Company Reports Mixed Financial Results with Inventory Challenges

Despite facing challenges, including missed sales projections and increased inventory valuation reserves, product margins improved by 190 basis points year-over-year. This improvement largely stemmed from higher initial markups. While buying, distribution, and occupancy costs collectively decreased by 290 basis points, they were $1.5 million lower than last year due to these costs being borne against reduced net sales.

SG&A Expenses and Net Loss

Total Selling, General and Administrative (SG&A) expenses came in at $52.4 million, or 35.6% of net sales, compared to $55.2 million, or 31.9% of net sales, in the previous year. The decrease in SG&A expenses was mainly attributed to an additional week in last year’s fourth quarter, which incurred approximately $2.6 million in costs.

The pretax loss for the quarter was $13.4 million, or 9.1% of net sales, up from last year’s pretax loss of $6.9 million, or 4% of net sales. An income tax expense of $0.2 million was recorded despite the loss, primarily due to the ongoing impact of a full noncash deferred tax asset valuation allowance. Last year, a similar valuation allowance charge of $15.4 million led to an income tax expense of $13.6 million, even amid a pre-tax loss. The net loss was reported at $13.7 million, amounting to $0.45 per share, compared to a net loss of $20.6 million, or $0.69 per share, in the fourth quarter of last year, which also included the aforementioned valuation allowance charge.

Balance Sheet and Inventory Management

As the fiscal year concluded, total cash and marketable securities stood at $47 million, supplemented by an available undrawn borrowing capacity of $48 million under the asset-backed credit facility. Total inventories were up 9.5% year-over-year, but had decreased by 6.1% compared to last year’s figures as of March 1, 2025, reflecting proactive measures to address inventory levels.

Capital expenditures for fiscal 2024 were marked at $8.2 million, a reduction from $14 million in fiscal 2023. Current trends indicate an improvement in business performance compared to the previous fourth quarter. For the month of February ending March 1, 2025, comparable net sales are expected to decline by 5.7% relative to the same period last year, although warmer weather has shown a positive influence on sales. Projections estimate total net sales for the first quarter to range between $105 million and $111 million, suggesting a comparable store net sales decline of approximately 3% to 8%.

Outlook for Fiscal 2025

SG&A expenses for the upcoming quarter are anticipated to be around $42 million to $43 million, assuming no significant noncash asset impairment charges occur. A pre-tax loss is projected to fall between $20 million and $17 million. The anticipated loss per share is estimated between $0.68 and $0.58, with a near-zero income tax rate attributed to the ongoing valuation allowance impacts. The company expects to operate 238 stores at the end of the first quarter, down from 246 stores at the same time last year. Cash and marketable securities are forecasted to range from $25 million to $30 million by the end of the first quarter, with expectations for a rise as the second quarter progresses and the back-to-school season approaches.

Given the current trend in comparable net sales, the company believes it can function without accessing its credit facility throughout fiscal 2025. Plans include maintaining lower unit inventories relative to last year. Additionally, an extension of the asset-backed credit facility with Wells Fargo Bank is expected to be finalized by the end of the first quarter, extending through July 2028. For fiscal 2025, the goals center on improving sales and inventory efficiency while reducing expenses.

While these ambitions may be challenging due to present economic uncertainties, management believes the strategies and teams in place are capable of delivering results. The company looks forward to updating its stakeholders on progress throughout the year.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Jeff Van Sinderen — Analyst

Thanks for taking my question. Could you clarify the tariff impact or potential tariff impact? I know some private label products are involved, but it seems there is not a significant impact there.

Michael Henry — Executive Vice President, Chief Financial Officer

Yeah, Jeff. The moment —

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

Let me take it.

Michael Henry — Executive Vice President, Chief Financial Officer

Go ahead, Hezy.

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

We looked into it on Monday, and it appears the effect will be minor. Only one of our private label vendors mentioned they might share the increased costs with us, and it is not significant at this stage. However, it’s still hard to quantify at this point.

Jeff Van Sinderen — Analyst

Understood. Considering the current economic backdrop and its potential impact on consumers, there is talk of a recession. How do you view this situation? Are the changes to your merchandise assortment likely to help mitigate these effects?

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

Yes, that’s the expectation. Though we anticipate headwinds similar to others in the market, we hope that aligning our merchandise effectively will help us navigate these challenges, though guarantees cannot be made.

Jeff Van Sinderen — Analyst

I also have a more strategic question regarding your cash balance and capital expenditures. What are your plans for store openings this year? Should we expect closures instead? Additionally, how are you addressing e-commerce fulfillment?

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

We utilize a hybrid model for e-commerce fulfillment. We fulfill orders from stores as well as from e-commerce centers. If an item is not available in the e-commerce inventory, it ships from the nearest store to the customer. We are not currently considering a complete shift to store-only fulfillment.

Company’s Strategic Store Openings and Closures: Financial Insights

In response to inquiries about capital expenditures, management expressed an opportunistic stance. They will pursue opportunities where they expect short-term returns on investment (ROI). Recently, two new stores were opened, both of which are already profitable. There is potential for additional store openings if suitable locations are identified, but the priority tilts toward closing unprofitable stores rather than expanding the footprint aggressively.

Michael Henry — Executive Vice President, Chief Financial Officer

Michael Henry provided further details, highlighting that one new store opened recently, with another set for an August launch. Currently, the company is facing seven store closures—three in the first quarter and four in the second quarter. The firm aims to manage these changes wisely, as noted by Hezy, the placeholder in the budget is limited to five potential store openings, reflecting a cautious approach to expansion.

Despite having plans for five openings, the company currently operates only two new stores against seven scheduled closures. Future store closures may also occur as decisions regarding leases continue throughout the year.

Jeff Van Sinderen — Analyst

Jeff Van Sinderen further probed about the number of lease decisions that the company anticipates for the year.

Michael Henry — Executive Vice President, Chief Financial Officer

Henry noted that the company generally renegotiates leases on a recurring schedule, dealing with approximately 80 lease decisions annually. This pattern is expected to hold true for the current year.

Jeff Van Sinderen — Analyst

After thanking Henry, Van Sinderen opened the floor for other questions.

Operator

Next, an inquiry was raised by Matt Koranda from ROTH Capital.

Matt Koranda — Analyst

He questioned the fourth quarter results and their compromised comp performance, which fell 11%, slightly below the projected range. He sought further insights into the reasons behind the decline as the quarter progressed.

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

Hezy Shaked handed the floor to Henry for more detailed commentary.

Michael Henry — Executive Vice President, Chief Financial Officer

Henry shared that November was notably weak for the quarter, concluding with a 21% dip. This was followed by a more moderate decrease of 6% to 7% in both December and January, giving a clearer picture of the quarter’s sales cadence.

Matt Koranda — Analyst

Koranda sought to clarify the trends for the current quarter, where the latest report indicated a 6% decline in comps for February. He requested insights into how the week performed and what factors influenced the variability within this range.

Michael Henry — Executive Vice President, Chief Financial Officer

Henry responded that three weeks into February showed weak performance, particularly Week 3. However, a heat wave in California during Week 4 resulted in improved sales, leading to positive comps for that brief period. This seasonal weather change coincided with a significant uptick in sales for parts of their spring assortment.

Overall, fiscal February ended with a total comp decline of 5.7%. Despite the challenges, there is cautious optimism that the onset of warmer weather may bolster sales. Since Easter falls later this year, any effects from Easter-related shopping are expected to create additional pressure in March.

As a result, the company’s outlook remains cautious due to the unpredictability associated with the later holiday, which could affect overall performance for the upcoming quarter.

Matt Koranda — Analyst

Seeking clarity on merchandising changes, Koranda asked at what stage the new merchandising team would have their full impact on store products.

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

Shaked noted that the prior merchandise strategy fell short, prompting an internal realignment of the merchandising team. By July, they expect to see more concrete results from these restructuring efforts. This comprehensive adjustment aims to enhance the overall productivity of the product offerings moving forward.

Retailer Restructures Inventory and Cost Management Amid Financial Challenges

The recent conference call highlighted the impact of inventory management on financial performance. The management acknowledged the need to mark down merchandise due to misalignment with market demand. As noted, these markdowns adversely affect revenue comparisons because if inventory levels decrease, it influences comp sales in various ways. The company is actively clearing outdated inventory and expects to see results by July.

Strategic Inventory Realignment

Matt Koranda — Analyst

Understanding the current situation, Hezy, could you explain what you anticipate regarding the cash balance, particularly related to inventory at the end of the quarter? Is the expectation that inventory will decrease year over year? Additionally, what might prompt you to utilize the credit facility, and when could that occur?

Michael Henry — Executive Vice President, Chief Financial Officer

Of course. As highlighted in my prepared comments, we plan to maintain lower unit inventories throughout the year. We’ve carefully assessed our inventory needs by product category and have implemented stricter purchasing practices. In recent years, our purchasing levels were excessive.

By collaborating with teams to realign our inventory plans from a granular perspective, we are confident in our strategy for effective inventory management throughout the year. We anticipate being below last year’s levels for each quarter. This forecasting is integrated into our merchandise budget. Unless we face significantly negative comp sales around the minus 10% mark consistently, we should avoid utilizing our credit facility. Based on our February comp run rate of minus 5.7%, we could maintain similar performance without needing to draw on credit.

We currently have a borrowing-free balance sheet. Provided our comp trends do not worsen, nearing that minus 10 threshold, we do not foresee accessing our credit facility anytime soon.

Cost Control Measures and Operational Efficiency

Matt Koranda — Analyst

Thank you for that clarification, guys. I appreciate it. Moving on, **Jeff Van Sinderen** from B. Riley Securities would like to ask a follow-up question.

Jeff Van Sinderen — Analyst

I’m interested in further exploring your approach to the credit line and cash reserves. Are there areas where you can still reduce SG&A, considering the current business performance?

Michael Henry — Executive Vice President, Chief Financial Officer

Indeed, we’ve made significant progress in that arena. As I mentioned in our management comments, we renegotiated many contractual obligations with the help of business partners. We had to navigate another wave of minimum wage increases, which incurred an added cost of approximately $400,000 for the first quarter.

Despite that, we’re tightening our payroll metrics and expect a reduction in payroll costs during this quarter. Hezy and I closely evaluated department budgets with each head. We scrutinized every aspect. Consequently, we predict favorable outcomes relating to lease decisions and overall payroll, across various facets of the business including store-specific payroll, distribution, and corporate office expenses. Our careful management can mitigate the need for credit facility access.

Jeff Van Sinderen — Analyst

If the business rebounds positively, especially around the summer months, are you optimistic that your SG&A expenses could remain lower year over year?

Michael Henry — Executive Vice President, Chief Financial Officer

Yes, that is our expectation—that we can navigate this year with a reduced total dollar amount in SG&A compared to FY24.

Jeff Van Sinderen — Analyst

Great. Thank you for that insight.

Conclusion and Closing Remarks

Operator

We will now conclude our question-and-answer session. I’d like to hand the floor back to Mike Henry for his closing comments.

Michael Henry — Executive Vice President, Chief Financial Officer

Thank you for joining today’s call. We look forward to sharing our upcoming results and appreciate your engagement.

Operator

[Operator signoff]

Call participants:

Gar Jackson — Investor Relations

Michael Henry — Executive Vice President, Chief Financial Officer

Jeff Van Sinderen — Analyst

Hezy Shaked — Co-Founder, Executive Chairman, President and Chief Executive Officer

Matt Koranda — Analyst

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