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Management Thinks This Undercover Growth Stock Is Undervalued

Specialty clothing retailer Tillys (NYSE: TLYS) announced it would be buying back up to 2 million of its shares over the next 12 months. The company's stock crashed by more than 20% after it guided for revenue and profits that were less than what the market was expecting.

Management showed what it thinks of the sell-off by quickly announcing a share buyback program. Let's look closer at what's been happening at Tillys.

Image source: Getty Images.

Management thinks the market overreacted

Tillys was devastated at the pandemic's onset when it had to shut its doors temporarily to in-person shoppers. Revenue fell by 14.2% in the year ended Jan. 31, 2021. The company bounced back impressively in the following year. Sales increased from $531 million in the year mentioned above to $776 million in the year that ended on Jan. 29, 2022.

Management skillfully handled supply chain disruptions and secured inventory that consumers wanted to buy. In addition to surging sales, Tillys boosted profits, to $64 million in the year ended January from a loss of $1.1 million the year before.

CEO Ed Thomas said:

Each quarter of fiscal 2021 set Company records for net sales and operating income. Our fourth quarter comparable net sales grew by 12.5%, and our earnings per share of $0.38 represented our best fourth-quarter earnings in our public company history. I am very proud of the dedication and hard work put in by our store, distribution, and corporate office teams.

Indeed, the calendar year 2021 was a record-setter for Tillys, and the stock responded by rising 97%. That said, management acknowledged it would be difficult to match or beat the performance in 2022. The prudent outlook for 2022 sent the stock crashing more than 20%. The market was hoping and pricing in continued record performance in 2022.

The pessimistic outlook was delivered after the market closed on March 10. In response to the stock crashing, management announced a share buyback program on March 14. The plan calls for repurchasing up to 2 million shares between now and March 14, 2023. The rapid sell-off response indicates that management thinks the market overreacted to the guidance for 2022.

Tillys stock is cheap

Tillys is the rare brick-and-mortar clothing retailer growing revenue and locations. In the last decade, it has increased revenue at a compound annual rate of 4.8%. The company has 241 locations across the U.S., concentrated in California, Texas, and Florida. It plans to add between 15 and 20 locations in 2022. That would be a 7% increase at the midpoint.

Management certainly has ammunition to support its argument that the stock is cheap. As of this writing, Tillys is selling at a price-to-earnings and price-to-free-cash-flow of 4.9 and 5.7, respectively -- a low price to be sure for a growing business.

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Parkev Tatevosian owns Tillys. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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