

Q: Has the inflection in your business changed discussions with vendors or brands you previously wanted to bring into the store? A: Nathan Smith (CEO): The business inflection hasn't changed those conversations. We are a strong retailer, and brands understand the value of our customer base and store experience. Our discussions revolve around whether a brand is a great fit for Tilly's, rather than waiting for an inflection point. We are actively pursuing several brands and feel good about our prospects.

Q: What is holding back SG&A leverage in Q3 guidance, given the strong positive comps? A: Michael Henry (CFO): SG&A should improve slightly as a percentage of sales relative to last year's Q3. However, bonus accruals are a significant factor, as we've returned to profitability and are beating targets significantly. This expense hasn't existed in our model for four years, so it's a non-comparable cost that may add more to SG&A than typically expected.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .