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This Undercover Growth Stock Crashed More Than 20% After a Downbeat Announcement

Tilly's (NYSE: TLYS) reported fourth-quarter and fiscal-year 2021 earnings after the market closed on March 10. The market was spooked by what the company revealed, and the stock dropped by 24% the day following the announcement.

Tilly's, a specialty clothing retailer that caters to preteens and young adults, was devastated at the pandemic's onset when it had to shut its doors temporarily. It has since recovered, reporting record sales and profits. So let's take a closer look at the quarter's results and see what could have spooked investors.

Image source: Getty Images.

The good news first

For its fourth quarter ended Jan. 29, Tilly's reported sales of $204.5 million. That was up by 14.9% from $177.9 million in the prior-year quarter. Tilly's has done an excellent job securing inventory to sell during widespread shortages. The coronavirus pandemic has sent workers home at manufacturing plants and shipping ports, making it a challenge for businesses to get the products their customers desire.

In addition to making sales, securing enough product during widespread shortages allowed Tilly's to sell at higher margins. Its gross profit margin of 35.7% was its highest in the last decade. The previous high was 32.2% reached in 2012. That makes sense; if you're one of the few places with what the customer is looking for, you don't need to offer discounts and promotions to get the product off your shelf.

Of course, that all bodes well for the bottom line, and Tilly's $0.38 of earnings per share (EPS) was the fourth-highest in the company's history. For the full year, Tilly's reported an EPS of $2.06, again eclipsing the previous high in the decade of $1.24 reached in 2012. This is all excellent news, so what explains the more than 20% sell-off in Tilly's stock after the Q4 earnings release?

Ok, now give me the bad news

Tilly's management spooked investors when it started discussing the prospects for the next few quarters. Specifically, here is the comment from management in the press release that sent shares crashing:

During March 2021, our net sales accelerated significantly primarily as a result of considerable pent-up demand coming out of 2020's pandemic-related restrictions and significant federal stimulus payments injected into the economy, both of which were historic anomalies. As a result, the company anticipates a further deceleration in its comparable net sales results as the first quarter of fiscal 2022 progresses compared to fiscal 2021, particularly as the company begins to anniversary last year's peak performance in the latter half of the first quarter which was driven by the unique environment at that time.

In other words, Tilly's thinks that the excellent results in 2021 were a one-off event. The several factors that worked together to create a favorable environment -- including limited inventory among its competitors along with robust fiscal stimulus payments to households -- are fading away in 2022, and operating performance is expected to worsen as a result. Given the poor expectations, it's no surprise the stock crashed.

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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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