Tilly's has been treading water for the past six months, recording a small loss of 3.4% while holding steady at $1.73. The stock also fell short of the S&P 500’s 27.9% gain during that period.

Is there a buying opportunity in Tilly's, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Tilly's Will Underperform?

We're sitting this one out for now. Here are three reasons we avoid TLYS and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Tilly’s demand has been shrinking over the last two years as its same-store sales have averaged 6.5% annual declines.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Tilly's, its EPS declined by 25.5% annually over the last six years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Tilly's burned through $26.62 million of cash over the last year, and its $227 million of debt exceeds the $50.68 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Tilly’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Tilly's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Tilly's, we’ll be cheering from the sidelines. With its shares trailing the market in recent months, the stock trades at $1.73 per share (or a forward price-to-sales ratio of 0.1×). The market typically values companies like Tilly's based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward our favorite semiconductor picks and shovels play.

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