While the S&P 500 is up 22.1% since March 2026, Tilly's (currently trading at $4.47 per share) has lagged behind, posting a return of 12.8%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Tilly's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Tilly's Will Underperform?
We’re sitting this one out for now. Here are three reasons you should be careful with TLYS, plus one stock we’d rather own.
1. Stores Are Closing, a Headwind for Revenue
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Tilly's listed 220 locations in the latest quarter and has generally closed its stores over the last two years, averaging 5% annual declines.
When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.
2. Operating Losses Sound the Alarm
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Although Tilly's was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3.1% over the last two years. Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. It’s unfortunate that Tilly's was one of them.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Tilly’s $218.4 million of debt exceeds the $62.2 million of cash on its balance sheet. Furthermore, its 13× net-debt-to-EBITDA ratio (based on its EBITDA of $12.35 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Tilly's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Tilly's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Tilly's, we’re out. With its shares trailing the market in recent months, the stock trades at 32.8× forward P/E (or $4.47 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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