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Why Investors Should Take Notice of SoCal Teen Retailer Tilly's

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On Friday, shares of California-based retailer Tilly’s Inc. (TLYS - Free Report) were surging, and closed the day up 10.72% in late-afternoon trading, still riding the highs of its strong second quarter fiscal 2017 results, which it reported on Wednesday.

Tilly’s reported non-GAAP earnings of 11 cents per share, surpassing the Zacks Consensus Estimate of 5 cents per share. Total net sales were $138.8 million, increasing 1.8% year-over year and topping our consensus estimate $136 million. Comparable store sales, which includes e-commerce sales, increased 2.1%, a noticeable increase from the 0.9% growth reported in the year-ago quarter.

“We believe the combination of our merchandising, marketing and operating initiatives is gaining traction, as evidenced by our positive comps and improved store traffic," commented Ed Thomas, President and Chief Executive Officer. "Our early back-to-school results are encouraging, and we believe we are well positioned to continue the momentum we have been building over recent quarters."

Tilly’s is known for its trendy, Southern California-inspired clothing and accessories, and is one of the more popular teen retailers among brands like Urban Outfitters (URBN - Free Report) , American Eagle Outfitters (AEO - Free Report) , Abercrombie & Fitch (ANF - Free Report) , and Zumiez (ZUMZ - Free Report) .

In particular, you’ll notice on Tilly’ consumer-friendly touches that signal the company understands the changing nature of what it means to shop both in store and online. There’s a free shipping promotion for orders over $59, and an option to pick up your items in your local store. Tilly’s even has a rewards membership program that for every $150 you spend, you receive a $5 reward.

The company is also smartly marketing to the back-to-school crowd, highlighting brands like Vans and Adidas (ADDYY - Free Report) , for example, two labels popular among teenagers.

Tilly’s retail story is reflected in Abercrombie’s subsidiary, Hollister. Once a staple in every cool kid’s closet, the Hollister brand, which emphasized another kind of West Coast cool, faded into obscurity. Recently, however, the brand has come charging back, and has become a vital part of its parent company’s growth.

The Hollister brand is much different than the one of its past, but its comps growth are telling sign that the label’s cleaner, no-logo strategy is working. On Thursday, Hollister reported its third straight quarter of positive comps growth, up 5% from the year-ago period.

Tilly’s In-Depth

Perhaps it’s the California vibe that is appealing to teen shoppers, and if it is, Tilly’s is surely benefitting from this popular aesthetic. Even though shares of the retailer are down over 28% year-to-date, the stock is up 33.33% in the past 12 months.

Right now, TLYS is a #3 (Hold) on the Zacks Rank, with a VGM score of ‘A.’ The company expects to see earnings growth of around 7.5% for the current year, with marginal sales growth of 0.23% during the same time frame. Its industry, Retail-Apparel and Shoes, sits in the bottom 41% of all 265 industries ranked on the Zacks Industry Rank.

Its current P/E of 19.96 comes in well above the Retail-Apparel and Shoes industry, a reflection both of Tilly’s perception among investors and its popularity with its teen customer base. However, the stock has significantly cheapened over the last year. Tilly’s P/E was hovering around 32 about a year ago, and this steep drop in valuation shows how skeptical investors became in teen retailers (and retail overall).

While the overall teen retail sector has a lot to prove, it looks like Tilly’s has a head start. The combination of its website, positive comparable sales growth, and improving margins put it in the right direction moving forward.

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