Tilly’s
Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended February 1, 2014OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934Commission File Number: 001-35535 TILLY’S, INC.(Exact name of registrant as specified in its charter) Delaware 45-2164791(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)10 Whatney, Irvine, CA 92618(Address of principal executive offices) (Zip Code)(949) 609-5599(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredClass A Common Stock, $0.001 par value per share New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer: ¨ Accelerated filer: xNonaccelerated filer: ¨ (Do not check if a smaller reporting company) Smaller reporting company: ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xThe aggregate market value of voting stock held by nonaffiliates of the registrant as of the last business day of the registrant’s most recently completedsecond fiscal quarter, at August 3, 2013, was $163,181,281 based on the closing sale price of $14.65 per share.The registrant had 11,370,639 shares of Class A common stock, par value $0.001 per share, outstanding at March 22, 2014. DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held June 11, 2014 are incorporated by reference into Part III ofthis Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART I Item 1. Business 3 Item 1A. Risk Factors 14 Item 1B. Unresolved Staff Comments 29 Item 2. Properties 29 Item 3. Legal Proceedings 29 Item 4. Mine Safety Disclosures 30 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6. Selected Financial Data 32 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 54 Item 8. Financial Statements and Supplementary Data 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79 Item 9A. Controls and Procedures 79 Item 9B. Other Information 80 PART III Item 10. Directors, Executive Officers and Corporate Governance 81 Item 11. Executive Compensation 81 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 81 Item 13. Certain Relationships and Related Transactions, and Director Independence 81 Item 14. Principal Accounting Fees and Services 81 PART IV Item 15. Exhibits, Financial Statement Schedules 82 Table of ContentsForward-Looking StatementsThis annual report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical orcurrent fact included in this annual report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relatingto our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statementsby the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”,“project”, “plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connectionwith any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to ourestimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations,growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-lookingstatements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including: • our ability to successfully open a significant number of new stores; • our ability to attract customers to our e-commerce website; • our ability to timely complete our new e-commerce fulfillment center; • effectively adapting to new challenges associated with our expansion into new geographic markets; • our ability to maintain and enhance a strong brand image; • generating adequate cash from our existing stores to support our growth; • identifying and responding to new and changing customer fashion preferences and fashion-related trends; • competing effectively in an environment of intense competition; • containing the increase in the cost of mailing catalogs, paper and printing; • the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located; • our ability to attract customers in the various retail venues and geographies in which our stores are located; • adapting to declines in consumer confidence and decreases in consumer spending; • our ability to adapt to significant changes in sales due to the seasonality of our business; • price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which itwill be sold; • natural disasters, unusually adverse weather conditions, boycotts and unanticipated events; • changes in the competitive environment in our industry and the markets we serve, including increased competition from other retailers; • our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices; • increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment; • our ability to balance proprietary branded merchandise with the third-party branded merchandise we sell; • most of our merchandise is made in foreign countries, making price and availability of our merchandise susceptible to international tradeconditions; • failure of our vendors and their manufacturing sources to use acceptable labor or other practices; • our dependence upon key executive management or our inability to hire or retain the talent required for our business; • our ability to effectively adapt to our rapid expansion in recent years and our planned expansion; • failure of our information technology systems to support our current and growing business, before and after our planned upgrades; • disruptions in our supply chain and distribution center; • our indebtedness and lease obligations, including restrictions on our operations contained therein; • our reliance upon independent third-party transportation providers for certain of our product shipments; • our ability to maintain comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile; 1Table of Contents • disruptions to our information systems in the ordinary course or as a result of systems upgrades; • our inability to protect our trademarks or other intellectual property rights; • acts of war, terrorism or civil unrest; • the impact of governmental laws and regulations and the outcomes of legal proceedings; • our ability to secure the personal financial information of our customers and comply with the security standards for the credit card industry; • our failure to maintain adequate internal controls over our financial and management systems; and • continuing costs incurred as a result of being a public company.We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While webelieve that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipateall factors that could affect our actual results.See “Risk Factors” for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties.All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this annualreport and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context ofthese risks and uncertainties.We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-lookingstatements included in this annual report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-lookingstatement as a result of new information, future events or otherwise, except as otherwise required by law. 2Table of ContentsPART I Item 1.BusinessOur Company HistoryTilly’s is a fast-growing destination specialty retailer of action sports inspired apparel, footwear and accessories. We believe we bring together anunparalleled selection of the most sought-after brands rooted in action sports, music, art and fashion. Our stores are designed to be a seamless extension of ourteen and young adult consumers’ lifestyles with a balance of guys’ and juniors’ merchandise in a stimulating environment. We believe our success across avariety of real estate venues and geographies in the United States demonstrates Tilly’s portability. Our motto “If it’s not here…it’s not happening” exemplifiesour goal to serve as a destination for the latest, most relevant merchandise and brands important to our customers.The Tilly’s concept began in 1982 when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since1984 the business has been conducted through World of Jeans & Tops, a California corporation (“WOJT”) formed by our co-founders, which operates underthe name “Tilly’s”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT inpreparation for an initial public offering (“IPO”).On May 2, 2012, the shareholders of WOJT contributed all of their equity interests in WOJT to Tilly’s, Inc. in exchange for shares of Tilly’s, Inc.Class B common stock on a one-for-one basis. In addition, WOJT terminated its “S” Corporation status and became a “C” Corporation. These events arecollectively referred to as the “Reorganization Transaction”. As a result of the Reorganization Transaction, WOJT became a wholly owned subsidiary ofTilly’s, Inc.On May 3, 2012, we completed an IPO in which we issued and sold 7,600,000 shares of Class A common stock at a price of $15.50 per share, lessunderwriting discounts and offering expenses payable by us, a portion of which was reimbursed by the underwriters. Certain of our stockholders also sold1,600,000 shares of Class A common stock in the IPO at a price of $15.50 per share. We did not receive any of the proceeds from the sale of stock by ourstockholders. As a result of the IPO, we raised net proceeds of approximately $107 million, after deducting the underwriting discount of $8.7 million andrelated fees and expenses of approximately $2.5 million. On May 9, 2012, we used $84.0 million of the net proceeds from the IPO to pay in full the principalamount of notes representing WOJT’s undistributed taxable income. These notes were issued to the former shareholders of WOJT in connection with theReorganization Transaction and all payments were made to trusts related to our founders Hezy Shaked and Tilly Levine, and their children.As used in this Annual Report, except where the context otherwise requires or where otherwise indicated, the terms “the Company”, “World of Jeans &Tops”, “WOJT”, “we”, “our”, “us” and “Tilly’s” refer to WOJT before the Reorganization Transaction (as defined above), and to Tilly’s, Inc. and itssubsidiary after the Reorganization Transaction.Our StrengthsWe believe that the following competitive strengths contribute to our success and distinguish us from our competitors: • Destination retailer with a broad, relevant assortment. We believe the combined depth and breadth of apparel, footwear and accessories offeredat our stores exceeds the selection offered at many other specialty retailers. We offer an extensive selection of third-party, West Coast and actionsports inspired and lifestyle brands complemented by our proprietary brands. Our merchandise includes a wide assortment of brands, styles,colors, sizes and price points to ensure we have what our customers want every time they visit our stores. We offer a balanced mix of merchandiseacross the guys and juniors categories, with additional merchandise in the boys, girls, footwear and accessories categories. We believe that bycombining proven fashion trends and core style products with a vibrant blend of carefully selected music and visuals, we provide an in-storeexperience that is authentic, fun, and 3Table of Contents engaging for our core customers. We believe that our differentiated in-store environment, evolving selection of relevant brands and broader anddeeper assortment positions us as a retail destination that appeals to a larger demographic than many other specialty retailers and encouragescustomers to visit our stores more frequently and spend more on each trip. • Dynamic merchandise model. We believe our extensive selection of third-party and proprietary merchandise allows us to identify and addresstrends more quickly, offer a greater range of price points and manage our inventories more dynamically. By closely monitoring trends andshipping product to our stores multiple times per week, we are able to adjust our merchandise mix based on store size and location. We also keepour merchandise mix relevant by introducing emerging brands not available at many other retailers. Our merchandising capabilities enable us toadjust our merchandise mix with a frequency that promotes a current look to our stores and website and encourages frequent visits. • Flexible real estate strategy across real estate venues and geographies. Our stores have proven to be successful in different real estate venuesand geographies. As of February 1, 2014, we operated profitable stores in malls, power centers, neighborhood and lifestyle centers, outlet centersand street-front locations across 76 markets in 32 states. We believe our success operating in these different retail venues and geographiesdemonstrates the portability of Tilly’s and provides us with greater flexibility for future expansion. • Multi-pronged marketing approach. We utilize a multi-pronged marketing strategy to connect with our customers and drive traffic to our storesand website. First, we distribute catalogs to potential and existing customers from our proprietary database to familiarize them with the Tilly’sbrand and our products and to drive sales to our stores and our website. We offer an integrated digital platform, including our mobile and tabletapplications, for our customers to shop how and when they like and to drive further connection with them. Second, we partner and collaboratewith our vendors on exclusive events and contests to build credibility with our target customers, actively involve them in our brands, and enhancethe connection between Tilly’s and the West Coast and action sports inspired lifestyle. Third, we use social media to communicate directly withour customers while also encouraging customers to interact with one another and provide feedback on our events and products. We also offer anintegrated digital platform, including our mobile and tablet applications, allowing our customers to shop how and when they like and providingus another point of connection with our customer. Fourth, we recently implemented a customer loyalty program, “The Tilly’s Hookup”, to furtherengage our customer. Fifth, through our “We Care Program”, we support and participate in various academic, art, and athletic programs at localschools and other organizations in communities surrounding our stores. All of these programs are complemented by digital and email marketing aswell as traditional radio and print advertising to build customer awareness and loyalty, highlight key merchandise offerings, drive traffic to ourstores and website and promote the Tilly’s brand. • Sophisticated systems and distribution/fulfillment infrastructure to support growth. Over the last six years, we have invested approximately$44 million in our highly automated distribution and fulfillment centers and information systems to support our future growth. We believe ourdistribution, fulfillment and allocation capabilities are unique within the industry and allow us to operate at a higher level of efficiency than manyof our competitors. Our distribution center allows us to quickly sort and process merchandise and deliver it to our stores in a floor-ready formatfor immediate display. Our new e-commerce fulfillment center that we expect to open in the second quarter of fiscal 2014 will provide a moreefficient and expeditious fulfillment process to support our future growth. Our systems enable us to respond to changing fashion trends, manageinventory in real time and provide a customized selection of merchandise at each location. We believe our distribution and fulfillmentinfrastructure can support a national retail footprint of 500 stores and significant growth of our e-commerce business with minimal incrementalcapital investment. • Experienced management team. Our senior management team, led by Hezy Shaked and Daniel Griesemer, has extensive experience across awide range of disciplines in the specialty retail and direct-to-consumer industries, including store operations, merchandising, distribution, realestate, and finance. Mr. Shaked, our Co-Founder, Executive Chairman of the Board of Directors, and Chief 4Table of Contents Strategy Officer, plays an important role in developing our long-term growth initiatives and cultivating our unique culture. Mr. Griesemer, ourPresident and Chief Executive Officer, joined Tilly’s in February 2011 with 28 years of retail experience. He served in various roles withColdwater Creek, Inc. from 2001 to 2009 including most recently as Chief Executive Officer. During his tenure, Coldwater Creek increased thestore base from 13 to approximately 400 and increased revenues from approximately $340 million to approximately $1.1 billion. Mr. Griesemeralso served in leadership positions at Gap, Inc. and Macy’s, Inc.Growth StrategyWe are pursuing several strategies to drive long-term sales and profitability, including: • Expand Our Store Base. We believe there is a significant opportunity to expand our store base from 195 locations as of February 1, 2014 to morethan 500 stores across the United States over time. We have a proven ability to expand the number of stores we operate, as we have almost doubledour store count over the last five years from 99 stores at the beginning of fiscal 2009 to 195 stores at February 1, 2014. We plan to add at least 18net new stores in fiscal year 2014. Our plan includes new store openings in both existing and new markets, and in both mall and off-malllocations.As of February 1, 2014, we operated stores in 32 states. Over the past six years we have grown our presence in existing markets and successfullyexpanded into 58 new markets. We have entered new markets by opening stores in high traffic malls relevant to our core customer in order toestablish the Tilly’s brand, as well as in off-mall locations that effectively cover trade areas where our customers want to shop. The opportunityexists to continue to significantly broaden our national footprint by entering new markets through both mall and off-mall locations, including inoutlet centers. • Drive Comparable Store Sales. We seek to maximize our comparable store sales by consistently offering new, on-trend and relevant merchandiseacross a broad assortment of categories, increasing our brand awareness through our multi-pronged marketing approach, providing an authenticstore experience for our core customers and maintaining our high level of customer service. We believe our comparable store sales will benefit asstores opened in the last few years continue to mature and we continue to build brand awareness in new markets. • Grow Our e-Commerce Platform. We believe our e-commerce platform is an extension of our brand and retail stores, providing our customers aseamless shopping experience. Our e-commerce platform allows us to provide an expanded product offering relative to our stores, reach newcustomers and build our brand in markets where we currently do not have stores. In fiscal year 2013, our e-commerce net sales increased 9% overfiscal 2012 and represented approximately 12% of our net sales, up from 6% of net sales in fiscal year 2008. We believe that our target customerregularly shops online and we see continued opportunity to grow our e-commerce business to significantly greater than 15% of total net sales overtime. Key factors driving growth include continuing our successful catalog and online marketing efforts, offering a wider selection of Internet-exclusive merchandise and expanding our online selection to ensure a broad and diverse offering of brands and products relative to ourcompetition. We also believe we will see continued growth in our e-commerce sales as we open additional stores and build brand awareness in thecommunities surrounding those locations. To support this growth, we plan to open our new e-commerce fulfillment center in the second quarter offiscal 2014. • Increase Our Operating Margins. We believe we have the opportunity to drive margin expansion through scale efficiencies and continuedprocess improvements. We believe comparable store sales increases combined with our planned store growth will permit us to take advantage oflargely fixed occupancy costs, favorable buying costs from larger volume purchases, leverage of our costs for store management and corporateoverhead as well as the fixed portion of shipping and handling costs over higher sales volumes. In addition, we expect to improve margins andsupport growth by leveraging ongoing investments in infrastructure, including the opening of our dedicated fulfillment center for our 5Table of Contents e-commerce store planned in the second quarter of fiscal 2014 and continuing upgrades to our e-commerce platforms, point-of-sale, merchandiseallocation and merchandise planning systems, as well as related work processes. We also will continue to use established business processes toidentify and execute initiatives focused on lowering our unit costs and improving operational efficiency throughout our organization.Merchandising, Purchasing, and Planning and AllocationMerchandisingWe seek to be viewed by our customers as the destination for West Coast and action sports inspired apparel, footwear and accessories. We believe weoffer an unparalleled selection of relevant brands, styles, colors, sizes and price points to ensure we have what our customers want every time they visit ourstores. Our extensive selection of third-party and proprietary merchandise allows us to identify and address trends more quickly, offer a greater range of pricepoints and manage our inventories more dynamically. We offer a balanced mix of merchandise across the guys and juniors categories, with additionalmerchandise in the boys, girls, footwear and accessories categories. We believe this category mix contributes to our broad demographic appeal. Our apparelmerchandise includes branded, fashion and core styles for tops, outerwear, bottoms, and dresses. Accessories merchandise includes backpacks, hats,sunglasses, headphones, handbags, watches, jewelry and more. We focus on our merchandise presentation and vary the visual displays in our stores andwindows throughout the month, presenting new looks and fashion combinations to our customers.Our ability to maintain an image consistent with the West Coast and action sports inspired lifestyle is important to our branded vendors and provides usbetter access to a wide assortment of products and styles. Our third-party branded merchandise features established and emerging brands. We strive to keepour merchandise mix current by continuously introducing emerging brands and styles not available at many other specialty retailers in order to identify andrespond to the evolving desires of our customers. Within our diversified portfolio of hundreds of third-party brands, which represented approximately 72%and 70% of our net sales in fiscal years 2013 and 2012, respectively, our largest brand accounted for between 4.0% and 4.5% of our net sales in each of thelast two fiscal years.Selected third-party brands include, in alphabetical order: • Adidas• Billabong• BLVD Supply• Converse• DC Shoes• Famous Stars & Straps• Fox• G-Shock• Hurley • KR3W• Last Kings• Levi’s• LRG• Neff• Nike SB• Nixon• O’Neill• Quiksilver • Roxy• RVCA• Spy• Stance• UGG• Vans• Volcom• Young & Reckless...and many moreWe supplement our third-party merchandise assortment with our own proprietary brands across many of our apparel, accessory and footwear productcategories. We utilize our own branded merchandise to expand our price point range, identify and respond to changing fashion trends quickly, fill merchandisegaps and provide a deeper selection of styles and colors for proven fashion items. Our own brands represented approximately 28% and 30% of our net sales forfiscal years 2013 and 2012, respectively. 6Table of ContentsOur proprietary branded merchandise includes: Brand Category Guys’, boys’ and juniors’ denim apparel and fragrance Juniors’ and girls’ apparel, footwear and accessories Guys’ and boys’ apparel and accessories Guys’, boys’ and juniors’ apparel and fragranceWe believe that our extensive selection of merchandise, from both established and emerging brands as well as our proprietary brands, caters to a widedemographic of core customers and enhances our store image as a destination that carries the most sought-after apparel, footwear and accessories.Merchandise PurchasingOur merchandise purchasing staff is organized by category and product type and consists of a Vice President/General Merchandise Manager and VicePresidents, divisional merchandise managers, buyers, associate buyers and assistant buyers. We believe a key element of our success is our team’s ability toidentify and source the latest proven fashion trends and core styles that are most relevant to our customers.Our purchasing approach focuses on product relevance, quality, fit, availability, cost and speed of production in order to provide timely frequentdelivery of merchandise to our stores. Our purchasing group and planning and allocation team are highly coordinated and maintain a disciplined buyingstrategy.To ensure a relevant assortment, our teams: • perform comprehensive analysis of sales trends from our stores and e-commerce site; • gather feedback from our customers and our staff; • maintain regular dialogue with our existing vendor network and potential new vendors; • utilize trend and color forecasting services; • participate in trade shows and action sport related events; • review trade publications; and • evaluate merchandise assortments offered by other retail and online merchants.We have developed and maintain strong, and in many cases long-standing, relationships with our third-party vendors and we have a history ofidentifying and growing with emerging brands. We believe the Tilly’s brand, shopping experience and core customer lifestyle is highly consistent with theimage and philosophy of our key vendors. This, in addition to our customer connectivity, facilitates a partnership culture with our key vendors and providesus access to an extensive variety of products and styles, as well as certain merchandise that is exclusive to our stores and website. Our merchandisepurchasing group also works closely with independent third parties who design and procure merchandise for our proprietary brands. Our proprietary brandcapabilities enhance our ability to 7Table of Contentsrapidly identify and respond to trends and consistently offer proven fashion items that provide a broader demographic appeal. We work with more than 100vendors based in the United States to supply us with our proprietary branded product. These vendors source from both domestic and international marketsand either have their own factories or contract with owners of factories to source finished product. By sourcing merchandise for our proprietary brands bothdomestically and internationally, we have the flexibility to benefit from shorter lead times associated with domestic manufacturing and lower costs associatedwith international manufacturing.Planning and AllocationOur merchandise planning and allocation team consists of a Vice President, directors, managers, planners and analysts. We have developed aninventory planning and allocation process to support our merchandise strategy. Working closely with our merchandise purchasing team, the planning andallocation team utilizes a disciplined approach to buying, forecasting, inventory control and allocation processes. Our planning and allocation team continuallyanalyzes information from our management information system, including inventory levels and sell-through data, to regularly adjust the assortment at eachstore and the inventory levels for our company as a whole. Our broad third-party vendor base allows us to shift merchandise purchases to react quickly tochanging consumer preferences and market conditions. Furthermore, the vendor base for our proprietary products provides us flexibility to develop our ownbranded products to quickly address emerging fashion trends and provide a deeper selection of styles, colors, and price points for proven fashion items. Wemodify our merchandising mix based upon store size, the season, and consumer preferences in different parts of the country. We are also able to react quicklyto changing customer needs due to our shipment of merchandise to our stores multiple times per week. Finally, we coordinate closely with our visualmerchandise managers and marketing group in order to manage inventory levels in connection with our promotions and seasonality.StoresStore GrowthDuring fiscal year 2013, we continued Tilly’s national expansion by opening 27 net new stores, a 16% increase in store count. In the past two years, wehave more than doubled the number of states where we operate stores from 14 states at the end of fiscal year 2011 to 32 states at the end of fiscal year 2013.As of February 1, 2014, we operated 195 stores throughout the United States. Our stores are located in mall and off-mall, including outlet, locationsand in fiscal year 2013 averaged 7,760 square feet. They generated average net sales per store of $2.4 million and net sales per square foot of $307 in fiscalyear 2013.The table below shows historical information for our stores by type of retail center as of fiscal year end for each of the years indicated: 2013 2012 2011 2010 2009 Regional Mall 102 89 71 62 55 Off-Mall (1) 86 74 64 59 53 Outlet 7 5 5 4 3 195 168 140 125 111 (1)Includes power centers, neighborhood and lifestyle centers and street-front locations. 8Table of ContentsAt February 1, 2014 we operated 195 stores in 32 states as shown below: State Number ofStores State Number ofStores Arizona 18 Nevada 6 California 82 New Jersey 7 Colorado 3 New Mexico 1 Delaware 1 New York 4 Florida 19 North Carolina 2 Georgia 1 Ohio 3 Illinois 6 Oklahoma 1 Indiana 5 Oregon 2 Iowa 1 Pennsylvania 3 Kansas 2 South Dakota 1 Kentucky 1 Tennessee 2 Maryland 2 Texas 4 Massachusetts 2 Utah 3 Michigan 2 Virginia 4 Minnesota 1 Washington 2 Nebraska 1 Wisconsin 3 Distinctive Store ExperienceTilly’s is a customer-driven lifestyle brand. We are energized and inspired by our customers’ individuality and passion for action sports, music, art,and fashion. Our stores bring these interests together in a vibrant, stimulating and authentic environment that is an extension of our customers’ high velocity,multitasking lifestyle. We do this by blending the most relevant brands and styles with music videos, product-related visuals and a dedicated team of storeassociates. Our associates share the same passion as our customers for action sports, music, art and fashion, enabling them to easily engage with ourcustomers and make shopping at Tilly’s a fun, social experience. Outside of our stores, we connect with our consumers using the same authentic approach,including social media, community outreach and sponsorship of contests, demos, and other events. We believe the Tilly’s experience drives customerawareness, loyalty and repeat visits while generating a buzz and excitement for our brand.Expansion Opportunities and Site SelectionAs of February 1, 2014, 49% of our stores had been opened within the previous five years. The following table shows the number of stores opened andclosed in each of our last five fiscal years: Fiscal Year StoresOpened StoresClosed Total Numberof Stores atEnd of Period 2009 13 1 111 2010 16 2 125 2011 16 1 140 2012 29 1 168 2013 28 1 195 102 6 We plan to open at least 18 net new stores in fiscal year 2014. Our new store openings are planned in both existing and new markets, for both mall andoff-mall, including outlet, locations. We focus on locations that have above average incomes and an ability to draw from a sufficient population with attractivedemographics. We have entered new markets by opening stores in high traffic malls relevant to our core customer in order to establish the Tilly’s brand, aswell as opening stores in off-mall locations that effectively cover trade areas where our customers want to shop. In 2014, we plan to enter markets under ouroutlet strategy targeting high traffic outlet locations. 9Table of ContentsStore Management, Culture and TrainingWe believe that a key to our success is our ability to attract, train, retain and motivate qualified employees at all levels of our organization. Each of ourstores typically operates with a three to five member store management team. In addition, each store has 10 or more full time equivalent store associates whorepresent the West Coast and action sports lifestyle and promote the Tilly’s brand not only inside the store, but also in their schools and communities. Thenumber of store associates we employ generally increases during peak selling seasons, particularly the back-to-school and the winter holiday seasons, and willincrease to the extent that we open new stores.We have developed a corporate culture that we believe empowers the individual store managers to make store-level business decisions and we rewardthem when they exceed sales targets. We are committed to improving the skills and careers of our workforce and providing advancement opportunities foremployees. We evaluate our store associates weekly on measures such as sales per hour, units per transaction and dollars per transaction to ensureproductivity, to recognize top performers and to identify potential training opportunities. We endeavor to design incentive programs for store associates thatpromote a competitive, yet fun, culture that is consistent with our image.We provide our managers with the knowledge and tools to succeed through comprehensive training programs, focusing on both operational expertise andsupervisory skills. Our training programs and workshops are offered at the store, district and regional levels, allowing managers from multiple locations tointeract with each other and exchange ideas to better operate stores. Store associates receive training from their managers to improve their product expertise andselling skills.e-CommerceOur e-commerce platform was established in 2004 and has grown significantly in every year of operation. We believe our digital platform is an extensionof our brand and retail stores, providing our customers a seamless shopping experience. In fiscal 2013, our e-commerce net sales increased 9% relative to fiscal2012, which reflected 53 weeks, while traffic at www.tillys.com increased 12%. We grew our e-commerce business to approximately 12% of our total net salesin fiscal 2013 from 6% of net sales in fiscal 2008. We believe that our target customer regularly shops online through various digital channels. In fiscal 2013we sold merchandise to customers in all 50 states and approximately 9% of our e-commerce net sales were to customers in states without brick-and-mortarstores. Our website serves both as a sales channel and a marketing tool to our extended customer base, including those customers in markets where we do notcurrently have stores. We also believe our fully integrated digital platform reinforces the Tilly’s brand image and serves as an effective advertising vehicle forour retail stores. Our digital platform provides an expanded product offering relative to our stores and includes expanded product assortment and web exclusivemerchandise. Similar to the merchandising approach in our stores, we frequently change the look of our website to highlight new brands and products and toencourage frequent visits. We utilize multiple tools to drive traffic to our website, including our catalog, marketing materials in our retail stores, search enginemarketing, internet ad placement, shopping site partnerships, third-party affiliations, email marketing, digital marketing and direct mail. In addition, weutilize the website to offer current information on our upcoming events, promotions and store locations.Our current e-commerce fulfillment is operated out of our distribution center in Irvine, California. To accommodate our growth, in the second quarter offiscal year 2014 we plan to transition to a new e-commerce fulfillment center also located in Irvine, California.Marketing and AdvertisingOur marketing approach is designed to create an authentic connection with our customers by consistently generating a buzz and excitement for our brandwhile staying true to our West Coast inspired, action sports heritage. We utilize a multi-pronged marketing strategy to connect with our customers and drivetraffic to our stores and website, comprised of the following: • Catalog. We view our catalog primarily as a sales and marketing tool to drive online and store traffic from both existing and new customers. Wealso believe our catalog reinforces the Tilly’s brand and showcases our comprehensive selection of products in settings designed to reflect ourbrand’s lifestyle 10Table of Contents image. In fiscal 2013, we mailed approximately 10.4 million catalogs to addresses included in our growing proprietary database, which currentlyincludes key information on over 3.1 million customers. We send these catalogs, which include coupons that can be redeemed at stores or online,to the customers in our database several times a year, primarily around key shopping periods such as spring break, back-to-school, and thewinter holidays. • Brand Partnerships. We partner and collaborate with our vendors for exclusive events such as autograph signings, in-store performances,contests, demos, giveaways, shopping sprees and VIP trips. In fiscal year 2013, we organized hundreds of events, many involving musicians,celebrities and athletes in the entertainment, music and action sports industries. For example, we partnered with MTV Fantasy Factory star RobDyrdek and music artist MGK to host autograph signings from coast to coast. We also partnered with many major action sports brands in fiscal2013. One such partnership was the Tilly’s Spend Reckless $35,000 Sweepstakes, which generated over 150,000 entries and was supported byYoung & Reckless owner and MTV Fantasy Factory star, Drama. Another partnership was Travis Barker’s 1965 Cadillac Sweepstakes, whichgenerated over 90,000 entries and was supported by legendary rock icon Travis Barker. Through brand partnerships such as these, we are able toconnect with and engage our customers in an exciting, authentic experience. • Social Media. We believe our core customers rely heavily on the opinions of their peers, often expressed through social media. Therefore we useour website blog as well as Facebook, Instagram and Twitter posts as a viral marketing platform to communicate directly with our customerswhile also allowing customers to interact with one another and provide feedback on our events and products. • Loyalty Program. We recently implemented our new customer loyalty program, “The Tilly’s Hookup”, which we believe will drive more directand targeted communications with our customers, and provide more insight into their shopping behaviors and preferences. The Tilly’s Hookup isfree to join and provides points to customers in exchange for purchases at our stores and online, and for interactions with us, such as checkinginto Tilly’s events. The points can be redeemed for exclusive merchandise and one-of-a-kind experiences with some of our brands. • Community Outreach. Through our “We Care Program” and in partnership with our vendors, we support and participate in various academic,art, and athletic programs at local schools and other organizations in communities surrounding our stores. • Radio, Print and Email Marketing. We utilize traditional radio and print advertising as well as email marketing to build awareness, drive trafficto our stores and website and to promote local in-store promotions and events. We periodically send emails to the customers in our proprietarydatabase to introduce new brands and products, offer promotions on select merchandise, highlight key events and announce new store openings.DistributionWe centrally distribute all of our merchandise through a 126,000 square foot distribution facility co-located with our headquarters in Irvine, California.Our lease expires in December 2017 and we have two five-year renewal option periods. We moved to our current location in January 2003 and have investedapproximately $43 million in our highly automated distribution center and information systems. We designed this state-of-the-art facility to allow us to manageour distribution operations in an efficient, cost-effective manner and to provide support for our growth initiatives. Extensive investments have been made to thedistribution-center infrastructure, focused around systems automation, material-handling equipment, RF technologies, and automated sortation in order tofurther enhance our processing speed and long term scalability. We believe the automation systems we utilize in our facility allow us to operate at a higher levelof efficiency and accuracy than many of our competitors.As of February 1, 2014, we have invested approximately $13 million in a new e-commerce fulfillment center to fulfill all e-commerce orders in a highlyautomated environment that leverages material handling equipment, automated systems and other technologies consistent with our current distribution facility.We expect to incur an additional $3 million to complete our new e-commerce fulfillment center and expect it to be operational in the second quarter of fiscal2014. 11Table of ContentsWe ship merchandise to our stores multiple times per week, providing them with a steady flow of both new and replenishment products. Merchandise isshipped in a floor-ready format (carrying price tickets, sensor tags and with hangers where appropriate) which allows store employees to spend less timeprocessing the merchandise and more time with our customers. We use our own fleet of trucks to ship merchandise to our local (Southern California) storesand third-party distributors to ship merchandise to stores outside our local area.We believe our distribution and fulfillment infrastructure can support a national retail footprint of in excess of 500 stores and significant e-commercegrowth with minimal incremental capital investment, including as a result of increased operational efficiencies as we transition from our current manualfulfillment process to a highly automated process.Management Information SystemsOur management information systems provide a full range of business process support and information to our store, merchandising, financial, realestate and other business teams. We selected, customized and integrated our information systems to enable and support our dynamic merchandise model. Webelieve our systems provide us with improved operational efficiencies, scalability, management control and timely reporting that allow us to identify andquickly respond to trends in our business. We believe that our information systems are scalable, flexible and have the capacity to accommodate our currentgrowth plans.We have made significant investments in our management information systems over the last several years and believe we are utilizing “best of breed”technology. We use software licensed from JDA Software Group, Inc. for allocation, SKU classification, inventory tracking, purchase order management andsales audit functions. We utilize MicroStrategy Incorporated for business intelligence. We utilize Manhattan Associates Inc.’s warehouse management systemsto handle merchandise distribution. We utilize technology from Strategic Distribution, Inc. in our distribution and new fulfillment centers enabling us toautomate our merchandise sortation and fulfillment processes, allowing us greater flexibility in scaling our operations for new store expansions and peakseason operations. Our financial systems are licensed from Lawson and our payroll system uses a third-party platform provided by Automatic DataProcessing, Inc.We update our sales daily in our merchandising reporting systems by collecting sales information from each store’s point-of-sale, or POS, terminalsutilizing software from Micros Systems, Inc. Our POS system consists of registers providing processing of retail transactions, price look-up, time andattendance and e-mail. Sales information, inventory tracking and payroll hours are uploaded to our central host system. The host system downloads pricechanges, performs system maintenance and provides software updates to the stores through automated nightly two-way electronic communication with eachstore. We evaluate information obtained through nightly polling to implement merchandising decisions, including product purchasing/reorders, markdownsand allocation of merchandise on a daily basis.CompetitionThe teenage and young adult retail apparel, accessories and footwear industry is highly competitive. We compete with other retailers for customers, storelocations, store associates and management personnel. We currently compete with other teenage-focused retailers such as, but not limited to, Abercrombie &Fitch Co., Aeropostale, Inc., American Eagle Outfitters, Inc., The Buckle, Inc., Forever 21, Inc., Hot Topic, Inc., Pacific Sunwear of California, Inc., UrbanOutfitters, Inc., The Wet Seal, Inc. and Zumiez, Inc. In addition, we compete with independent specialty shops, department stores and direct marketers thatsell similar lines of merchandise and target customers through catalogs and e-commerce. Further, we may face new competitors and increased competition fromexisting competitors as we expand into new markets and increase our presence in existing markets. Given the extensive number and types of retailers withwhich Tilly’s competes for customers, we believe that our target market is highly fragmented and we do not believe we have a significant share of this market. 12Table of ContentsCompetition in our sector is based, among other things, upon merchandise offerings, store location, price and the ability to identify with the customer.We believe that we compete favorably with many of our competitors based on our differentiated merchandising strategy, store environment, flexible real estatestrategy and company culture. However, many of our competitors are larger, have significantly more stores, and have substantially greater financial,marketing and other resources than we do. Moreover, we recognize that we do not possess exclusive rights to many of the elements that comprise our in-storeexperience and product offerings. Our competitors can emulate facets of our business strategy and in-store experience, which could result in a reduction of anycompetitive advantage or special appeal that we might possess. See “Risk Factors—We face intense competition in our industry and we may not be able tocompete effectively.”Trademarks“Ambitious”, “Blue Crown”, “Division 7”, “Eldon”, “Full Tilt”, “Full Tilt Sport”, “If it’s not here…it’s not happening”, “Infamous”, “RSQ”,“Tilly’s”, “Vindicated”, and logos related to some of these names, are among our trademarks registered with the U.S. Patent and Trademark Office. We regardour trademarks as valuable and intend to maintain such marks and any related registrations. We are not aware of any claims of infringement or otherchallenges to our right to use our marks in the U.S. We vigorously protect our trademarks.EmployeesAs of February 1, 2014, we employed approximately 1,300 full-time and approximately 2,800 part-time employees, of which approximately 500 wereemployed at our corporate office and distribution facility and approximately 3,600 were employed at our store locations. However, the number of employees,especially part-time employees, fluctuates depending upon our seasonal needs and, in fiscal year 2013, varied between approximately 4,000 and 6,700employees. None of our employees are represented by a labor union and we consider our relationship with our employees to be good.Government RegulationWe are subject to labor and employment laws, laws governing advertising and promotions, privacy laws, safety regulations, consumer protectionregulations and other laws that regulate retailers and govern the promotion and sale of merchandise and the operation of stores and warehouse facilities. Wemonitor changes in these laws and believe that we are in material compliance with applicable laws.InsuranceWe use insurance for a number of risk management activities, including workers’ compensation, general liability, automobile liability and employee-related health care benefits, a portion of which is paid by the employees. We evaluate our insurance requirements on an ongoing basis to maintain adequatelevels of coverage.SeasonalityDue to the seasonal nature of the retail industry, we have historically experienced and expect to continue to experience some fluctuations in our revenuesand net income reflecting increased demand during the year-end holiday season, other holidays, such as Easter, the beginning of spring break and peakshopping periods, such as the back-to-school season. Revenues generated during the holiday selling season generally contribute to our relatively higher fourthquarter net income. Revenues generated around the back-to-school season generally contribute to our relatively higher third quarter net income. If for any reasonour revenues were below seasonal norms or expectations during these quarters, our annual results of operations could be adversely affected. The level of ourworking capital reflects the seasonality of our business. We expect inventory levels, along with an increase in accounts payable and accrued expenses,generally to reach their highest levels in anticipation of the increased revenues during these periods. 13Table of ContentsAdditional InformationWe make available free of charge on our internet website, www.tillys.com, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934, as amended, as soon as reasonably practicable after filing such material electronically with, or otherwise furnishing it to, the Securities and ExchangeCommission (“SEC”). The public may also read and copy any materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street,NE, Washington, D.C. 20549. In addition, these materials may be obtained at the web site maintained by the SEC at www.sec.gov.The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the informationcontained on the website is not part of this document. Item 1A.Risk FactorsInvesting in our securities involves a high degree of risk and you should carefully consider all of the information in this report. In particular, thefollowing risks and uncertainties could materially affect our business, financial condition and results of operations in future periods, and should bekept in mind when you read “forward-looking statements” contained in this report. “Forward-looking statements” generally express expectations,beliefs, plans, objectives, assumptions and future events, and may be identified by the use of words or phrases such as “anticipate”, “believe”,“estimate”, “expect”, “intend”, “plan” and “project”, and similar words or phrases. The risks and uncertainties described below are not the onlyones that we face. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and results of operations in future periods.Risks Related to Our BusinessOur business depends upon identifying and responding to changing customer fashion preferences and fashion-related trends. If we cannotidentify trends in advance or we select the wrong fashion trends, our sales could be adversely affected.Fashion trends in the West Coast and action sports inspired apparel, footwear and accessories market can change rapidly. We need to anticipate, identifyand respond quickly to changing trends and consumer demands in order to provide the merchandise our customers seek and maintain our brand image. If wecannot identify changing trends in advance, fail to react to changing trends or misjudge the market for a trend, our sales could be adversely affected and wemay be faced with a substantial amount of unsold inventory or missed opportunities. As a result, we may be forced to mark down our merchandise in order todispose of slow moving inventory, which may result in lower profit margins, negatively impacting our financial condition and results of operations.We face intense competition in our industry and we may not be able to compete effectively.The retail industry is highly competitive. We currently compete with other retailers such as, but not limited to, Abercrombie & Fitch Co., Aeropostale,Inc., American Eagle Outfitters, Inc., The Buckle, Inc., Forever 21, Inc., Hot Topic, Inc., Pacific Sunwear of California, Inc., Urban Outfitters, Inc., TheWet Seal, Inc. and Zumiez, Inc. In addition, we compete with independent specialty shops, department stores and direct marketers that sell similar lines ofmerchandise and target customers through catalogs and e-commerce. Moreover, the internet and other new technologies facilitate competitive entry andcomparison shopping in our retail segment. While we offer a multichannel shopping experience and use social media as a way to interact with our customersand enhance their shopping experiences, multichannel retailing is rapidly evolving and we must keep pace with changing customer expectations and newdevelopments by our competitors. Competition with some or all of these retailers noted above could require us to lower our prices or risk losing customers. Inaddition, significant or unusual promotional activities by our competitors may cause us to respond in-kind and adversely impact our operating cash flow.Because of these factors, current and future competition could have a material adverse effect on our financial condition and results of operations. 14Table of ContentsFurthermore, many of our competitors have greater financial, marketing and other resources than we currently do, and therefore may be able to devotegreater resources to the marketing and sale of their products, generate national brand recognition or adopt more aggressive pricing policies than we can, whichwould put us at a competitive disadvantage. Moreover, we do not possess exclusive rights to many of the elements that comprise our in-store experience andproduct offerings. Our competitors may seek to emulate facets of our business strategy and in-store experience, which could result in a reduction of anycompetitive advantage or special appeal that we might possess. In addition, most of our products are sold to us on a non-exclusive basis. As a result, ourcurrent and future competitors may be able to duplicate or improve on some or all of our in-store experience or product offerings that we believe are important indifferentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or improve on some or all of our in-store experience orproduct offerings, our competitive position and our business could suffer.Our sales could be severely impacted by declines in consumer confidence and decreases in consumer spending.We depend upon consumers feeling confident to spend discretionary income on our product offering to drive our sales. Consumer spending may beadversely impacted by economic conditions such as consumer confidence in future economic conditions, interest and tax rates, employment levels, salary andwage levels, general business conditions, the availability of consumer credit and the level of housing, energy and food costs. These risks may be exacerbatedfor retailers like us who focus on specialty apparel and accessories. Our financial performance is particularly susceptible to economic and other conditions inregions or states where we have a significant number of stores, such as the southwestern U.S. and Florida. If periods of decreased consumer spending persist,our sales could decrease and our financial condition and results of operations could be adversely affected.We have expanded rapidly in recent years and have limited operating experience at our current size.We have significantly expanded our operations in the last nine and a half years, increasing from 32 stores in June 2004 in the state of California tooperating 195 stores in 32 states as of February 1, 2014. If our operations continue to grow, we will be required to expand our sales and distribution functions,marketing, support services, management information systems and administrative personnel. This expansion could increase the strain on our existingresources, causing operational difficulties such as difficulties in hiring, difficulties in obtaining adequate levels of merchandise, delayed shipments anddecreased customer service levels. These difficulties could cause our brand image to deteriorate and lead to a decrease in revenues, income and the price of ourcommon stock.Our continued growth depends upon our ability to successfully open a significant number of new stores.We have grown our store count rapidly in recent years and that has contributed to our growth in revenue. However, we must continue to open and operatenew stores to help maintain this revenue growth. We opened 28 stores in 2013 and 29 stores in 2012. We plan to open at least 18 net new stores in 2014.However, there can be no assurance that we will open the planned number of new stores in fiscal year 2014 or thereafter. Our ability to successfully open andoperate new stores is subject to a variety of risks and uncertainties, such as: • identifying suitable store locations, the availability of which is beyond our control; • obtaining acceptable lease terms; • sourcing sufficient levels of inventory; • selecting the appropriate merchandise that appeals to our customers; • hiring and retaining store employees; • assimilating new store employees into our corporate culture; • effectively marketing the new stores’ locations; • avoiding construction delays and cost overruns in connection with the build-out of new stores; • managing and expanding our infrastructure to accommodate growth; and • integrating the new stores with our existing buying, distribution and other support operations.Our failure to successfully address these challenges could have a material adverse effect on our financial condition and results of operations, causing themarket price of our Class A common stock to decline. 15Table of ContentsExpanding into new geographic markets may present challenges that are different from those we currently encounter. Failure to effectively adaptto these new challenges could adversely affect our ability to profitably operate those stores and maintain our brand image.We operate stores in a variety of different geographic markets in the U.S. and do not significantly differentiate between our stores by visual display orby the product offering. We also currently do not significantly differentiate our general store business plan from store to store. As we expand store locations, wemay face challenges that are different from those we currently encounter. Our expansion into new geographic markets could result in competitive,merchandising, distribution and other challenges. In addition, as the number of our stores increases, we may face risks associated with market saturation ofour product offerings and locations. Our vendors may also restrict their sales to us in new markets to the extent they are already saturating that market withtheir products through other retailers or their own stores. There can be no assurance that any newly opened stores will be received as well as, or achieve netsales or profitability levels comparable to those of, our existing stores in the time periods estimated by us, or at all. If our stores fail to achieve, or are unable tosustain, acceptable net sales and profitability levels, our business may be materially harmed and we may incur significant costs associated with closing thosestores and our brand image may be negatively impacted.Our business largely depends on a strong brand image, and if we are not able to maintain and enhance our brand, particularly in new marketswhere we have limited brand recognition, we may be unable to increase or maintain our level of sales.We believe that our brand image and brand awareness has contributed significantly to the success of our business. We also believe that maintaining andenhancing our brand image, particularly in new markets where we have limited brand recognition, is important to maintaining and expanding our customerbase. As we execute our growth strategy, our ability to successfully integrate new stores into their surrounding communities, to expand into new markets or tomaintain the strength and distinctiveness of our brand image in our existing markets will be adversely impacted if we fail to connect with our target customer.Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising, marketing, store operations,community relations, store graphics, catalog distribution and employee training, which could adversely affect our cash flow and which may not ultimately besuccessful. Failure to successfully market our brand in new and existing markets could harm our business, results of operations and financial condition.Our sales can significantly fluctuate based upon shopping seasons, which may cause our operating results to fluctuate disproportionately on aquarterly basis.Because of a traditionally higher level of sales during the back-to-school and winter holiday shopping seasons, our sales are typically higher in the thirdand fourth fiscal quarters than they are in the first and second fiscal quarters. Accordingly, the results of a single fiscal quarter, particularly the third andfourth fiscal quarters, should not be relied on as an indication of our annual results or future performance. In addition, any factors that harm our third andfourth fiscal quarter operating results could have a disproportionate effect on our results of operations for the entire fiscal year.We depend on cash generated from our existing store operations to support our growth, which could strain our cash flow.We primarily rely on cash flow generated from existing stores to fund our current operations and our growth plans. It takes several months and asignificant amount of cash to open a new store. If we continue to open a large number of stores relatively close in time, the cost of these store openings and thecost of continuing operations could reduce our cash position. An increase in our net cash outflow for new stores could adversely affect our operations byreducing the amount of cash available to address other aspects of our business.In addition, as we expand our business, we will need significant amounts of cash from operations to pay our existing and future lease obligations, buildout new store space, purchase inventory, pay personnel, pay for the increased costs associated with operating as a public company, and, if necessary, furtherinvest in our infrastructure and facilities. If our business does not generate sufficient cash flow from operations to fund these activities and sufficient fundsare not otherwise available from our existing revolving credit facility or future credit facilities, we may need additional equity or debt financing. If suchfinancing is not available to us on satisfactory terms, our ability to operate and expand our business or to respond to competitive pressures would be limitedand we could be required to delay, curtail or eliminate planned store openings. Moreover, if we raise additional capital by issuing equity securities or securitiesconvertible into equity securities, your ownership may be diluted. Any debt financing we may incur may impose on us covenants that restrict our operations,and will require interest payments that would create additional cash demands and financial risk for us. 16Table of ContentsOur ability to attract customers to our stores depends significantly on the success of the retail centers where the stores are located.We depend on the location of our stores to generate a large amount of our customer traffic. We try to select well-known and popular malls, power centers,neighborhood and lifestyle centers, outlet centers and street-front locations, usually near prominent retailers, to generate customer traffic for our stores.Customer traffic at these retail centers, and consequently our stores, could be adversely affected by economic downturns nationally or regionally, competitionfrom Internet retailers, changes in consumer demographics, the closing or decrease in popularity of other retailers in the retail centers in which our stores arelocated, our inability to obtain or maintain prominent store locations within retail centers or the selection by prominent retailers and businesses of otherlocations. A reduction in customer traffic would likely lead to a decrease in our sales, and, if similar reductions in traffic occur at a number of our stores, thiscould have a material adverse effect on our financial condition and results of operations.Some of our new stores may open in locations close enough to our existing stores that sales at those existing stores may be negatively impacted.As we continue to open additional locations within existing markets, some of our new stores may open in locations close enough to our existing storesthat a segment of customers will stop shopping at our existing locations and prefer to shop at the new locations, and therefore sales and profitability at thoseexisting stores may decline. If this were to occur with a number of our stores, this could have a material adverse effect on our results of operations.We purchase merchandise in advance of the season in which it will be sold and if we purchase too much inventory we may need to reduce pricesin order to sell it, which may adversely affect our overall profitability.We must actively manage our purchase of inventory. Generally, we order merchandise months in advance of it being received and offered for sale. Ifthere is a significant decrease in demand for our products or if we fail to accurately predict fashion trends or consumer demands, we may be forced to rely onmarkdowns or promotional sales to dispose of excess inventory. In addition, seasonal fluctuations also affect our inventory levels, as we usually order andcarry a significant amount of inventory before the back-to-school and winter holiday shopping seasons. If we are not successful in selling our inventory duringthese periods, we may be forced to rely on markdowns or promotional sales to dispose of the inventory, or we may not be able to sell the inventory at all,which could have an adverse effect on our margins and operating income.We buy and stock merchandise based upon seasonal weather patterns and therefore unseasonable weather could negatively impact our sales.We buy select merchandise for sale based upon expected weather patterns during the seasons of winter, spring, summer and fall. If we encounteruntimely aberrations in weather conditions, such as warmer winters or cooler summers than would be considered typical, these weather variations could causesome of our merchandise to be inconsistent with what consumers wish to purchase, causing our sales to decline. Furthermore, extended unseasonable weatherconditions in regions such as in the southwestern U.S., particularly in California and Arizona, or Florida, will likely have a greater impact on our salesbecause of our store concentration in those regions.If we fail to maintain good relationships with our suppliers or if our suppliers are unable or unwilling to provide us with sufficient quantities ofmerchandise at acceptable prices, our business and operations may be adversely affected.Our business is largely dependent on continued good relations with our suppliers, including vendors for our third-party branded products andmanufacturers for our proprietary branded products. We operate on a purchase order basis for our proprietary branded and third-party branded merchandiseand do not have long-term contractual relationships with our suppliers. Accordingly, our suppliers can refuse to sell us merchandise, limit the type or quantityof merchandise they sell us or raise prices at any time, which can have an adverse impact on our business. 17Table of ContentsDeterioration in our relationships with our suppliers could have a material adverse impact on our business, and there can be no assurance that we will be ableto acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Also, some of our vendors are vertically integrated, sellingproducts directly from their own retail stores, and therefore are in direct competition with us. These vendors may decide at some point in the future todiscontinue supplying their merchandise to us, supply us less desirable merchandise or raise prices on the products they do sell us. If we lose key vendors orare unable to find alternative vendors to supply us with substitute merchandise for lost products, our business may be adversely affected.A rise in the cost of raw materials, labor and transportation could increase our cost of sales and cause our results of operations and margins todecline.Fluctuations in the price, availability and quality of fabrics or other raw materials used to manufacture our products, as well as the price for labor andtransportation, could have adverse impacts on our cost of sales and our ability to meet our customers’ demands. In particular, because a key component ofour clothing is cotton, increases in the cost of cotton may significantly affect the cost of our products and could have an adverse impact on our cost of sales.We may not be able to pass all or a portion of these higher costs on to our customers, which could have a material adverse effect on our profitability.Any inability to balance merchandise bearing our proprietary brands with the third-party branded merchandise we sell may have an adverse effecton our sales and gross margin.Our proprietary branded merchandise represented approximately 28% of our net sales for the fiscal year ended February 1, 2014. Our proprietarybranded merchandise generally has a higher gross margin than the third-party branded merchandise we offer. As a result, we may determine that it is best forus to continue to hold or increase the penetration of our proprietary brands in the future. However, carrying our proprietary brands limits the amount of third-party branded merchandise we can carry and, therefore, there is a risk that the customers’ perception that we offer many major brands will decline. Bymaintaining or increasing the amount of our proprietary branded merchandise, we are also exposed to greater fashion risk, as we may fail to anticipate fashiontrends correctly. These risks, if they occur, could have a material adverse effect on sales and profitability.Most of our merchandise is produced in foreign countries, making the price and availability of our merchandise susceptible to international tradeand other international conditions.Although we purchase our merchandise from domestic suppliers, these suppliers have a majority of their merchandise made in foreign countries. Someforeign countries can be, and have been, affected by political and economic instability and natural disasters, negatively impacting trade. The countries inwhich our merchandise currently is manufactured or may be manufactured in the future could become subject to new trade restrictions imposed by the U.S. orother foreign governments. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, against apparel items, as well asU.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and have a material adverseeffect on our business, financial condition and results of operations. In addition, our merchandise supply could be impacted if our suppliers’ imports becomesubject to existing or future duties and quotas, or if our suppliers face increased competition from other companies for production facilities, import quotacapacity and shipping capacity. Any increase in the cost of our merchandise or limitation on the amount of merchandise we are able to purchase could have amaterial adverse effect on our financial condition and results of operations.If our vendors and manufacturing sources fail to use acceptable labor or other practices our reputation may be harmed, which could negativelyimpact our business.We purchase merchandise from independent third-party vendors and manufacturers. If any of these suppliers have practices that are not legal oraccepted in the U.S., consumers may develop a negative view of us, our brand image could be damaged and we could become the subject of boycotts by ourcustomers and/or interest groups. Further, if the suppliers violate labor or other laws of their own country, these violations could cause disruptions or delays intheir shipments of merchandise. For example, much of our merchandise is manufactured in China and Mexico, which have different labor practices than theU.S. We do not independently investigate whether our suppliers are operating in compliance with all applicable laws and therefore we rely upon the suppliers’ 18Table of Contentsrepresentations set forth in our purchase orders and vendor agreements concerning the suppliers’ compliance with such laws. If our goods are manufacturedusing illegal or unacceptable labor practices in these countries, or other countries from which our suppliers source the product we purchase, our ability tosupply merchandise for our stores without interruption, our brand image and, consequently, our sales may be adversely affected.If we lose key management personnel our operations could be negatively impacted.Our business and growth depends upon the leadership and experience of our key executive management team, including our co-founder, Hezy Shaked,who currently serves as our Chief Strategy Officer and Executive Chairman of our board of directors, and Daniel Griesemer, our President and ChiefExecutive Officer, and we may be unable to retain their services. We also may be unable to retain other existing management personnel that are critical to oursuccess, which could result in harm to our vendor and employee relationships, loss of key information, expertise or know-how and unanticipated recruitmentand training costs. The loss of services of any of our key personnel could have a material adverse effect on our business and prospects, and could be viewedin a negative light by investors and analysts, which could cause our Class A common stock price to decline. None of our employees, except for Mr. Griesemer,have employment agreements and we do not intend to purchase key person life insurance covering any employee. If we lose the services of any of our keypersonnel or we are not able to attract additional qualified personnel, we may not be able to successfully manage our business.If we cannot retain or find qualified employees to meet our staffing needs in our stores, our distribution center, or our corporate offices, ourbusiness could be adversely affected.Our success depends upon the quality of the employees we hire. We seek employees who are motivated, represent our corporate culture and brand imageand, for many positions, have knowledge of our merchandise and the skill necessary to excel in a customer service environment. The turnover rate in the retailindustry is high and finding qualified candidates to fill positions may be difficult. If we cannot attract and retain corporate employees, district managers, storemanagers and store associates with the qualifications we deem necessary, our ability to effectively operate and expand may be adversely affected. In addition,we rely on temporary personnel to staff our distribution center, as well as seasonal part-time employees to provide incremental staffing to our stores in busyselling seasons such as the back-to-school and winter holiday seasons. We cannot guarantee that we will be able to find adequate temporary or seasonalpersonnel to staff our operations when needed, which may strain our existing personnel and negatively impact our operations.Our corporate headquarters, distribution center and management information systems are in a single location in southern California, and if theiroperations are disrupted, we may not be able to operate our store support functions or ship merchandise to our stores, which would adverselyaffect our business.Our corporate headquarters, distribution center and management information systems are in a single location in Irvine, California. If we encounter anydisruptions to our operations at this building or if it were to shut down for any reason, including by fire or other natural disaster, then we may be preventedfrom effectively operating our stores, shipping and processing our merchandise and operating our e-commerce business. Furthermore, the risk of disruption orshut down at this building is greater than it might be if it were located in another region, as southern California is prone to natural disasters such asearthquakes and wildfires. Any disruption or shut down at this location could significantly impact our operations and have a material adverse effect on ourfinancial condition and results of operations.If we fail to open our e-commerce fulfillment center or its opening is delayed, it could adversely affect our business.We expect to open our e-commerce fulfillment center in 2014 to process all our e-commerce orders. If the e-commerce center opening is delayed, we wouldbe unable to achieve the planned cost savings and we would continue to fulfill orders from our existing distribution center, which could increase our costs andhave an adverse effect on our business. Once our e-commerce fulfillment center opens, we will be subject to risks similar to those of our existing facilitiesdescribed above, such as operations disruptions and natural disasters. 19Table of ContentsOur stores are mostly located in the southwestern U.S. and Florida, with a significant number of stores located in California, putting us at risk toregion-specific disruptions.Out of a total of 195 stores as of February 1, 2014, we operated 82 stores in California, 18 stores in Arizona, six stores in Nevada and 19 stores inFlorida. Sales in these states could be more susceptible than the country generally to disruptions, such as from economic and weather conditions, demographicand population changes and changes in fashion tastes, and consequently, we may be more susceptible to these factors than more geographically diversifiedcompetitors. For example, because of the negative economic impact caused by the downturn in the housing market that began several years ago, sales in thesestates may have slowed more than sales would have in other regions or the country as a whole. Compared to the country as a whole, stores in California areexposed to a relatively high risk of damage from a major earthquake or wildfires, while stores in Florida are also exposed to a relatively high risk fromhurricane damage. Any negative impact upon or disruption to the operations of stores in these states could have a material adverse effect on our financialcondition and results of operations.We are required to make significant lease payments for our store leases and corporate offices and warehouses and distribution center, which maystrain our cash flow.We lease all of our retail store locations as well as our corporate headquarters and warehouses and distribution center. We do not own any real estate.Leases for our stores are typically for terms of ten years and many can be extended in five-year increments. Many of our leases have early cancelation clauseswhich permit us to terminate the lease if certain sales thresholds are not met in certain periods of time. Our costs under these leases are a significant amount ofour expenses and are growing rapidly as we expand the number of locations and existing locations experience expense increases. In fiscal year 2013, our totaloperating lease rent expense was $43.4 million and our common area maintenance expense was $17.4 million. This increased from $37.3 million and $14.3million, respectively, in fiscal year 2012 and can be expected to continue to increase as we open more stores. We are required to pay additional rent under manyof our lease agreements based upon achieving certain sales plateaus for each store location. In addition, we must make significant payments for common areamaintenance and real estate taxes. Many of our lease agreements also contain provisions which increase the rent payments on a set time schedule, causing thecash rent paid for a location to escalate over the term of the lease. In addition, rent costs could escalate when multi-year leases are renewed at the expiration oftheir lease term. These costs are significant, recurring and increasing, which places a consistent strain on our cash flow.We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cashflows from operating activities, and sufficient funds are not otherwise available to us from borrowings under our available revolving credit facility or fromother sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or to fund our other liquidityand capital needs, which would harm our business.Additional sites that we lease are likely to be subject to similar long-term leases. If an existing or future store is not profitable, and we decide to close it,we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance ofthe lease term. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us toclose stores in desirable locations. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligationsunder leases for stores that we close, our business, profitability and results of operations may be harmed.We rely on Integrity Retail Distribution and Federal Express to deliver merchandise to our stores located outside of southern California andtherefore our business could be negatively impacted by disruptions in the operations of these third-party providers.We rely on Integrity Retail Distribution to ship our merchandise from our distribution center in Irvine, California to our stores located in northern andcentral California, Arizona and Nevada, and we rely on Federal Express to ship our merchandise to stores in all other states. We also rely on Federal Expressand the U.S. Postal Service to ship all e-commerce sales packages to our customers. Relying on these third-party delivery services puts us at risk fromdisruptions in their operations, such as employee strikes, inclement weather and their ability to meet our shipping demands. If we are forced to use otherdelivery services, our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain terms as favorable asthose received from the transportation providers we currently use, which would further increase our costs. These circumstances may negatively impact ourfinancial condition and results of operations. 20Table of ContentsWe may continue to experience comparable store sales or sales per square foot declines, which may cause our results of operations to decline andthe price of our Class A common stock to be volatile.The investing public may use comparable store sales or net store sales per square foot projections or results, over a certain period of time, such as on aquarterly or yearly basis, as an indicator of our profitability growth. Our comparable store sales have declined in recent periods and can vary significantlyfrom period to period for a variety of reasons, such as the age of stores, changing economic factors, unseasonable weather, changing fashion trends, pricing,the timing of the release of new merchandise and promotional events and increased competition. These factors could cause comparable store sales or net storesales per square foot to decline period to period or fail to grow at expected rates, which could adversely affect our results of operations and cause the price ofour Class A common stock to be volatile during such periods.If our management information systems fail to operate or are unable to support our growth, our operations could be disrupted.We rely upon our management information systems in almost every aspect of our daily business operations. For example, our management informationsystems serve an integral part in enabling us to order merchandise, process merchandise at our distribution center and retail stores, perform and track salestransactions, manage personnel, pay vendors and employees, operate our e-commerce business and report financial and accounting information tomanagement. In addition, we rely on our management information systems to enable us to leverage our costs as we grow. If our management informationsystems fail to operate or are unable to support our growth, our store operations and e-commerce business could be severely disrupted, and we could berequired to make significant additional expenditures to remediate any such failure.Our internal operations, management information systems and databases containing the personal information of our customers could bedisrupted by system security failures or breached by intentional attacks. These disruptions or attacks could negatively impact our sales, increaseour expenses, and harm our reputation and the price of our Class A common stock.Database privacy, network security and identify theft are matters of growing public concern. Hackers, computer programmers and internal users maybe able to penetrate our network security and create system disruptions, cause shutdowns and misappropriate our confidential information or that of thirdparties, including our customers. Therefore, we could incur significant expenses addressing problems created by security breaches to our network. This riskis heightened because we collect and store customer information for marketing purposes, as well as credit card information. We must, and do, takeprecautions to secure customer information and prevent unauthorized access to our database of confidential information. However, if unauthorized parties,including external hackers or computer programmers, gain access to our database, they may be able to steal this confidential information. Our failure to securethis information could result in costly litigation, adverse publicity or regulatory action that could have a material adverse effect on our financial condition andresults of operations. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may containdefects in design or manufacture that could unexpectedly interfere with our operations. The cost to alleviate security risks, defects in software and hardwareand address any problems that occur could negatively impact our sales, distribution and other critical functions, as well as our financial results.If we are unable to protect our intellectual property rights, our financial results may be negatively impacted.Our success depends in large part on our brand image. Our company’s name, logo, domain name and our proprietary brands and our registered andunregistered trademarks and copyrights are valuable assets that serve to differentiate us from our competitors. We currently rely on a combination ofcopyright, trademark, trade dress and unfair competition laws to establish and protect our intellectual property rights. We cannot assure you that the stepstaken by us to protect our proprietary rights will be adequate to prevent infringement of our trademarks and proprietary rights by others, including imitationand misappropriation of our brand. We cannot assure you that 21Table of Contentsobstacles will not arise as we expand our product lines and geographic scope. The unauthorized use or misappropriation of our intellectual property coulddamage our brand identity and the goodwill we created for our company, which could cause our sales to decline. Moreover, litigation may be necessary toprotect or enforce these intellectual property rights, which could result in substantial costs and diversion of our resources, causing a material adverse effect onour business, financial condition, results of operations or cash flows. If we cannot protect our intellectual property rights, our brand identity and the goodwillwe created for our company may diminish, causing our sales to decline.Most of our intellectual property has not been registered outside of the U.S. and we cannot prohibit other companies from using our unregisteredtrademarks in foreign countries. Use of our trademarks in foreign countries could negatively impact our identity in the U.S. and cause our sales to decline.We may be subject to liability if we, or our vendors, infringe upon the intellectual property rights of third parties.We may be subject to liability if we infringe upon the intellectual property rights of third parties. If we were to be found liable for any such infringement,we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could harmour brand image. In addition, any payments we are required to make and any injunction we are required to comply with as a result of such infringementactions could adversely affect our financial results.We purchase merchandise from vendors that may be subject to design copyrights, design patents, or otherwise may incorporate protected intellectualproperty. We are not involved in the manufacture of any of the merchandise we purchase from our vendors for sale to our customers, and we do notindependently investigate whether these vendors legally hold intellectual property rights to merchandise that they are manufacturing or distributing. As a result,we rely upon vendors’ representations set forth in our purchase orders and vendor agreements concerning their right to sell us the products that we purchasefrom them. If a third party claims to have licensing rights with respect to merchandise we purchased from a vendor, or we acquire unlicensed merchandise, wecould be obligated to remove such merchandise from our stores, incur costs associated with destruction of such merchandise if the distributor or vendor isunwilling or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royaltiesand other damages and injunctions. Although our purchase orders and vendor agreement with each vendor require the vendor to indemnify us against suchclaims, a vendor may not have the financial resources to defend itself or us against such claims, in which case we may have to pay the costs and expensesassociated with defending such claim. Any of these results could harm our brand image and have a material adverse effect on our business and growth.Our founders control a majority of the voting power of our common stock, which may prevent other stockholders from influencing corporatedecisions and may result in conflicts of interest that cause the price of our Class A common stock to decline.Our common stock consists of two classes: Class A and Class B. Holders of Class A common stock are entitled to one vote per share, and holders ofClass B common stock are entitled to 10 votes per share, on all matters to be voted on by our common stockholders. All of the shares of Class B commonstock are beneficially owned by Hezy Shaked, Tilly Levine and their children through related trusts, which we refer to as the Shaked and Levine familyentities. As of February 1, 2014, the Shaked and Levine family entities controlled approximately 94% of the total voting power of our outstanding commonstock. In addition, Mr. Shaked serves as Executive Chairman of the Board of Directors, and is the voting trustee, pursuant to a voting trust agreement,covering the shares owned by Ms. Levine. As a result, Mr. Shaked is in a position to dictate the outcome of any corporate actions requiring stockholderapproval, including the election of directors and mergers, acquisitions and other significant corporate transactions. Mr. Shaked may delay or prevent a changeof control from occurring, even if the change of control could appear to benefit the stockholders. Mr. Shaked may also have interests that differ from yoursand may vote in a way with which you disagree and which may be adverse to your interests. This ownership concentration may adversely impact the tradingof our Class A common stock because of a perceived conflict of interest that may exist, thereby depressing the value of our Class A common stock. 22Table of ContentsWe have entered into tax indemnification agreements with our existing shareholders and could become obligated to make payments to them forany additional federal, state or local income taxes assessed against them for fiscal periods prior to the completion of our initial public offering inMay 2012.World of Jeans & Tops historically was treated as an “S” Corporation for U.S. federal income tax purposes. Effective upon completion of theReorganization Transaction, World of Jeans & Tops’ “S” Corporation status terminated and it thereafter became subject to federal income taxes and increasedstate income taxes. In the event of an adjustment to World of Jeans & Tops’ reported taxable income for a period or periods prior to termination of its “S”Corporation status, its shareholders during those periods could be liable for additional income taxes for those prior periods. Therefore, we entered into taxindemnification agreements with the former shareholders of World of Jeans & Tops prior to the Reorganization Transaction. Pursuant to the taxindemnification agreements, we agreed to indemnify, defend and hold harmless each such shareholder on an after-tax basis against additional income taxes,plus interest and penalties resulting from adjustments made, as a result of a final determination made by a competent tax authority, to the taxable incomeWorld of Jeans & Tops reported as an “S” Corporation. Such indemnification also includes any losses, costs or expenses, including reasonable attorneys’fees, arising out of a claim for such tax liability.War, terrorism, civil unrest or other violence could negatively affect our business.All of our stores are located in public areas where large numbers of people typically gather. Terrorist attacks, threats of terrorist attacks or civil unrestinvolving public areas could cause people not to visit areas where our stores are located. Further, armed conflicts or acts of war throughout the world maycreate uncertainty, causing consumers to spend less on discretionary purchases, including on apparel and accessories, and disrupting our ability to obtainmerchandise for our stores. Such decreases in consumer spending or disruptions in our ability to obtain merchandise would likely decrease our sales andmaterially adversely affect our financial condition and results of operations. Other types of violence, such as shootings in malls or in public areas, could leadto lower customer traffic in shopping malls or centers in which we operate stores. In addition, local authorities or management from the mall or shopping centercould close the mall or shopping center in response to security concerns. Such closures, as well as lower customer traffic due to security concerns, could resultin decreased sales.Litigation costs and the outcome of litigation could have a material adverse effect on our business.From time to time we may be subject to litigation claims through the ordinary course of our business operations regarding, but not limited to,employment matters, compliance with the Americans with Disabilities Act of 1990, apparel, footwear and accessory safety standards, security of customerand employee personal information, contractual relations with vendors, marketing and infringement of trademarks and other intellectual property rights.Litigation to defend ourselves against claims by third parties, or to enforce any rights that we may have against third parties, may be necessary, which couldresult in substantial costs and diversion of our resources, causing a material adverse effect on our business, financial condition, results of operations or cashflows.Management does not believe the nature of any pending legal proceeding will have a material adverse effect on our financial condition and results ofoperations. However, management’s assessment may change at any time based upon the discovery of facts or circumstances that are presently not known tous. Therefore, there can be no assurance that any pending or future litigation will not have a material adverse effect on our financial condition and results ofoperations.We may be subject to unionization, work stoppages, slowdowns or increased labor costs.Currently, none of our employees are represented by a union. However, our employees have the right under the National Labor Relations Act to form oraffiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly differentfrom our current compensation arrangements, it could increase our costs and adversely impact our profitability. Moreover, participation in labor unions couldput us at increased risk of labor strikes and disruption of our operations. 23Table of ContentsViolations of and/or changes in laws, including employment laws and laws related to our merchandise, could make conducting our business moreexpensive or change the way we do business.We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection and zoning andoccupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of storesand warehouse facilities. If these regulations were violated by our management, employees or vendors, the costs of certain goods could increase, or we couldexperience delays in shipments of our goods, be subject to fines or penalties or suffer reputational harm, which could reduce demand for our merchandise andhurt our business and results of operations.Similarly, changes in laws could make operating our business more expensive or require us to change the way we do business. For example, changes inlaws related to employee healthcare, hours, wages, job classification and benefits could significantly increase operating costs. In March 2010, the PatientProtection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act of 2010, or, collectively, the Act, was signed into law. TheAct includes a number of health care provisions taking effect over several years, including expanded dependent coverage, incentives for business to providehealth care benefits, a prohibition on denial of coverage and denial of claims on pre-existing conditions, a prohibition on limiting essential benefits, and otherexpansion of health care benefits and coverage. Some of the associated taxes and fees, as well as certain health care changes required by these acts, are expectedto result in increased health care costs for us. The costs of such legislation may adversely impact our results of operations.In addition, changes in product safety or other consumer protection laws could lead to increased costs for certain merchandise, or additional labor costsassociated with readying merchandise for sale. It may be difficult for us to foresee regulatory changes impacting our business and our actions needed torespond to changes in the law could be costly and may negatively impact our operations.As a result of our being a publicly traded company, our costs have increased and our management is required to devote substantial time tocomplying with public company regulations.In May 2012, we completed an initial public offering. As a result, we incur additional legal, accounting, compliance and other expenses that we did notincur as a private company. We are obligated to file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended. We are also subjectto other reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange, or NYSE, and certain provisionsof the Sarbanes-Oxley Act of 2002, or SOX, and the regulations promulgated thereunder, which impose significant compliance obligations on us.SOX, as well as rules subsequently implemented by the SEC and NYSE, have imposed increased regulation and disclosure and have requiredenhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and standards result in increasedadministrative expenses and a diversion of management’s time and attention from revenue-generating activities. In addition, if we fail to implement or maintainthe requirements with respect to our internal accounting and audit functions, our ability to continue to report our operating results on a timely and accuratebasis could be impaired and we could be subject to sanctions or investigation by regulatory authorities, such as the SEC or NYSE. Any such action couldharm our reputation and the confidence of investors and customers in our company and could materially adversely affect our business and cause the price ofour Class A common stock to decline.Required disclosures regarding conflict minerals could have a negative impact on our results of operations.Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of certainminerals (tantalum, tin, gold and tungsten) known as conflict minerals, which are mined in the Democratic Republic of the Congo and adjoining countries, aswell as procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. These newrequirements will require due diligence efforts, with initial disclosure requirements effective in May 2014. There may be costs associated with complying withthe disclosure requirements, such as costs related to determining the source of such minerals used in certain of our merchandise, as well as costs of possiblechanges to products, processes or sources of supply as a consequence of such verification activities. We may also face reputational challenges if we are unableto verify the origins for any or all minerals used in our merchandise, or if we are unable to certify that our products are “conflict free”. 24Table of ContentsOur failure to maintain adequate internal controls over our financial and management systems may cause errors in our financial reporting.These errors may cause a loss of investor confidence and result in a decline in the price of our Class A common stock.Our public company reporting obligations and our anticipated growth will likely strain our financial and management systems, internal controls andour employees. In addition, pursuant to Section 404 of SOX, and the Jumpstart Our Business Startups Act, or JOBS Act, we are required to provide annuallyan assessment of the effectiveness of our internal controls over financial reporting and, starting with the year after we are no longer an “emerging growthcompany” as defined in the JOBS Act, our independent registered public accounting firm will be required to provide an attestation on our assessment of ourinternal controls over financial reporting.The process required to comply with Section 404 of SOX is time consuming and costly. If during this process we identify one or more materialweaknesses in our internal controls, it is possible that our management may not be able to certify that our internal controls are effective by the certificationdeadline.Moreover, if we identify any material weaknesses or significant deficiencies in our internal controls we will have to implement appropriate changes tothese controls, which may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting,legal and other personnel, entail substantial costs to modify our existing accounting systems and take a significant period of time to complete. Such changesmay not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability toproduce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business.Effective internal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to satisfy therequirements of Section 404 on a timely basis could result in us being subject to regulatory action and a loss of investor confidence in the reliability of ourfinancial statements, both of which in turn could cause the market value of our Class A common stock to decline.Prior to our initial public offering, we were treated as an “S” Corporation under Subchapter S of the Internal Revenue Code, and claims oftaxing authorities related to its prior status as an “S” Corporation could harm us.Concurrent with and as a result of the Reorganization Transaction, our “S” Corporation status terminated and we are now treated as a “C” Corporationfor federal and applicable state income tax purposes. As a “C” Corporation, we are subject to increased federal and state income taxes. In addition, if theunaudited, open tax years in which we were an “S” Corporation are audited by the Internal Revenue Service, and we are determined not to have qualified for,or to have violated, our “S” Corporation status, we will be obligated to pay back taxes, interest and penalties, and the company will not have the right toreclaim tax distributions it made to its shareholders during those periods. These amounts could include taxes on all of our taxable income while we were an “S”Corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our results of operations and financialcondition.The terms of our credit facility impose operating and financial restrictions on us that may impair our ability to respond to changing business andeconomic conditions.On March 17, 2014, we amended our credit agreement with Wells Fargo Bank, National Association (the “Amended Credit Agreement”). The AmendedCredit Agreement amended our prior credit agreement, and among other things, eliminated certain financial covenants and added other financial covenants.The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on indebtedness; limitations on consolidations,mergers and sales of assets; and limitations on transactions with affiliates. The Amended Credit Agreement also contains financial covenants setting forthrequirements for certain levels of liquidity and profitability. These limitations and covenants may restrict our ability to respond to changing business andeconomic conditions, and may therefore have a material adverse effect on our business. Although we do not currently have any outstanding borrowings underthe Amended Credit Agreement, we may in the future. If we are unable to meet these limitations and covenants, we may be in default under the Amended CreditAgreement, which could also have a material adverse effect on our business. 25Table of ContentsWe may engage in strategic transactions that could negatively impact our liquidity, increase our expenses and present significant distractions toour management.We may consider strategic transactions and business arrangements, including, but not limited to, acquisitions, asset purchases, partnerships, jointventures, restructurings, divestitures and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our nearand long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations andfinancial results.Our e-commerce business subjects us to numerous risks that could have an adverse effect on our results of operations.For fiscal year 2013, net sales from our e-commerce business increased 9% over the previous year and represented approximately 12% of our total netsales. Our e-commerce business and its continued growth subject us to certain risks that could have an adverse effect on our results of operations, including: • diversion of traffic from our stores; • liability for online content; • government regulation of the Internet; and • risks related to the computer systems that operate our website and related support systems, including computer viruses, electronic break-ins andsimilar disruptions.Changes to accounting rules or regulations could significantly affect our financial results.Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, orGAAP. New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changesto accounting rules or regulations, such as changes to lease accounting guidance or a requirement to convert to international financial reporting standards,could negatively affect our results of operations and financial condition through increased cost of compliance. For example, the Financial AccountingStandards Board, or FASB, recently issued a proposed update on lease accounting that would require entities to recognize assets and liabilities arising fromlease contracts on our balance sheet. We cannot presently determine the potential impact the proposed standard will have on our results of operations. While webelieve that the proposed standard, as currently drafted, likely will have a material impact on our timing and recognition of rent expense, we do not believe thestandard will have a material impact on our liquidity. The actual impact of the proposed standard, including the cost of complying with such standard, willnot be known until it is finalized.We may incur substantial expenses related to our issuance of stock-based compensation, which may have a negative impact on our operatingresults for future periods.We follow the provisions of FASB Accounting Standards Codification, or ASC, 718, Compensation-Stock Compensation, for stock-basedcompensation. Our stock-based compensation expenses may be significant in future periods, which could have an adverse impact on our operating and netincome. FASB ASC 718 requires the use of subjective assumptions, including the options’ expected lives and the price volatility of our Class A commonstock. Changes in the subjective input assumptions can materially affect the amount of our stock-based compensation expense. In addition, an increase in thecompetitiveness of the market for qualified employees could result in an increased use of stock-based compensation awards, which in turn would result inincreased stock-based compensation expense in future periods.Risks Related to Ownership of Our Class A Common StockWe are a controlled company within the meaning of the NYSE rules, and, as a result, we may rely on exemptions from certain corporategovernance requirements that provide protection to stockholders of other companies.Mr. Shaked controls more than 50% of the total voting power of our common stock and we are considered a controlled company under the NYSEcorporate governance listing standards. As a controlled company, certain exemptions under the NYSE listing standards will exempt us from the obligation tocomply with certain NYSE corporate governance requirements, including the requirements: 26Table of Contents • that a majority of our board of directors consist of independent directors, as defined under the rules of the NYSE; • that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressingthe committee’s purpose and responsibilities; and • that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’spurpose and responsibilities.Although we intend to comply with these listing requirements even though we are a controlled company, there is no guarantee that we will not takeadvantage of these exemptions in the future. Accordingly, so long as we are a controlled company, holders of our Class A common stock may not have thesame protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.If securities or industry analysts publish inaccurate or unfavorable research about our business, the price and trading volume of our Class Acommon stock could decline.The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us orour business. If one or more of the analysts who covers us downgrades our Class A common stock or publishes inaccurate or unfavorable research about ourbusiness, the price of our Class A common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on usregularly, demand for our Class A common stock could decrease, which could cause the price of our Class A common stock and trading volume to decline.Financial forecasting by us and financial analysts who may publish estimates of our performance may differ materially from actual results.Given the dynamic nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of ourrevenues, comparable sales, margins, net income and other financial and operating forecasts may differ materially from actual results. Such discrepanciescould cause a decline in the trading price of our Class A common stock.We have a small public float and this may result in price swings in our Class A common stock or make it difficult to acquire or dispose of ourClass A common stock.As of February 1, 2014, we had 11,370,639 publicly traded shares of Class A common stock outstanding. This small public float can result in largeswings in our stock price with relatively low trading volume. In addition, a purchaser that seeks to acquire a significant number of shares may be unable to doso without increasing our common stock price, and conversely, a seller that seeks to dispose of a significant number of shares may experience a decreasingstock price.The price of our Class A common stock has been, and may continue to be volatile and may decline in value.The market for retail apparel stocks can be highly volatile. As a result, the market price of our Class A common stock is likely to be volatile andinvestors may experience a decrease in the value of the Class A common stock, unrelated to our operations. The price of our Class A common stock has, andcould in the future, fluctuate significantly in response to a number of factors, as discussed in this “Risk Factors” section.Further, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type oflitigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments tosatisfy judgments or to settle litigation. The threat or filing of class action litigation lawsuits could cause the price of our Class A common stock to decline. 27Table of ContentsFuture sales of our common stock by us or by existing stockholders could cause the price of our Class A common stock to decline.Any sales of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, may cause themarket price for our Class A common stock to decline. As of February 1, 2014, we had 11,370,639 publicly traded shares of Class A common stock,excluding 2,356,790 shares of Class A common stock issuable upon the exercise of outstanding stock options, and 16,642,366 shares of Class B commonstock outstanding. All of these shares, other than the 16,642,366 shares of Class B common stock held by the Shaked and Levine family entities, are freelytradable without restriction under the Securities Act of 1933, as amended, or Securities Act. The shares held by the Shaked and Levine family entities and ourdirectors, officers and other affiliates are restricted securities under the Securities Act, and may not be sold in the public market unless the sale is registeredunder the Securities Act or an exemption from registration is available.Our corporate organizational documents and Delaware law have anti-takeover provisions that may inhibit or prohibit a takeover of us and thereplacement or removal of our management.In addition to the concentration of ownership and voting power in the Shaked and Levine family entities, the anti-takeover provisions under Delawarelaw, as well as the provisions contained in our corporate organizational documents, may make an acquisition of us more difficult.For example: • our certificate of incorporation includes a provision authorizing our board of directors to issue blank check preferred stock without stockholderapproval, which, if issued, would increase the number of outstanding shares of our capital stock and make it more difficult for a stockholder toacquire us; • our certificate of incorporation provides that if all shares of our Class B common stock are converted into Class A common stock or otherwisecease to be outstanding, our board of directors will be divided into three classes in the manner provided by our certificate of incorporation. Afterthe directors in each class serve for the initial terms provided in our certificate of incorporation, each class will serve for a staggered three-yearterm; • our certificate of incorporation permits removal of a director only for cause by the affirmative vote of the holders of a majority of the voting powerof the company once the board of directors is divided into three classes and provides that director vacancies can only be filled by an affirmativevote of a majority of directors then in office; • our amended and restated bylaws require advance notice of stockholder proposals and director nominations; and • Section 203 of the Delaware General Corporation Law may prevent large stockholders from completing a merger or acquisition of us.These provisions may prevent a merger or acquisition of us which could limit the price investors would pay for our common stock in the future.Our amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types ofactions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forumfor disputes with us or our directors, officers or other employees.Our amended and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware willbe the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary dutyowed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DelawareGeneral Corporation Law, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person purchasing or otherwise acquiringany interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated bylaws.This choice-of-forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for 28Table of Contentsdisputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of ouramended and restated bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incuradditional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.We do not intend to pay cash dividends on our common stock, which may make our Class A common stock less desirable to investors and decreaseits value.We intend to retain all of our earnings to finance our operations and growth and do not anticipate paying any cash dividends on our common stock forthe foreseeable future. Therefore, you may only receive a return on your investment in our Class A common stock if the market price increases above the priceat which you purchased it, which may never occur. Item 1B.Unresolved Staff CommentsNone. Item 2.PropertiesWe lease approximately 172,000 square feet for our corporate headquarters and retail support and distribution center located at 10 Whatney and 12Whatney, Irvine, California. Our lease began on January 1, 2003. We have exercised the first of three five-year renewal options on this lease. Upon exercisingthe first renewal option, the lease now terminates on December 31, 2017.We lease approximately 24,000 square feet of office and warehouse space located at 15 Chrysler, Irvine, California. Our lease began on November 1,2010 and terminates on October 31, 2014. Approximately 17,000 square feet of this building is subleased to a third party and we use the remaining space. Thesublease terminates on May 31, 2014.We lease approximately 26,000 square feet of office and warehouse space located at 11 Whatney, Irvine, California. The lease began on September 2,2011 and terminates on June 30, 2022.We lease approximately 81,000 square feet of office and warehouse space located at 17 Pasteur, Irvine, California. The lease began on November 1,2011 and terminates on October 31, 2021. We expect to use this property as our e-commerce fulfillment center beginning in the second quarter of fiscal 2014.All of our stores, encompassing approximately 1.5 million total square feet as of February 1, 2014, are occupied under operating leases. The store leasesgenerally have a base lease term of 10 years and many have renewal option periods, and we are generally responsible for payment of property taxes andutilities, common area maintenance and mall marketing fees. Item 3.Legal ProceedingsFrom time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. Management is currently unableto predict the ultimate outcome of any litigation or claim, determine whether a liability has been incurred or make an estimate of the reasonably possibleliability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pendinglitigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim towhich we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have amaterial adverse effect on our financial condition or results of operations. See Item 1A “Risk Factors—Litigation costs and the outcome of litigation could havea material adverse effect on our business” included in this report. 29Table of ContentsKristin Christiansen and Shellie Smith, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, Superior Court ofCalifornia, County of Sacramento, Case No. 34-2013-00139010. On January 29, 2013, the plaintiffs in this matter filed a lawsuit against us allegingviolations of California Civil Code Section 1747.08 which prohibits requesting or requiring personal identification information from a customer paying forgoods with a credit card and recording such information, subject to exceptions. In June 2013, the Court granted our motion to strike provisions of theplaintiff’s complaint and granted plaintiff’s leave to extend. Plaintiffs have amended the complaint and discovery is in the early stages. The complaint seekscertification of a class, unspecified damages, injunctive relief and attorneys’ fees. We intend to defend this case vigorously.Maria Rebolledo, individually and on behalf of all others similarly situated and on behalf of the general public vs. Tilly’s, Inc.; World of Jeans &Tops, Superior Court of the State of California, County of Orange, Case No. 30-2012-00616290-CU-OE-CXC. On December 5, 2012, the plaintiff inthis matter filed a putative class action lawsuit against us alleging violations of California’s wage and hour, meal break and rest break rules and regulations,and unfair competition law, among other things. An amended complaint was filed on February 28, 2013, to include enforcement of California’s privateattorney general act. The complaint seeks an unspecified amount of damages and penalties. In April 2013, we filed a motion to compel arbitration, which wasdenied in May 2013. We have appealed the denial of the motion to compel arbitration. We intend to defend this case vigorously. Item 4.Mine Safety DisclosuresNot applicable. 30Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur Class A common stock has been listed on the New York Stock Exchange under the symbol “TLYS” since May 4, 2012, the day after our initialpublic offering. The following table sets forth the high and low sales prices of our Class A common stock, as reported by the NYSE, for each quarterly periodsince our initial public offering: High Low Fiscal 2013 quarter ended: February 1, 2014 $15.95 $10.59 November 2, 2013 15.80 12.44 August 3, 2013 17.35 14.52 May 4, 2013 15.44 12.00 Fiscal 2012 quarter ended: February 2, 2013 $17.15 $12.36 October 27, 2012 19.57 15.41 July 28, 2012 (commencing May 4, 2012) 19.29 13.70 As of March 22, 2014, we had approximately 12 stockholders of record, eight of whom were holders of our Class A common stock and four of whomwere holders of our Class B common stock. The number of stockholders of record is based upon the actual number of stockholders registered at such dateand does not include holders of shares in “street names” or persons, partnerships, associates, corporations or other entities identified in security positionlistings maintained by depositories.DividendsOur Class A common stock began trading on May 4, 2012, following our initial public offering. Since that time, we have not declared any cashdividends, and we do not anticipate declaring any cash dividends in the foreseeable future.Prior to our initial public offering, as an “S” Corporation, we distributed annually to our shareholders amounts sufficient to cover their tax liabilities,due to the income that flowed through the shareholders’ tax returns. Additional amounts were distributed from time to time to our shareholders at the discretionof the board of directors. During fiscal year 2012, we paid distributions of $84.3 million to our shareholders, which included a final distribution (resultingfrom the termination of our “S” Corporation status) of 100% of our undistributed taxable income from the date of our formation through May 2, 2012.Securities Authorized for Issuance Under Equity Compensation PlansThe information required by this Item is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting ofStockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 1, 2014.Stock Performance GraphThe graph set forth below compares the cumulative stockholder return on our Class A common stock between May 4, 2012 (the day after our initialpublic offering) and February 1, 2014 to the cumulative return of (i) the S&P Midcap 400 Index and (ii) the S&P 400 Apparel Retail Index over the sameperiod. This graph assumes an initial investment of $100 on May 4, 2012 in our Class A common stock, the S&P Midcap 400 Index and the S&P 400Apparel Retail Index and assumes the reinvestment of dividends, if any. The graph also assumes that the initial prices of our Class A common stock, theS&P Midcap 400 Index and the S&P 400 Apparel Retail Index on May 4, 2012 were the closing prices on that trading day. 31Table of Contents Recent Sales of Unregistered SecuritiesWe did not sell any unregistered equity securities or purchase any of our securities during the fiscal year ended February 1, 2014. Item 6.Selected Financial DataThe following tables present selected consolidated financial and other data as of and for the periods indicated, and certain unaudited pro formainformation to reflect our conversion during fiscal year 2012 from an “S” Corporation to a “C” Corporation for income tax purposes. The selected consolidatedstatement of income data for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 and selected consolidated balance sheet data asof February 1, 2014 and February 2, 2013 are derived from our consolidated financial statements audited by Deloitte & Touche LLP, our independentregistered public accounting firm, included in Item 8 of this report. The selected consolidated statement of income data for the fiscal years ended January 29,2011 and January 30, 2010 and the selected consolidated balance sheet data as of January 28, 2012, January 29, 2011 and January 30, 2010 are derived fromour audited consolidated financial statements that have not been included elsewhere in this report. The historical results presented below are not necessarilyindicative of the results to be expected for any future period. You should read this selected consolidated financial data in conjunction with the consolidatedfinancial statements and accompanying notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” appearing elsewhere in this report. 32Table of Contents Fiscal Year Ended (1) February 1, February 2, January 28, January 29, January 30, 2014 2013 2012 2011 2010 (in thousands, except per share data) Consolidated Statements of Income Data: Net sales $495,837 $467,291 $400,624 $332,604 $282,764 Cost of goods sold (2) 343,542 317,096 271,482 229,989 195,430 Gross profit 152,295 150,195 129,142 102,615 87,334 Selling, general and administrative expenses 122,558 118,805 94,217 77,668 65,912 Operating income 29,737 31,390 34,925 24,947 21,422 Interest expense, net 9 91 196 249 284 Income before income taxes 29,728 31,299 34,729 24,698 21,138 Income tax expense 11,591 7,406 389 282 275 Net income $18,137 $23,893 $34,340 $24,416 $20,863 Basic earnings per share of Class A and Class B common stock $0.65 $0.93 $1.72 $1.22 $1.04 Diluted earnings per share of Class A and Class B common stock $0.65 $0.92 $1.68 $1.21 $1.04 Weighted average basic shares outstanding 27,822 25,656 20,000 20,000 20,000 Weighted average diluted shares outstanding 28,116 26,076 20,500 20,098 20,014 Pro Forma Income Information (3): Pro forma income tax expense $12,520 $13,892 $9,879 $8,455 Pro forma net income 18,779 20,837 14,819 12,683 Pro forma basic earnings per share of Class A and Class B common stock $0.73 $1.04 $0.74 $0.63 Pro forma diluted earnings per share of Class A and Class B common stock $0.72 $1.02 $0.74 $0.63 Fiscal Year Ended February 1, February 2, January 28, January 29, January 30, 2014 2013 2012 2011 2010 Operating Data (unaudited): Stores operating at beginning of period 168 140 125 111 99 Stores opened during the period 28 29 16 16 13 Stores closed during the period 1 1 1 2 1 Stores operating at end of period 195 168 140 125 111 Comparable store sales change (4) -1.9% 2.2% 10.7% 6.7% -3.1% Total square feet at end of period 1,513,138 1,318,803 1,094,419 967,011 862,971 Average square footage per store at end of period 7,760 7,850 7,817 7,736 7,775 Average net sales per store (in thousands) (5) $2,396 $2,676 $2,718 $2,528 $2,479 Average net store sales per square foot (5) $307 $341 $350 $326 $318 Capital expenditures (in thousands) $42,701 $33,298 $20,223 $15,674 $17,514 33Table of Contents As of February 1, February 2, January 28, January 29 January 30 2014 2013 2012 2011 2010 (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities $60,355 $57,182 $25,091 $29,338 $25,705 Working capital 80,710 73,891 27,673 33,907 29,639 Total assets 232,407 205,381 140,819 130,974 115,454 Total long-term debt (6) 3,258 3,970 4,638 5,266 5,857 Stockholders’ equity 140,923 117,296 60,424 62,092 59,896 (1)The fiscal years ended February 1, 2014, January 28, 2012, January 29, 2011 and January 30, 2010 each included 52 weeks. The fiscal year endedFebruary 2, 2013 included 53 weeks.(2)Includes buying, distribution and occupancy costs.(3)The unaudited pro forma income statement for all years presented gives effect to an adjustment for income tax expense as if we had been a “C”Corporation for all years presented at an assumed combined federal, state and local effective income tax rate, which approximates our statutory incometax rate, of 40%.(4)Comparable store sales are net sales from stores that have been open at least 12 full fiscal months as of the end of the current reporting period. Aremodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store was not changedby more than 20% and the store was not closed for more than five days in any fiscal month. Comparable store sales include sales through our e-commerce store but exclude gift card breakage income and e-commerce shipping and handling fee revenue. E-commerce sales contributed 1.8%, 2.1%,2.3%, 3.3% and 2.9% to the comparable store sales change for fiscal years 2013, 2012, 2011, 2010 and 2009, respectively. The comparable store saleschange for the period ended February 2, 2013 excludes the 53rd week in fiscal year 2012.(5)The number of stores and the amount of square footage reflect the number of days during the period that new stores were open. E-commerce sales, e-commerce shipping revenue, and gift card breakage income are excluded from our sales in deriving net sales per store.(6)Comprised solely of a capital lease for our corporate headquarters and distribution center. 34Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion in conjunction with the consolidated financial statements and the accompanying notes and theinformation contained in other sections of this report, particularly under the headings “Risk Factors”, “Selected Consolidated Financial Data” and“Business”. This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currentlyavailable to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity andcapital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-LookingStatements”. These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors”. Ouractual results could differ materially from those suggested or implied by any forward-looking statements.We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period endingon the Saturday closest to January 31 of the following year. References to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year endedFebruary 1, 2014, references to “fiscal year 2012” or “fiscal 2012” refer to the fiscal year ended February 2, 2013 and references to “fiscal year2011” or “fiscal 2011” refer to the fiscal year ended January 28, 2012. Fiscal years 2013 and 2011 each consisted of a 52-week period, and fiscalyear 2012 consisted of a 53-week period.OverviewTilly’s is a fast-growing destination specialty retailer of West Coast and action sports inspired apparel, footwear and accessories. We believe we bringtogether an unparalleled selection of the most sought-after brands rooted in action sports, music, art and fashion. Our West Coast heritage dates back to 1982when Hezy Shaked and Tilly Levine opened our first store in Orange County, California. As of February 1, 2014, we operated 195 stores in 32 states,averaging approximately 7,760 square feet. We also sell our products through our e-commerce website, www.tillys.com.We increased net sales 6%, to $495.8 million in fiscal year 2013 from $467.3 million in fiscal year 2012 as we opened 27 net new stores and expandedour presence in both existing and new markets. Operating income decreased 5%, to $29.7 million in fiscal year 2013 from $31.4 million in fiscal year 2012,primarily due to a decline in our comparable store sales and a $1.8 million store asset impairment charge in the fourth quarter of fiscal 2013. Our comparablestore sales decreased 1.9% in fiscal year 2013 after a 2.2% increase in fiscal year 2012.We believe there is a significant opportunity to grow our national footprint from the 195 store locations as of February 1, 2014 to more than 500 storesover time. We plan to add a total of at least 18 net new stores in fiscal year 2014, including approximately 30% of those stores under our new outlet format inselect outlet centers. We expect to fund our continued store expansion through our cash from operations. We believe our success operating in different retailvenues and geographies demonstrates the portability of Tilly’s and provides us with flexibility for future expansion.We believe e-commerce will be an important component of future sales growth and believe e-commerce could represent significantly more of our totalsales than we previously anticipated. Over the past several years we have expanded our website connection with third-party brands, developed e-commerceapplications for mobile and tablet devices and enhanced the integration of e-commerce and store operations and fulfillment. We expect to place greater emphasison enhancing and growing this digital platform, including improving a variety of key digital channels to give our customers seamless access and increasedease of shopping. We also intend to continue our catalog and online marketing efforts, offering a wider selection of Internet-exclusive merchandise andexpanding our online selection. In addition, we believe our new automated e-commerce fulfillment center will become operational in the second quarter of 2014and will allow us to more efficiently fulfill e-commerce orders and support the growth of the e-commerce business.Over the last six years, we have invested approximately $44 million in infrastructure and systems to support our recent and long-term growth. Webelieve our distribution and allocation capabilities are unique within the industry and allow us to quickly sort and process merchandise and deliver it to ourstores in a floor-ready format for immediate display. We believe our distribution and new e-commerce fulfillment infrastructure can support a national retail 35Table of Contentsfootprint of at least 500 stores and significant growth of our online sales with minimal incremental capital investment. In addition, we anticipate spendingapproximately $3 million to complete our new e-commerce fulfillment center in fiscal 2014.We believe our business strategy will continue to offer significant opportunity, but it also presents risks and challenges. These risks and challengesinclude, but are not limited to, that we may not be able to effectively identify and respond to changing fashion trends and customer preferences, that we maynot be able to find desirable locations for new stores and that we may not be able to effectively manage our future growth. In addition, our financial results canbe expected to be directly impacted by trends in the general economy. A decline in consumer spending or a substantial increase in product costs due tocommodity cost increases or general inflation could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed onto consumers and the competitive environment could become more highly promotional. See “Risk Factors” for other important factors that could adverselyimpact us and our results of operations. We strive to ensure that addressing these risks does not divert our attention from continuing to build on the strengthsthat we believe have driven the growth of our business.How We Assess the Performance of Our BusinessIn assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financialcondition and operating performance of our business are net sales, comparable store sales, gross profit, selling, general and administrative expenses andoperating income.Net SalesNet sales reflect revenue from the sale of our merchandise at store locations as well as sales of merchandise through our e-commerce store, which isreflected in sales when the merchandise is received by the customer. Net sales also include shipping and handling fees for e-commerce shipments that havebeen delivered to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns expected in the future stemming fromcurrent period sales. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are used to purchase merchandise.However, over time, the redemption of some gift cards becomes remote (referred to as gift card breakage). Revenue from estimated gift card breakage is alsoincluded in net sales.Our business is seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected bya number of factors including the timing of holidays and weather patterns. The third and fourth quarters of the fiscal year, which include the back-to-schooland holiday sales seasons, have historically produced stronger sales and disproportionately stronger operating results than have the first two quarters of thefiscal year.Comparable Store SalesComparable store sales are net sales from stores that have been open at least 12 full fiscal months as of the end of the current reporting period. Aremodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store was not changed bymore than 20% and the store was not closed for more than five days in any fiscal month. Comparable store sales include sales through our e-commerce store,but exclude gift card breakage income and e-commerce shipping and handling fee revenue. Some of our competitors and other retailers may calculatecomparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable store sales may not be comparable to similardata made available by other retailers.Measuring the change in year-over-year comparable store sales allows us to evaluate how our store base is performing. Numerous factors affect ourcomparable store sales, including: • overall economic trends; • our ability to identify and respond effectively to consumer preferences and fashion trends; • competition; • the timing of our releases of new and seasonal styles; 36Table of Contents • changes in our product mix; • pricing; • the level of customer service that we provide in stores; • our ability to source and distribute products efficiently; • calendar shifts of holiday or seasonal periods; • the number and timing of store openings and the relative proportion of new stores to mature stores; and • the timing and success of promotional and advertising efforts.Opening new stores is an important part of our growth strategy and we expect a significant percentage of our net sales during this growth period to comefrom non-comparable store sales. Accordingly, comparable store sales are only one element we use to assess the success of our business.Gross ProfitGross profit is equal to our net sales less our cost of goods sold. Cost of goods sold reflects the direct cost of purchased merchandise as well as buying,distribution and occupancy costs. Buying costs include compensation expense for our internal buying organization. Distribution costs include costs forreceiving, processing, warehousing and shipping of merchandise to or from our distribution center, to our e-commerce customers and between store locations.Occupancy costs include the rent, common area maintenance, utilities, property taxes, security, and depreciation costs of all store locations. These costs aresignificant and can be expected to continue to increase as our company grows. The components of our reported cost of goods sold may not be comparable tothose of other retail companies.We regularly analyze the components of gross profit as well as gross profit as a percentage of net sales. Specifically we look at the initial markup onpurchases, markdowns and reserves, shrinkage, buying costs, distribution costs and occupancy costs. Any inability to obtain acceptable levels of initialmarkups, a significant increase in our use of markdowns or a significant increase in inventory shrinkage or inability to generate sufficient sales leverage onthe buying, distribution and occupancy components of cost of goods sold could have an adverse impact on our gross profit and results of operations.Gross profit is also impacted by shifts in the proportion of sales of proprietary branded products compared to third-party branded products, as well asby sales mix shifts within and between brands and between major product categories such as guys’ and juniors’ apparel, footwear or accessories. Asubstantial shift in the mix of products could have a material impact on our results of operations. In addition, gross profit and gross profit as a percent ofsales have historically been higher in the third and fourth quarters of the fiscal year, as these periods include the back-to-school and winter holiday sellingseasons. This reflects that various costs, including occupancy costs, generally do not increase in proportion to the seasonal sales increase.Selling, General and Administrative ExpensesOur selling, general and administrative, or SG&A, expenses are composed of store selling expenses and corporate-level general and administrativeexpenses. Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-commerce processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functions such asexecutive management, legal, accounting, information systems, human resources and other centralized services. Store selling expenses generally varyproportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to net sales and storegrowth, but will be expected to increase over time to support the needs of our growing company. SG&A expenses as a percentage of net sales are usually higherin lower volume periods and lower in higher volume periods.The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in futureperiods due to our continuing store growth and in part due to additional legal, accounting, insurance and other expenses we incur as a result of being a publiccompany. Among other things, we expect that compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could result in significantincremental legal, accounting and other overhead costs. 37Table of ContentsOperating IncomeOperating income equals gross profit less SG&A expenses. Operating income excludes interest income, interest expense and income taxes. Operatingincome percentage measures operating income as a percentage of our net sales.Income TaxesPrior to May 2, 2012, we were taxed as an “S” Corporation for federal income tax purposes under Section 1362 of the Internal Revenue Code, andtherefore were not subject to federal and state income taxes (subject to an exception in a limited number of state and local jurisdictions that do not recognize the“S” Corporation status). On May 2, 2012, our “S” Corporation status terminated and we became subject to corporate-level federal and state income taxes atprevailing corporate rates.Results of OperationsThe following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our netsales: Fiscal Year Ended February 1, February 2, January 28, 2014 2013 2012 (in thousands) Statements of Income Data: Net sales $495,837 $467,291 $400,624 Cost of goods sold 343,542 317,096 271,482 Gross profit 152,295 150,195 129,142 Selling, general and administrative expenses 122,558 118,805 94,217 Operating income 29,737 31,390 34,925 Other expense, net 9 91 196 Income before income taxes 29,728 31,299 34,729 Income tax expense 11,591 7,406 389 Net income $18,137 $23,893 $34,340 Percentage of Net Sales: Net sales 100.0% 100.0% 100.0% Cost of goods sold 69.3% 67.9% 67.8% Gross profit 30.7% 32.1% 32.2% Selling, general and administrative expenses 24.7% 25.4% 23.5% Operating income 6.0% 6.7% 8.7% Interest expense, net 0.0% 0.0% 0.0% Income before income taxes 6.0% 6.7% 8.7% Income tax expense 2.3% 1.6% 0.1% Net income 3.7% 5.1% 8.6% Pro Forma Data (unaudited) (1): Income before income taxes $31,299 $34,729 Pro forma income tax expense 12,520 13,892 Pro forma net income $18,779 $20,837 (1)The unaudited pro forma income statement for all periods presented gives effect to an adjustment for income tax expense as if we had been a “C”Corporation at an assumed combined federal, state and local effective income tax rate, which approximates our statutory income tax rate, of 40%. 38Table of ContentsThe following table presents store operating data for the periods indicated: Fiscal Year Ended February 1, February 2, January 28, 2014 2013 2012 Store Operating Data: Stores operating at end of period 195 168 140 Comparable store sales change (1) -1.9% 2.2% 10.7% Total square feet at end of period 1,513,138 1,318,803 1,094,419 Average net sales per store (in thousands) (2) $2,396 $2,676 $2,718 Average net sales per square foot (2) $307 $341 $350 E-commerce revenues (in thousands) (3) $57,775 $52,953 $43,587 (1)Comparable store sales are net sales from stores that have been open at least 12 full fiscal months as of the end of the current reporting period. Aremodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store was not changedby more than 20% and the store was not closed for more than five days in any fiscal month. Comparable store sales include sales through our e-commerce store but exclude gift card breakage income and e-commerce shipping and handling fee revenue. E-commerce sales contributed 1.8%, 2.1%and 2.3% to the comparable store sales change for fiscal years 2013, 2012 and 2011, respectively. The comparable store sales change for the periodended February 2, 2013 excludes the 53rd week in fiscal year 2012.(2)E-commerce sales, e-commerce shipping fee revenue and gift card breakage are excluded from net sales in deriving average net sales per store and averagenet sales per square foot.(3)E-commerce revenues include e-commerce sales and e-commerce shipping fee revenue.Fiscal Year 2013 Compared to Fiscal Year 2012Net SalesNet sales increased $28.5 million, or 6%, to $495.8 million in fiscal year 2013 from $467.3 million in fiscal year 2012. This increase was mainly dueto net sales from stores open during fiscal year 2013 that were not open during the same period in fiscal year 2012. The increase was offset by a comparablestore sales decrease of 1.9%, or $8.6 million, in fiscal year 2013 compared to fiscal year 2012. The comparable store sales decrease was due to lower net salesof guy’s, footwear and accessories, which was partially offset by an increase in junior’s and girl’s sales compared to the prior year. There were 166comparable brick-and-mortar stores and 29 non-comparable brick-and-mortar stores open as of February 1, 2014.Net sales, including shipping and handling fees, from our e-commerce store increased $4.8 million, or 9%, to $57.8 million in fiscal year 2013 from$53.0 million in fiscal year 2012. This increase reflects higher sales in all major product categories. E-commerce sales, excluding shipping and handling fees,are included in our calculation of comparable store sales, as comparable store sales is intended to reflect revenue from the sale of merchandise only.Gross ProfitGross profit increased $2.1 million, or 1%, to $152.3 million in fiscal year 2013 from $150.2 million in fiscal year 2012. As a percentage of net sales,gross profit was 30.7% and 32.1% during fiscal years 2013 and 2012, respectively. Of the 1.4% decrease of gross profit as a percentage of net sales, 1.6%related to higher occupancy costs as a percentage of net sales reflecting the large number of new stores opened during the year. This was offset by a 0.2%increase in product margins due to improved initial markup. Buying and distribution costs as a percentage of net sales were consistent with fiscal year 2012.Selling, General and Administrative ExpensesSG&A expenses increased $3.8 million, or 3%, to $122.6 million in fiscal year 2013 from $118.8 million in fiscal year 2012. As a percentage of netsales, SG&A expenses were 24.7% and 25.4% during fiscal years 2013 and 2012, respectively.Store selling expenses increased $5.7 million, or 8%, to $80.8 million in fiscal year 2013 from $75.1 million in fiscal year 2012. As a percentage of netsales, store selling expenses were 16.3% and 16.1% during fiscal years 2013 and 2012, respectively. 39Table of ContentsThe following contributed to the increase in store selling expenses as a percentage of net sales: • store and regional payroll, payroll benefits and related personnel costs increased $5.6 million, or 0.5% as a percentage of net sales, as these costsincreased more quickly than net sales, partially due to many new store openings; • field processing costs increased $0.4 million, but as a percentage of net sales remained consistent with fiscal year 2012; • marketing costs increased $0.1 million, but decreased 0.2% as a percentage of net sales; and • supplies and other support costs decreased $0.4 million, or 0.1% as a percentage of net sales.General and administrative expenses decreased $1.9 million, or 4%, to $41.8 million in fiscal year 2013 from $43.7 million in fiscal year 2012. As apercentage of net sales, general and administrative expenses were 8.4% and 9.4% during fiscal years 2013 and 2012, respectively.The following contributed to the decrease in general and administrative expenses as a percentage of net sales: • a one-time charge in fiscal year 2012 of $7.6 million, or 1.6% of net sales, to recognize life-to-date stock-based compensation expense for stockoptions, recognition that was triggered by the consummation of our IPO; • an increase in ongoing stock-based compensation expense of $1.1 million, 0.2% of net sales, due to additional equity awards granted during fiscalyear 2013; • payroll, payroll benefits and related costs for corporate office personnel increased $0.6 million, which represents a decrease of 0.2% as apercentage of net sales, as these costs increased more slowly than sales; • depreciation, legal, audit and tax services and consulting expenses increased $1.7 million, or 0.2% as a percentage of net sales; and • other expenses increased $2.2 million, or 0.4% as a percentage of net sales, mostly due to a $1.8 million impairment charge for long-lived assets atfour of our stores in fiscal year 2013.Operating IncomeOperating income decreased $1.7 million, or 5%, to $29.7 million in fiscal year 2013 from $31.4 million in fiscal year 2012. As a percentage of netsales, operating income was 6.0% and 6.7% during fiscal years 2013 and 2012, respectively. The decrease in operating income as a percentage of net saleswas due to the decrease in comparable store sales combined with the increase in expenses discussed above.Other Income (Expense), NetOther expense, net, was $9 thousand and $91 thousand in fiscal years 2013 and 2012, respectively. Other income (expense), net comprises interestearned on cash balances and tenant construction allowances received from landlords, realized gains on marketable securities, interest paid on a capital lease ofour corporate office and distribution center and costs related to maintaining our unused revolving credit facility.Income Tax ExpenseIncome tax expense increased $4.2 million, or 57%, to $11.6 million in fiscal year 2013 from $7.4 million in fiscal year 2012. Our effective income taxrates were 39.0% and 23.7% in fiscal years 2013 and 2012, respectively.In fiscal year 2013, the Company was taxed as a “C” Corporation the entire year and its effective tax rate reflected a one-time tax benefit recorded in thefourth quarter of fiscal 2013 related to certain return to provision adjustments. The Company’s expected annual effective long-term tax rate is 40%.In fiscal year 2012, income tax expense was comprised of (1) a one-time deferred tax benefit of $3.0 million recognized upon the conversion to a “C”Corporation, (2) income tax expense of $0.1 million related to the period during fiscal year 2012 in which the company was an “S” Corporation (January 29,2012 through May 1, 2012) computed at the “S” Corporation effective tax rate and (3) income tax expense of $10.3 million related to the period in which thecompany was a “C” Corporation (May 2, 2012 through February 2, 2013) at the “C” Corporation effective tax rate. 40Table of ContentsNet IncomeNet income decreased $5.8 million, or 24%, to $18.1 million in fiscal year 2013 from $23.9 million in fiscal year 2012, due to the factors discussedabove. Applying a pro forma 40% “C” Corporation effective tax rate to fiscal year 2012, rather than the blended “S” Corporation and “C” Corporation tax ratesthat actually applied to us during that period, pro forma net income was $18.8 million in fiscal year 2012.Basic earnings per share of Class A and Class B common stock was $0.65 in fiscal year 2013, compared to $0.93 in fiscal year 2012. Dilutedearnings per share of Class A and Class B common stock was $0.65 in fiscal year 2013, compared to $0.92 in fiscal year 2012. Applying a pro forma 40%“C” Corporation effective tax rate to fiscal year 2012, rather than the blended “S” Corporation and “C” Corporation tax rates that actually applied to us duringthat period, pro forma basic earnings per share of Class A and Class B common stock was $0.73 and pro forma diluted earnings per share of Class A andClass B common stock was $0.72 in fiscal year 2012.Fiscal Year 2012 Compared to Fiscal Year 2011Net SalesNet sales increased $66.7 million, or 17%, to $467.3 million in fiscal year 2012 from $400.6 million in fiscal year 2011. New stores opened in fiscalyear 2012 accounted for $30.8 million of the increase in net sales. Also, $27.2 million of the increase in net sales resulted from the additional portion of theyear that stores opened during fiscal year 2011 were operating in fiscal year 2012, as well as fees charged to customers for shipping merchandise sold throughour e-commerce store. Net sales also increased due to a comparable store net sales increase of 2.2%, or $8.7 million. The comparable store net sales increasestemmed from higher net sales of guys’ and juniors’ apparel, as well as footwear and accessories, which was partially offset by lower net sales of boys’ andgirls’ apparel. There were 139 comparable stores and 29 non-comparable stores open at February 2, 2013.Net sales, including shipping and handling fees, from our e-commerce store increased $9.4 million, or 21%, to $53.0 million in fiscal year 2012 from$43.6 million in fiscal year 2011. This increase reflects higher sales in all major product categories which was attributable at least partially to the greatermarketing efforts that directly supported the e-commerce business. E-commerce sales, excluding shipping and handling fees, are included in our calculation ofcomparable store sales, as comparable store sales is intended to reflect revenue from the sale of merchandise only.Gross ProfitGross profit increased $21.1 million, or 16%, to $150.2 million in fiscal year 2012 from $129.1 million in fiscal year 2011. As a percentage of netsales, gross profit was 32.1% and 32.2% during fiscal years 2012 and 2011, respectively. Of the 0.1% decrease, 0.4% related to higher occupancy costs as apercentage of net sales reflecting the large number of new stores opened during the year. This was mostly offset by a 0.3% decrease in product, buying anddistribution costs as a percentage of net sales as these costs increased at a slower rate than the increase in net sales.Selling, General and Administrative ExpensesSG&A expenses increased $24.6 million, or 26%, to $118.8 million in fiscal year 2012 from $94.2 million in fiscal year 2011. As a percentage of netsales, SG&A expenses were 25.4% and 23.5% during fiscal years 2012 and 2011, respectively.Store selling expenses increased $11.3 million, or 18%, to $75.1 million in fiscal year 2012 from $63.8 million in fiscal year 2011. As a percentage ofnet sales, store selling expenses were 16.1% and 15.9% during fiscal years 2012 and 2011, respectively. 41Table of ContentsThe following contributed to the increase in store selling expenses as a percentage of net sales: • marketing costs increased $2.7 million, or 0.2% as a percentage of net sales, reflecting growth in the size and number of marketing campaigns,entry into many new markets, increased distribution of catalog mailings and marketing costs incurred to support and drive the growth of our e-commerce business; • store and regional payroll, payroll benefits and related personnel costs increased $8.1 million, or 0.2% as a percentage of net sales, as these costsincreased more quickly than net sales, partially due to many new store openings; and • supplies and other support costs increased $0.5 million, but decreased 0.2% as a percentage of net sales.General and administrative expenses increased $13.3 million, or 44%, to $43.7 million in fiscal year 2012 from $30.4 million in fiscal year 2011. As apercentage of net sales, general and administrative expenses were 9.4% and 7.6% during fiscal years 2012 and 2011, respectively.The following contributed to the increase in general and administrative expenses as a percentage of net sales: • a one-time charge of $7.6 million, or 1.6% of net sales, to recognize life-to-date stock-based compensation expense for stock options, recognitionthat was triggered by the consummation of our IPO during the second quarter of 2012; • ongoing stock-based compensation expense of $2.0 million, or 0.4% of net sales, which commenced upon the completion of our IPO during thesecond quarter of 2012; • payroll, payroll benefits and related costs for corporate office personnel increased $1.4 million, which represents a decrease of 0.5% as apercentage of net sales, as these costs increased more slowly than sales; and • depreciation, legal, audit and tax services and other expenses, including incremental costs in the current year as a result of becoming a publiccompany, increased $2.3 million, or 0.3% as a percentage of net sales.Operating IncomeOperating income decreased $3.5 million, or 10%, to $31.4 million in fiscal year 2012 from $34.9 million in fiscal year 2011. As a percentage of netsales, operating income was 6.7% and 8.7% during fiscal years 2012 and 2011, respectively. The decrease in operating income as a percentage of net saleswas due to the recognition of $9.6 million of stock-based compensation expense for stock options during fiscal year 2012, as discussed above.Other Income (Expense), NetOther income expense, net was $0.1 million and $0.2 million in fiscal years 2012 and 2011, respectively. Other income (expense), net, comprisesinterest earned on cash balances and tenant construction allowances received from landlords, realized gains on marketable securities, interest paid on a capitallease of our corporate office and distribution center and costs related to maintaining our unused revolving credit facility.Income Tax ExpenseIncome tax expense in fiscal year 2012 was $7.4 million. Income tax expense was comprised of (1) a one-time deferred tax benefit of $3.0 millionrecognized upon the conversion to a “C” Corporation, (2) income tax expense of $0.1 million related to the period during fiscal year 2012 in which thecompany was an “S” Corporation (January 29, 2012 through May 1, 2012) computed at the “S” Corporation effective tax rate and (3) income tax expense of$10.3 million related to the period in which the company was a “C” Corporation (May 2, 2012 through February 2, 2013) at the “C” Corporation effective taxrate. For fiscal year 2011, our income tax expense of $0.4 million (calculated at the effective tax rate of 1.1%) was mainly comprised of a 1.5% Californiafranchise tax. The increase in our effective tax rate resulted from our change in tax status. 42Table of ContentsNet IncomeNet income decreased $10.4 million, or 30%, to $23.9 million in fiscal year 2012 from $34.3 million in fiscal year 2011, due to the factors discussedabove. Applying a pro forma 40% “C” Corporation effective tax rate to both years, rather than the “S” Corporation tax rate that actually applied to us prior tothe Reorganization, pro forma net income decreased $2.1 million, or 10%, to $18.8 million in fiscal year 2012 from $20.8 million in fiscal year 2011.Basic earnings per share of Class A and Class B common stock was $0.93 in fiscal year 2012, compared to $1.72 in fiscal year 2011. Dilutedearnings per share of Class A and Class B common stock was $0.92 in fiscal year 2012, compared to $1.68 in fiscal year 2011. Applying a pro forma 40%“C” Corporation effective tax rate to fiscal years 2012 and 2011, rather than the blended “S” Corporation and “C” Corporation tax rates that actually appliedto us during those periods, pro forma basic earnings per share of Class A and Class B common stock was $0.73 and $1.04 in fiscal years 2012 and 2011,respectively, and pro forma diluted earnings per share of Class A and Class B common stock was $0.72and $1.02 in fiscal years 2012 and 2011,respectively.Liquidity and Capital ResourcesGeneralOur business relies on cash flows from operating activities as well as cash on hand as our primary sources of liquidity. In addition, we have had accessto additional liquidity through a $25.0 million revolving credit facility with Wells Fargo Bank, NA. We have never drawn funds from or issued letters ofcredit financing from the revolving credit facility and we do not expect to draw from the revolving credit facility over the next 12 months. We expect to financecompany operations and store growth with existing cash on hand, marketable securities and cash flows from operations.Historically our primary cash needs have been for merchandise inventories, payroll, store rent, capital expenditures associated with opening new stores,improvements to our distribution facilities, marketing and information technology expenditures and shareholder distributions. As a result of our conversion toa “C” Corporation for income tax purposes, we no longer make “S” Corporation distributions to shareholders. In addition to cash and cash equivalents andmarketable securities, the most significant components of our working capital are merchandise inventories, accounts payable and accrued expenses. Webelieve that cash flows from operating activities, the availability of cash under our revolving credit facility, if necessary, and our cash and marketablesecurities on hand will be sufficient to cover working capital requirements and anticipated capital expenditures for the next 12 months. If cash flows fromoperations and borrowings under our existing revolving credit facility are not sufficient or available to meet our capital requirements, then we will be required toobtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, ifavailable, that the terms will be satisfactory to us and not dilutive to our stockholders.Cash Flow AnalysisA summary of operating, investing and financing activities is shown in the following table: Fiscal Year Ended February 1, February 2, January 28, 2014 2013 2012 (in thousands) Net cash provided by operating activities $43,794 $41,730 $52,584 Net cash used in investing activities (37,530) (72,326) (20,195) Net cash provided by (used in) financing activities 1,834 22,819 (36,636) Net Cash Provided by Operating ActivitiesOperating activities consist primarily of net income adjusted for non-cash items that include depreciation, asset impairment write-downs, deferredincome taxes and stock-based compensation expense, plus the effect on cash of changes during the year in our assets and liabilities. 43Table of ContentsWe generated $43.8 million of net cash from operating activities in fiscal year 2013. The significant components of cash flows from operating activitieswere net income of $18.1 million, the add-back of non-cash depreciation and amortization expense of $19.4 million, non-cash stock-based compensationexpense of $3.1 million and a non-cash impairment charge of $1.8 million related to store assets at four stores. Deferred rent increased by $6.0 million due tothe opening of new stores and accounts payable increased by $1.6 million due to the timing of payments. The above was offset by an increase in receivablesof $2.6 million mainly due to an income tax receivable which was in a payable position in the prior year, a $1.9 million increase in prepaid expenses andother assets mainly due to an increase in deferred rent resulting from our increase in the number of stores, a $1.8 million decrease in accrued expenses due tothe timing of payments and a $1.1 million decrease in accrued compensation and benefits due to lower incentive pay accruals.We generated $41.7 million of net cash from operating activities in fiscal year 2012. The significant components of cash flows from operating activitieswere net income of $23.9 million, the add-back of non-cash depreciation and amortization expense of $16.7 million, the change in deferred income taxes of$6.7 million and non-cash stock-based compensation expense of $9.6 million. Deferred rent increased by $8.6 million due to the opening of new stores. Theabove was offset by an increase in merchandise inventories of $9.9 million due to the opening of 29 new stores and the growth in sales, an increase in prepaidexpenses and other assets of $12.9 million mainly due to increases in prepaid rent resulting from the opening of new stores and the recognition of deferred taxassets resulting from our conversion from an “S” Corporation to a “C” Corporation, and a decrease in accrued compensation and benefits of $1.4 million dueto lower incentive pay accruals offset partially by the timing of payroll payments.We generated $52.6 million of net cash from operating activities in fiscal year 2011. The significant components of cash flows from operating activitieswere net income of $34.3 million and the add-back of non-cash depreciation and amortization expense of $15.1 million. In addition, accounts payable andaccrued expenses increased by $2.3 million due to the timing of payments and growth in inventory. Accrued compensation and benefits increased by $3.4million due to the addition of staff to support company growth and pay increases, and an increase in incentive pay reflecting individual and company-wideperformance. Deferred rent increased by $4.2 million due to the opening of new stores. The above was offset by an increase in merchandise inventories of $3.0million due to the opening of new stores and the growth in sales, an increase in receivables of $2.3 million due to the growth of the business and an increase inprepaid expenses and other assets of $2.9 million due to the growth in the number of stores and the timing of payments.Net Cash Used in Investing ActivitiesInvesting activities consist of capital expenditures for growth related to new store openings as well as for remodels and changes in fixtures and equipmentat existing stores, investments in information technology, distribution center enhancements, investments in assets at our corporate headquarters and theaddition or replacement of company vehicles. Investing activities also consist of the purchase and sale of marketable securities.Net cash used in investing activities was $37.5 million in fiscal year 2013. Capital expenditures totaled $42.7 million, with spending on new stores andthe remodeling or other improvements of existing stores comprising $24.7 million of this total. The remaining capital expenditures were for our investment inour new e-commerce fulfillment center, information technology systems and other distribution and corporate facility enhancements. We purchased $44.9million of marketable securities and received proceeds of $50.0 million from the maturities of marketable securities during fiscal year 2013.Net cash used in investing activities was $72.3 million in fiscal year 2012. Of this total, $33.3 million was for capital expenditures. Spending on newstores and the remodeling or other improvements of existing stores was $24.9 million of this total. The remaining capital expenditures were for our investmentin information technology systems and distribution and corporate facility enhancements. In addition, we received $0.8 million of insurance proceeds related tofixed assets that were destroyed by smoke damage as a result of a fire in 2010 at a mall where one of our stores is located. We purchased $75.4 million ofmarketable securities and received proceeds of $35.5 million from the sale of marketable securities during the period. 44Table of ContentsNet cash used in investing activities was $20.2 million in fiscal year 2011. Of this total, $16.1 million was for capital expenditures for new stores orthe remodeling and improvements of existing stores. The remaining capital expenditures were primarily for our investment in information technology systemsand distribution and corporate facility enhancements.Capital expenditures during fiscal year 2014 are expected to be between $24 million and $28 million. We expect to spend approximately $19 million fornew stores, remodels of existing stores and store improvements, approximately $3 million to complete our new e-commerce fulfillment facility, approximately$4 million for information technology systems, including enhancing our e-commerce platform and digital channels, and other store projects and the remainderon other enhancements to our distribution center and corporate offices. These expenditures are expected to be funded from cash provided by operations.Net Cash Provided by (Used in) Financing ActivitiesFinancing activities consist of payments on our capital lease obligation, proceeds from the exercise of stock options, excess tax benefits from stock-basedcompensation and, prior to the Reorganization, distributions to our shareholders. In fiscal year 2012 net proceeds from our initial public offering were includedin financing activities.Net cash provided by financing activities was $1.8 million in fiscal year 2013. This included $3.2 million of proceeds from the exercise of stockoptions and excess tax benefits from stock based compensation. These proceeds were offset by $0.6 million of tax payments related to employee withholdingson the exercise of stock options and $0.7 million paid towards our capital lease obligation during fiscal year 2013.Net cash provided by financing activities was $22.8 million in fiscal year 2012. This included $106.8 million in net proceeds from our initial publicoffering, which was consummated during the second quarter of 2012. Offsetting this was $84.3 million for final distributions to the former shareholders ofWorld of Jeans & Tops. We received $0.9 million in proceeds from the exercise of stock options, net of tax withholdings, and paid $0.7 million for our capitallease obligation during the period.Net cash used in financing activities was $36.6 million in fiscal year 2011. This included $36.0 million in distributions to our shareholders primarilyfor them to pay their “S” Corporation taxes, and $0.6 million in fiscal year 2011 for payments on our capital lease obligation.Line of CreditOn May 3, 2012, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A., which we amended on March 17, 2014 toextend the maturity date, reduce the borrowing rate, eliminate a fee of 0.10% on the average daily unused amount on the line of credit, eliminate certain financialcovenants related to current liabilities, funded debt and net profits, and add certain new covenants relating to total net losses and maximum balance sheetleverage. The amended credit facility continues to provide for a $25.0 million revolving line of credit with a maturity date of May 31, 2017. The interestcharged is either at the London Interbank Offered Rate, or LIBOR, plus 1.00%, or at the bank’s prime rate. We have the ability to select between the prime rateor LIBOR-based rate at the time of a cash advance. The revolving credit facility is secured by substantially all of the Company’s assets. As a sub-featureunder the revolving credit facility the bank may issue stand-by and commercial letters of credit up to $15.0 million.We are required to maintain certain financial and nonfinancial covenants in accordance with the revolving credit facility. The financial covenants requirecertain levels of leverage and profitability, such as an aggregate maximum net loss after taxes not to exceed $5 million, and a maximum ratio of 2.00 to 1.00 for“balance sheet leverage”, defined as total liabilities divided by total tangible net worth.Contractual ObligationsWe enter into long-term contractual obligations and commitments in the normal course of business, primarily noncancellable capital and operatingleases. 45Table of ContentsWe lease approximately 172,000 square feet for our corporate headquarters and distribution center from a company that is owned by the co-founders ofTilly’s. These buildings are located at 10 and 12 Whatney, Irvine, California. On June 29, 2012, we exercised the first of our three five-year renewal optionson this lease, with the renewal commencing on January 1, 2013. The lease now expires on December 31, 2017, with two remaining five-year renewal optionperiods. The land component of this lease is accounted for as an operating lease and the building component is accounted for as a capital lease. The obligationunder the capital lease was $3.3 million and $4.0 million as of February 1, 2014 and February 2, 2013, respectively. The gross amount of the building undercapital lease was $7.8 million as of February 1, 2014 and February 2, 2013. The accumulated depreciation of the building under capital lease was $5.8million and $5.3 million as of February 1, 2014 and February 2, 2013, respectively. We incurred rent expense of $0.9 million in each of the fiscal years 2013,2012 and 2011 related to the operating (land component) of this lease.We lease approximately 24,000 square feet of office and warehouse space from a company that is owned by one of the co-founders of Tilly’s. Thisbuilding is located at 15 Chrysler, Irvine California. The lease is accounted for as an operating lease and expires on October 31, 2014. We subleaseapproximately 17,000 square feet of the building to an unrelated third party. The sublease began December 1, 2010 and terminates on May 31, 2014. Therental income paid to us with respect to the sublease, per square foot, is slightly above the rental expense paid by us with respect to the master lease.We lease approximately 26,000 square feet of office and warehouse space with a company that is owned by one of the co-founders of Tilly’s. Thisbuilding is located at 11 Whatney, Irvine, California. The lease is accounted for as an operating lease and expires on June 30, 2022.We lease approximately 81,000 square feet of office and warehouse space with a company that is owned by one of the co-founders of Tilly’s. Thisbuilding is located at 17 Pasteur, Irvine, California. The lease is accounted for as an operating lease and expires on October 31, 2021. We intend to use thisproperty as our e-commerce distribution center beginning the second quarter of fiscal year 2014.Prior to signing each of the related party leases above, we received an independent market analysis regarding the property and therefore believe that theterms of each lease are reasonable and not materially different from terms we would have obtained from an unaffiliated third party.With the exception of the corporate headquarters and distribution center and warehouse leases discussed above, our leases are generally noncancellableoperating leases expiring at various dates through fiscal year 2024. Certain leases provide for additional rent based on a percentage of sales and annual rentincreases based upon the Consumer Price Index. In addition, many of our store leases contain certain co-tenancy provisions that permit us to pay rent based ona pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in such lease.As of February 1, 2014, our contractual cash obligations over the next several periods are set forth below (in thousands). Payments Due by Period Less Than 1 More Than Total Year 1-2 Years 3-5 Years 5 Years (in thousands) Capital Lease Obligations (1)(3) $3,600 $860 $1,880 $860 $— Operating Lease Obligations (2)(3) 311,470 43,682 90,453 79,662 97,673 Purchase Obligations (4) 94,689 94,689 — — — Total $409,759 $139,231 $92,333 $80,522 $97,673 (1)The capital lease is for the building portion of our corporate headquarters and distribution center, including interest. 46Table of Contents(2)Our store leases generally have initial lease terms of 10 years and many also include renewal options on substantially the same terms and conditions asthe original lease. Also included in operating leases is the land portion of the corporate headquarters and distribution center lease, as well as thewarehouse leases described above.(3)Amounts represent commitments for minimum lease payments under noncancellable leases.(4)Purchase obligations consist primarily of inventory purchase orders for goods not yet received.Off-Balance Sheet ArrangementsWe are not a party to any off-balance sheet arrangements, except for the operating leases, purchase obligations and revolving credit facility as discussedabove.Critical Accounting Policies and EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the appropriate application ofcertain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in ourconsolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differfrom our estimates.We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimatesare reevaluated on an ongoing basis and adjustments are made when facts and circumstances dictate a change.The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our consolidatedfinancial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have amaterially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in the consolidatedfinancial statements have not been materially impacted by such variances. Our accounting policies are more fully described in Note 2 of the notes to theconsolidated financial statements, “Summary of Significant Accounting Policies”. Management has discussed the development and selection of these criticalaccounting policies and estimates with our board of directors.We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policieswith respect to revenue recognition, merchandise inventories, long-lived assets, stock-based compensation and accounting for income taxes, which are morefully described below.Revenue RecognitionSales are recognized at the time of purchase by customers at our retail store locations. Sales are recorded net of taxes collected from customers. For onlinesales, revenue is recognized at the estimated time goods are received by customers. On average, customers receive goods within three days of being shipped.The estimate of the transit times for these shipments is based on shipping terms and historical delivery times. Shipping and handling fees billed to customersfor online sales are included in net sales and the related shipping and handling costs are classified as cost of goods sold in the Consolidated Statements ofIncome. For fiscal years 2013, 2012 and 2011, shipping and handling fee revenue included in net sales was $3.3 million, $3.7 million and $3.8 million,respectively.We reserve for projected merchandise returns based upon historical experience and various other assumptions that we believe to be reasonable.Customers can return merchandise within 30 days of the original purchase date. Merchandise returns are often resalable merchandise and are refunded byissuing the same tender as in the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and,therefore, are not included in the population when calculating the sales returns reserve. The total reserve for returns was $0.6 million and $0.7 million atFebruary 1, 2014 and February 2, 2013, respectively. Should the returns rate as a percentage of net sales significantly change in future periods, it could have amaterial impact on our results of operations. 47Table of ContentsWe recognize sales from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain an unearned revenue liability for unredeemedgift card balances. Our gift cards do not have expiration dates; however, over time, the redemption of some gift cards is remote and there is no obligation toremit the unredeemed gift cards to relevant jurisdictions (gift card breakage). An assessment of the ultimate non-redemption rate of gift cards is performedwhen enough time has passed since the activation of the cards to enable a determination of the ultimate breakage rate based upon our historical redemptionexperience. This date of assessment has historically been two full fiscal years after the fiscal year in which the cards were activated. At the time of assessmenta breakage estimate is calculated and recorded in net sales. Breakage revenue for gift cards was $0.6 million, $0.4 million and $0.5 million in fiscal years2013, 2012 and 2011, respectively. If the gift card breakage experience were to change significantly in future periods, it could have a material impact on ourresults of operations.Merchandise InventoriesMerchandise inventories are stated at the lower of cost or market. Market is determined based on the estimated net realizable value, which generally is themerchandise selling price. Cost is calculated using the retail inventory method. Under the retail inventory method, inventory is stated at its current retail sellingvalue and then is converted to a cost basis by applying a cost-to-retail ratio based on beginning inventory and the fiscal year purchase activity. The retailinventory method inherently requires management judgments and estimates, such as the amount and timing of markdowns needed in order to sell throughslow-moving inventories.Markdowns are recorded when the sales value of the inventory has diminished. Factors considered in the determination of markdowns include currentand anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to mark down merchandise, the resultinggross margin reduction is recognized in the period in which the markdown is recorded. During each accounting period we record adjustments to ourinventories, which are reflected in cost of goods sold, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimatesale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such asmerchandise seasonality, historical trends and inventory levels, including estimated sell-through rates of remaining units.Total markdowns, including permanent and promotional markdowns, on a cost basis were $35.7 million, $32.2 million and $23.2 million andrepresented 7.2%, 6.9% and 5.8% of net sales in fiscal years 2013, 2012 and 2011, respectively. We accrued $0.9 million and $0.5 million for planned butunexecuted markdowns, including markdowns related to slow-moving merchandise, as of February 1, 2014 and February 2, 2013, respectively.To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross margin,operating income and the carrying value of inventories. Our success is largely dependent upon our ability to anticipate the changing fashion tastes of ourcustomers and to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brandpreferences of our customers, we may experience lower sales, excessive inventories and more frequent and extensive markdowns, which would adversely affectour operating results.We also record an inventory shrinkage reserve calculated as a percentage of net sales for estimated merchandise losses for the period between the lastphysical inventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mixand changes in shrinkage trends. We perform physical inventory counts at least once per year for the entire chain of stores and our distribution center andadjust the inventory shrinkage reserve accordingly. If actual physical inventory losses differ significantly from the estimate, our results of operations could beadversely impacted. The inventory shrinkage reserve reduces the value of total inventory and is a component of inventories on the Consolidated BalanceSheets. The inventory shrinkage reserve at February 1, 2014 and February 2, 2013 was not material.Long-Lived AssetsWe evaluate the carrying value of our long-lived assets, consisting largely of leasehold improvements, furniture and fixtures and equipment at store,distribution center and corporate office locations, for impairment whenever events or changes in circumstances indicate that the carrying value of such assetsmay not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current- 48Table of Contentsperiod operating or cash flow loss combined with a history of operating or cash flow losses and a forecast that indicates continuing losses or insufficientincome associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or asignificant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activitiescompared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss isrecognized, measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted cash flows using ourweighted-average cost of capital, with such estimated fair values determined using the best information available. Quarterly, we assess whether events orchanges in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable.During fiscal year 2013 the net book value of fixed assets and four stores was impaired with a charge of $1.8 million. Similarly, in fiscal year 2011 thenet book value of fixed assets at one store was impaired with a charge of $0.6 million. These charges were recorded as the assets were not projected to generatesufficient cash flows to recover the carrying values. We did not have any impairment charges during fiscal year 2012.The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales and gross marginperformance. Factors used in the valuation of long-lived assets with finite lives include, but are not limited to, discount rates, management’s plans for futureoperations, recent operating results and projected future cash flows. If our net sales or gross profit performance or other estimated operating results are notachieved at or above our forecasted level, or inflation exceeds our forecast and we are unable to recover such costs through price increases, the carrying value ofcertain of our retail stores may prove to be unrecoverable and we may incur additional impairment charges in the future.Stock-Based CompensationIn June 2007 our board of directors adopted the 2007 Stock Option Plan, or 2007 Plan, which authorized the issuance of options to purchase up to1,600,000 shares of common stock for employees, consultants and directors. These share-based awards are granted at an exercise price equal to the fairmarket value of our common stock at the date of grant. These awards vest in equal installments over a four year period (service period) and generally expire atthe earlier of 30 days after employment or services are terminated or ten years from the date of grant. The awards included a performance condition thatprevented the awards from becoming exercisable until the consummation of an initial public offering by us. As the awards contained both a servicerequirement and a performance condition, compensation expense was not recognized in the financial statements until the consummation of our initial publicoffering on May 3, 2012. On that date, we recognized $7.6 million of stock-based compensation expense relating the stock options previously granted toemployees and directors under the 2007 Plan.In April 2012 our board of directors adopted the Tilly’s 2012 Equity and Incentive Award Plan, or 2012 Plan, which authorized the issuance of up to2,913,900 shares of our Class A common stock pursuant to a variety of stock-based compensation awards, including stock options, stock appreciationrights, or SARs, restricted stock awards, restricted stock unit awards, deferred stock awards, deferred stock unit awards, dividend equivalent awards, stockpayment awards and performance awards and other stock-based awards. As of February 1, 2014, we have granted stock options to employees and restrictedstock awards to directors under the 2012 Plan.We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”),which establishes accounting for equity instruments exchanged for employee services. Under the provisions of this statement, stock-based compensationexpense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over theemployee’s requisite service period (generally the vesting period of the equity grant). As required under this guidance, we estimate forfeitures for options grantedwhich are not expected to vest. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our stock-basedcompensation expense.Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine thefair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by a number of assumptions,such as the fair value of the common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellationbehaviors, risk-free interest rates, and expected dividends, which we estimate as follows: 49Table of Contents • Fair Value of Our Common Stock. We use the closing price of our Class A common stock on the date of grant. Prior to May 4, 2012, ourcommon stock was not publicly traded. Therefore, we estimated the fair value of our common stock, as discussed below under the heading“Determination of the Fair Value of Common Stock Granted Prior to Our IPO”. • Expected Term. We have limited historical information regarding expected option term. Accordingly, we determined the expected stock option termof the awards using the latest historical data available from comparable public companies and our expectation of exercise behavior. • Volatility. As we do not have a significant trading history for our Class A common stock, the expected stock price volatility for each grant ismeasured using the average of historical daily price changes of comparable public companies’ common stock over the most recent period equal tothe expected term of our stock option awards. We intend to consistently apply this process using the same or similar public companies until asufficient amount of historical information regarding the volatility of our own common stock share price becomes available. However, if thecircumstances change so the identified companies are no longer similar to us, we will select companies we believe are more suitable and use theirpublicly available share prices in the calculation. • Risk-Free Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of thestock options for each stock option group. • Dividend Yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future.Consequently, we used an expected dividend yield of zero.If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for future awards may differmaterially compared with the expense for awards granted previously.The following table presents the assumptions we used to estimate the fair value of stock options granted during the periods presented: Fiscal Year Ended February 1, 2014 February 2, 2013 January 28, 2012 Expected option term 5.0 years 5.0 years 5.0 years Expected volatility factor 55.0% - 56.2% 57.6% - 62.9% 59.7% Risk-free interest rate 0.8% - 1.7% 0.6% - 0.8% 2.2% Expected annual dividend yield 0% 0% 0% Our estimates of pre-vesting forfeitures, or forfeiture rates, were based on our internal analysis, which includes the award recipients’ positions withinthe company and the vesting period of the awards.Determination of the Fair Value of Common Stock Granted Prior to Our IPOPrior to May 4, 2012, we were a private company with no active public market for our common stock. The fair value of the common stock underlyingour stock options under the 2007 Plan was determined by our board of directors, which intended all stock options granted to be exercisable at a price per sharenot less than the per share fair value of our common stock underlying those stock options on the date of grant. We determined the estimated per share fair valueof our common stock using a contemporaneous valuation consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation ofPrivately-Held Company Equity Securities Issued as Compensation”, or the Practice Aid. In conducting this valuation, we considered all objective andsubjective factors that we believed to be relevant, including our best estimate of our business condition, prospects and operating performance at the valuationdate. Within this contemporaneous valuation performed by management, with the assistance of third-party valuation specialists hired by us, a range offactors, assumptions and methodologies were used. The significant factors included: 50Table of Contents • the fact that we were a private retail company with illiquid securities; • our historical operating results; • our discounted future cash flows, based on our projected operating results; • the hiring of key personnel; • the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering orsale of our company, given prevailing market conditions; • any adjustment necessary to recognize a lack of marketability for our common stock; • valuation of comparable public companies at the time of grant; • the U.S. and global capital market conditions; and • outlook for our industry at the time of grant.After review of the fair value analysis, our board of directors authorized the use of that fair value as the exercise price for options granted on the date ofthat valuation report.Common Stock Valuation Methodologies Prior to Our IPOFor the contemporaneous valuation of our common stock, management estimated, as of January 28, 2012, the latest valuation date prior to our IPO, ourenterprise value on a continuing operations basis primarily using the income and market approaches which are both acceptable valuation methods inaccordance with the Practice Aid. The income approach utilized a discounted cash flow methodology based on our financial forecasts and projections, asdetailed below. The market approach utilized both the guideline public company and the guideline merged and acquired methodologies based on data obtainedon comparable public companies, as detailed below. Management considered both objective and subjective factors, including information provided by a third-party valuation firm, to determine its best estimate of the fair market value of our common stock.For the discounted cash flow methodology, we prepared detailed annual forecasts of cash flows for future years, which we refer to as the “discreteforecast period”. The value of the cash flows beyond the discrete forecast period was derived by applying a capitalized earnings approach, in which such cashflows are assumed to grow at a constant annual long-term growth rate and in which the terminal-year cash flow is capitalized at a rate equal to the estimateddiscount rate less the estimated constant annual long-term growth rate. Our forecasts of future cash flows were based on our estimated net debt-free cash flowsand were discounted to the valuation date at an estimate of our weighted average cost of capital. We weighted the discounted cash flow method 50% indetermining the total fair value of our equity as this approach was determined to represent the best indication of value because this method relied on a detailedfinancial forecast for the next five fiscal years as well as growth and profitability assumptions for subsequent years that are specific to Tilly’s business model.The guideline public company method of the market approach is based on the market prices of stock for comparable companies. Indications of valuewere estimated by deriving multiples of equity or invested capital to various measures of revenue, earnings or cash flow for the selected guideline companiesand then applying such multiples to the metrics of our business. When selecting comparable companies, consideration was given to industry similarity, theirspecific products offered, financial data availability and capital structure. We weighted the guideline public company method 40%. In selecting the revenue andEBITDA multiples from other companies to apply to Tilly’s, we considered differences between Tilly’s and eleven comparable companies in terms of size,profitability and growth, among other factors. Given the timely nature of the public company data and the quantity of the public companies in the group thatwere in the same or similar retail sector as Tilly’s, the guideline public company method was given a weighting of 40%. We weighted the guideline publiccompany method less than the discounted cash flow method due to the fact that the stock price and earnings estimates for the comparable public companieswere relatively volatile as of the valuation date.The guideline merged and acquired method of the market approach follows the same basic methodology as the guideline public company method.However, instead of deriving multiples based on stock prices of guideline companies, indications of value are estimated by deriving multiples of equity orinvested capital from sales of entire companies. We weighted the guideline merged and acquired method only 10% as most of the observed industrytransactions occurred in a different economic environment (none since December 2009) and we had higher EBITDA margins than many of the targetcompanies. 51Table of ContentsWe believe that the procedures employed in the discounted cash flow, guideline public company and guideline merged and acquired methodologies arereasonable and consistent with the Practice Aid.We granted stock options with the following exercise prices between May 2, 2010 and the date of our initial public offering: Option Grant Date Number ofSharesUnderlyingOptions ExercisePrice PerShare Common StockFair Value PerShare atGrant Date Fair Value ofStock OptionsGranted October 2010 (1) 762,500 $8.98 $8.98 $4.57 - $7.01 March 2011 578,000 16.26 16.26 8.52 (1)Includes 739,500 stock options that were re-priced on a one-for-one basis to $8.98 per share. See section below titled “Stock Option Re-Pricing”.Based on the closing price of our Class A common stock on February 2, 2014, the last trading day of fiscal year 2013, the aggregate intrinsic value ofvested stock options outstanding as of February 1, 2014 was approximately $1.9 million, and the aggregate intrinsic value of unvested stock optionsoutstanding as of February 1, 2014 was $58 thousand.Significant factors considered by our board of directors in determining the fair value of our common stock at the above grant dates included:October 2010We performed a valuation of our common stock as of fiscal month ended August 28, 2010 which included the back-to-school shopping season thatpeaks in August. Although the U.S. economy had been recovering from recession in 2010, the recovery was weaker than in many past recovery periods. Thefinancial results of many of our comparable companies reflected weak performance driven generally by either negative or only modestly positive year-to-datecomparable store sales through August. Our comparable store sales trends for this same period were consistent with our comparable companies, with close tozero comparable store sales growth, lower income than the same year-to-date period in the prior year and sales and income running well below the forecast forfiscal 2010 that was incorporated in the prior valuation of our common stock. As a result of these factors, we lowered our financial forecast and expectationsfor growth in fiscal 2010 and, because they were building upon 2010 expected results, the forecasted sales and income in fiscal 2011 and beyond. Themarketability discount was 15%, based upon expectations that an initial public offering would not occur until at least early in 2012. This valuationdetermined the value of our common stock to be $8.98 per share. Our board of directors granted stock options with exercise prices at $8.98 per share onOctober 8, 2010, the date the valuation was finalized, after determining that the fair value of our common stock would not have materially changed between thevaluation date and the date of the grant. In addition, stock options previously granted with exercise prices greater than $8.98 per share were re-priced to $8.98per share as of October 8, 2010 by our board of directors. See “Stock Option Re-Pricing” section below.March 2011We performed a valuation of our common stock as of the fiscal year end date of January 29, 2011. Over the previous quarter the national economy grewmore quickly than earlier in fiscal 2010 and our comparable companies’ results generally improved substantially in the fourth quarter of fiscal 2010. Ourresults, similarly, improved substantially, with a double-digit comparable store sales increase in the fourth quarter of fiscal 2010 compared to the fourthquarter of fiscal 2009 and profitability for the quarter well above the prior year’s fourth quarter. Therefore, profitability for fiscal 2010 ended up being wellabove the revised forecast used in the August 2010 valuation. This greatly improved sales and profit trend continued into February and March of 52Table of Contentsfiscal 2011. As a result, we increased the financial forecast and expectations for growth in fiscal 2011 and beyond. Concurrently, our comparable companies’financial results led to, in many cases, increased market prices for their common stock. The marketability discount was 10%, based upon expectations thatan initial public offering would not occur until mid 2011 at the earliest. This valuation determined the value of our common stock to be $16.26 per share. Ourboard of directors granted stock options with exercise prices at $16.26 per share on March 31, 2011, the date the valuation was finalized, after determiningthat the fair value of our common stock would not have materially changed between the valuation date and the date of the grant.Stock Option Re-PricingIn October 2010, our board of directors approved a common stock option re-pricing whereby previously granted stock options held by currentemployees with exercise prices above $8.98 per share were re-priced on a one-for-one basis to $8.98 per share with no modification to any other terms of thepreviously issued stock options. As a result, 739,500 stock options originally granted to purchase common stock at prices ranging from $9.64 to $14.47were re-priced in order to continue maintaining an equity incentive for our employees and reflect a significantly different economic environment. We treated there-pricing as a modification for accounting purposes of the original awards and calculated additional compensation costs for the difference between the fairvalue of the re-priced award and the fair value of the original award on the re-pricing date. The re-pricing affected 48 optionees and resulted in incrementalunrecognized stock-based compensation expense of $0.6 million. Expense related to vested stock options was recognized upon the consummation of our initialpublic offering, and expense related to unvested stock options is being amortized over the remaining vesting period of the stock options. Our assumptions usedto estimate the fair value of the original awards immediately before the re-pricing and the fair value of the re-priced awards required significant judgment.Accounting for Income TaxesPrior to May 2, 2012, the Company was taxed as an “S” Corporation for income-tax purposes under section 1362 of the Internal Revenue Code andtherefore was not subject to federal and state income taxes (subject to exception in a limited number of state and local jurisdictions that did not recognize the “S”Corporation status). On May 2, 2012, the Company’s “S” Corporation status terminated as part of the Reorganization and the Company became subject tocorporate-level federal and state income taxes at prevailing “C” Corporation rates.The Company accounts for income taxes and the related accounts using the asset and liability method in accordance with FASB ASC Topic 740,Income Taxes (“ASC 740”). Under this method, the Company accrues income taxes payable or refundable and recognizes deferred tax assets and liabilitiesbased on differences between GAAP and tax bases of assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates ineffect for the years in which the differences are expected to reverse, and recognizes the effect of a change in enacted rates in the period of enactment.We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider allavailable positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planningstrategies and recent financial operations.The Company establishes assets and liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-notrecognition threshold. The Company includes in income tax expense any interest and penalties related to uncertain tax positions.Recently Issued Accounting PronouncementsIn July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized TaxBenefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues TaskForce)”. The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating losscarryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reductionto a deferred tax asset for a net operating loss carryforward, a 53Table of Contentssimilar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financialstatements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years,and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have a material impacton our financial position, results of operations or liquidity.The FASB issues ASUs to amend the authoritative literature in the Accounting Standards Codification. There have been a number of ASUs to date thatamend the original text of the Accounting Standards Codification. Except for the ASU noted above, those issued to date either (i) provide supplementalguidance, (ii) are technical corrections, (iii) are not applicable to the company or (iv) are not expected to have a significant impact on the company. Item 7A.Quantitative and Qualitative Disclosures About Market RisksInterest Rate RiskWe are subject to interest rate risk in connection with borrowings, if any, under our line of credit, which bears interest at variable rates. As ofFebruary 1, 2014 and February 2, 2013, we had no outstanding borrowings under our line of credit.Impact of InflationOur results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflationdue to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have beenimmaterial.Foreign Exchange Rate RiskWe currently source all merchandise through domestic vendors. We source certain fixtures and materials from various suppliers in other countries. Allpurchases are denominated in U.S. dollars, and therefore we do not hedge using any derivative instruments. Historically, we have not been impacted bychanges in exchange rates. 54Table of ContentsItem 8.Financial Statements and Supplementary DataTilly’s, Inc.Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 56Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013 57Consolidated Statements of Income for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 58Consolidated Statements of Comprehensive Income for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 59Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 60Consolidated Statements of Cash Flows for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 61Notes to Consolidated Financial Statements 62 55Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofTilly’s, Inc.Irvine, CaliforniaWe have audited the accompanying consolidated balance sheets of Tilly’s, Inc. and its subsidiary (the “Company”) as of February 1, 2014 andFebruary 2, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three yearsin the period ended February 1, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Tilly’s, Inc. and its subsidiary asof February 1, 2014 and February 2, 2013, and the results of their operations and their cash flows for each of the three years in the period ended February 1,2014, in conformity with accounting principles generally accepted in the United States of America./s/ Deloitte & Touche LLPCosta Mesa, CAApril 1, 2014 56Table of ContentsTilly’s, Inc.Consolidated Balance Sheets(In thousands, except per share data) February 1,2014 February 2,2013 ASSETS Current assets: Cash and cash equivalents $25,412 $17,314 Marketable securities 34,943 39,868 Receivables 8,545 5,934 Merchandise inventories 46,266 46,595 Prepaid expenses and other current assets 11,772 11,387 Total current assets 126,938 121,098 Property and equipment, net 100,936 80,926 Other assets 4,533 3,357 Total assets $232,407 $205,381 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $19,645 $18,261 Deferred revenue 6,214 5,453 Accrued compensation and benefits 4,975 6,094 Accrued expenses 9,241 12,132 Current portion of deferred rent 5,395 4,555 Current portion of capital lease obligation/Related party (Note 9) 758 712 Total current liabilities 46,228 47,207 Long-term portion of deferred rent 42,756 37,620 Long-term portion of capital lease obligation/Related party (Note 9) 2,500 3,258 Total long-term liabilities 45,256 40,878 Total liabilities 91,484 88,085 Commitments and contingencies (Note 10) Stockholders’ equity: Common stock (Class A), $0.001 par value; February 1, 2014 - 100,000 shares authorized, 11,361 shares issued andoutstanding; February 2, 2013 - 100,000 shares authorized, 10,772 shares issued and outstanding 11 11 Common stock (Class B), $0.001 par value; February 1, 2014 - 35,000 shares authorized, 16,642 shares issued andoutstanding; February 2, 2013 - 35,000 shares authorized, 16,920 shares issued and outstanding 17 17 Preferred stock, $0.001 par value; February 1, 2014 and February 2, 2013 - 10,000 shares authorized, no shares issued oroutstanding — — Additional paid-in capital 122,886 117,391 Retained earnings (deficit) 17,997 (140) Accumulated other comprehensive income 12 17 Total stockholders’ equity 140,923 117,296 Total liabilities and stockholders’ equity $232,407 $205,381 The accompanying notes are an integral part of these consolidated financial statements. 57Table of ContentsTilly’s, Inc.Consolidated Statements of Income(In thousands, except per share data) Fiscal Year Ended February 1,2014 February 2,2013 January 28,2012 Net sales $495,837 $467,291 $400,624 Cost of goods sold (includes buying, distribution, and occupancy costs) 343,542 317,096 271,482 Gross profit 152,295 150,195 129,142 Selling, general and administrative expenses 122,558 118,805 94,217 Operating income 29,737 31,390 34,925 Other expense, net 9 91 196 Income before income taxes 29,728 31,299 34,729 Income tax expense 11,591 7,406 389 Net income $18,137 $23,893 $34,340 Basic earnings per share of Class A and Class B common stock $0.65 $0.93 $1.72 Diluted earnings per share of Class A and Class B common stock $0.65 $0.92 $1.68 Weighted average basic shares outstanding 27,822 25,656 20,000 Weighted average diluted shares outstanding 28,116 26,076 20,500 Pro forma income information (Note 1): Historical income before income taxes $31,299 $34,729 Pro forma income tax expense (unaudited) 12,520 13,892 Pro forma net income (unaudited) $18,779 $20,837 Pro forma basic earnings per share of Class A and Class B common stock (unaudited) $0.73 $1.04 Pro forma diluted earnings per share of Class A and Class B common stock (unaudited) $0.72 $1.02 The accompanying notes are an integral part of these consolidated financial statements. 58Table of ContentsTilly’s, Inc.Consolidated Statements of Comprehensive Income(In thousands) For the Fiscal Years Ended February 1,2014 February 2,2013 January 28,2012 Net income $18,137 $23,893 $34,340 Other comprehensive income, net of tax: Net change in unrealized gain/loss on available-for-sale securities (5) 17 — Other comprehensive (loss) income, net of tax (5) 17 — Comprehensive income $18,132 $23,910 $34,340 The accompanying notes are an integral part of these consolidated financial statements. 59Table of ContentsTilly’s, Inc.Consolidated Statements of Stockholders’ Equity(In thousands) Number of Shares CommonStock(Class A) CommonStock(Class B) CommonStock(WOJT) CommonStock AdditionalPaid-inCapital RetainedEarnings(Deficit) AccumulatedOtherComprehensiveIncome TotalStockholders’Equity Balance at January 29, 2011 — — 20,000 $20 $150 $61,922 $— $62,092 Net income — — — — — 34,340 — 34,340 Distributions — — — — — (36,008) — (36,008) Balance at January 28, 2012 — — 20,000 20 150 60,254 — 60,424 Net income — — — — — 23,893 — 23,893 Reorganization (see Note 1) — 20,000 (20,000) — — — — — Issuance of stock in IPO, net of costs 9,200 (1,600) — 7 106,782 — — 106,789 Distributions to “S” Corporationshareholders — — — — — (84,287) — (84,287) Shares converted by founders 1,480 (1,480) — — — — — — Stock-based compensation expense — — — — 9,570 — — 9,570 Exercise of stock options, including taxbenefit of $74 92 — — 1 889 — — 890 Net change in unrealized gain/loss onavailable-for-sale securities — — — — — — 17 17 Balance at February 2, 2013 10,772 16,920 — 28 117,391 (140) 17 117,296 Net income — — — — — 18,137 — 18,137 Shares converted by founders 278 (278) — — — — — — Stock-based compensation expense — — — — 3,106 — — 3,106 Restricted stock 31 — — — — — — — Exercise of stock options, including taxbenefit of $42 280 — — — 2,389 — — 2,389 Net change in unrealized gain/loss onavailable-for-sale securities — — — — — — (5) (5) Balance at February 1, 2014 11,361 16,642 — $28 $122,886 $17,997 $12 $140,923 The accompanying notes are an integral part of these consolidated financial statements. 60Table of ContentsTilly’s, Inc.Consolidated Statements of Cash Flows(In thousands) Fiscal Year Ended February 1,2014 February 2,2013 January 28,2012 Cash flows from operating activities Net income $18,137 $23,893 $34,340 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,367 16,679 15,129 Loss on disposal of assets 140 111 232 Impairment of assets 1,840 — 554 (Gain) loss on sales and maturities of marketable securities (176) 28 — Deferred income taxes 304 6,689 — Stock-based compensation expense 3,106 9,570 — Excess tax benefit from stock-based compensation (157) (95) — Changes in operating assets and liabilities: Receivables (2,611) 21 (2,304) Merchandise inventories 329 (9,927) (3,028) Prepaid expenses and other assets (1,861) (12,930) (2,868) Accounts payable 1,554 1,431 2,113 Accrued expenses (1,796) (1,470) 155 Accrued compensation and benefits (1,119) (1,442) 3,362 Deferred rent 5,976 8,584 4,159 Deferred revenue 761 588 740 Net cash provided by operating activities 43,794 41,730 52,584 Cash flows from investing activities Purchase of property and equipment (42,701) (33,298) (20,223) Proceeds from sale of property and equipment 79 17 28 Insurance proceeds from casualty loss — 822 — Purchases of marketable securities (44,908) (75,377) — Maturities of marketable securities 50,000 35,510 — Net cash used in investing activities (37,530) (72,326) (20,195) Cash flows from financing activities Payment of capital lease obligation (712) (668) (628) Net proceeds from initial public offering — 106,789 — Proceeds from exercise of stock options 3,025 1,169 — Tax withholding payments related to exercise of stock options (636) (279) — Excess tax benefit from stock-based compensation 157 95 — Distributions — (84,287) (36,008) Net cash provided by (used in) financing activities 1,834 22,819 (36,636) Change in cash and cash equivalents 8,098 (7,777) (4,247) Cash and cash equivalents, beginning of period 17,314 25,091 29,338 Cash and cash equivalents, end of period $25,412 $17,314 $25,091 Supplemental disclosures of cash flow information Interest paid $253 $299 $327 Income taxes paid $14,969 $13,727 $493 Supplemental disclosure of non-cash activities Unpaid purchases of property and equipment $2,348 $2,875 $2,209 The accompanying notes are an integral part of these consolidated financial statements. 61Table of ContentsTilly’s, Inc.Notes to Consolidated Financial Statements 1.Description of the Company and Basis of PresentationTilly’s, Inc. was formed as a Delaware corporation on May 4, 2011 for the purpose of reorganizing the corporate structure of World of Jeans & Tops, aCalifornia corporation (“WOJT”). On May 2, 2012, the shareholders of WOJT contributed all of their shares of common stock to Tilly’s, Inc. in return forshares of Tilly’s, Inc. Class B common stock on a one-for-one basis. In addition, effective May 2, 2012, WOJT converted from an “S” Corporation to a “C”Corporation for income tax purposes. These events are collectively referred to as the “Reorganization”. As a result of the Reorganization, WOJT became awholly owned subsidiary of Tilly’s, Inc. Except where context requires or where otherwise indicated, the terms “Company” and “Tilly’s” refers to WOJTbefore the Reorganization and to Tilly’s, Inc. and its subsidiary, WOJT, after the Reorganization.Tilly’s operates a chain of specialty retail stores featuring casual clothing, footwear and accessories for teens and young adults. The Company operateda total of 195 and 168 stores as of February 1, 2014 and February 2, 2013, respectively. The stores are located in malls, lifestyle centers, ‘power’ centers,community centers, outlet centers and street-front locations. Customers may also shop online, where the Company features a similar assortment of product asis carried in its brick-and-mortar stores.Fiscal YearThe Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years 2013, 2012 and 2011 ended on February 1, 2014, February 2,2013 and January 28, 2012, respectively. Fiscal years 2013 and 2011 each included 52 weeks, and fiscal year 2012 included 53 weeks.Segment ReportingAccounting principles generally accepted in the U.S. (“GAAP”) has established guidance for reporting information about a company’s operatingsegments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company has one reportablesegment. All of the Company’s identifiable assets are in the U.S.Unaudited Pro Forma Income InformationThe unaudited pro forma income information gives effect to the conversion of the Company to a “C” Corporation on May 2, 2012. Prior to suchconversion, the Company was an “S” Corporation and generally not subject to income taxes. The pro forma net income and per share amounts, therefore,include an adjustment for income tax expense as if the Company had been a “C” Corporation during the periods presented at an assumed combined federal,state and local effective tax rate of 40%, which approximates the calculated statutory tax rate for each period. In addition, the unaudited pro forma dilutedweighted average shares outstanding was computed using the assumed 40% effective tax rate. As a result, the pro forma adjustment to diluted weighted averageshares outstanding was a decrease of approximately 20,000 shares and 90,000 shares in fiscal years 2012 and 2011, respectively.Initial Public OfferingOn May 3, 2012, Tilly’s, Inc. completed its initial public offering (“IPO”) in which it issued and sold 7,600,000 shares of its Class A common stockand certain selling stockholders sold 400,000 shares of Class A common stock. In addition, on May 9, 2012, the underwriters exercised their option topurchase an additional 1,200,000 shares of Class A common stock from the selling stockholders to cover over-allotments. As a result, the total IPO size was9,200,000 shares of Class A common stock, which consisted of 7,600,000 shares sold by Tilly’s, Inc. and 1,600,000 shares sold by the selling stockholders.The 9,200,000 shares of Class A common stock sold in the offering were sold at a price of $15.50 per share. Tilly’s, Inc. did not receive any proceeds fromthe sale of shares by the selling stockholders.As a result of the IPO, the Company received net proceeds of approximately $107 million, after deducting the underwriting discount of $8.7 million andrelated fees and expenses of approximately $2.5 million. The Company used $84.0 million of the net proceeds from the IPO to pay in full notes previouslyissued to the shareholders of WOJT. These notes represented WOJT’s undistributed taxable income from the date of its formation through the date oftermination of its “S” Corporation status. 62Table of Contents2.Summary of Significant Accounting PoliciesCash and Cash EquivalentsThe Company considers all short-term investments with an initial maturity of 90 days or less when purchased to be cash equivalents.Marketable SecuritiesMarketable securities are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of income taxes,reflected as a separate component of stockholders’ equity until realized. For the purposes of computing realized and unrealized gains and losses, cost isdetermined on a specific identification basis. The Company classifies all marketable securities within current assets on the consolidated balance sheet,including those with maturity dates beyond twelve months, as they are available to support the Company’s current operational liquidity needs.Merchandise InventoriesMerchandise inventories are comprised of finished goods offered for sale at the Company’s retail stores and online. Inventories are stated at the lower ofweighted-average cost or market using the retail inventory method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio.The Company believes that the retail inventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $6.6million, $5.6 million and $5.1 million in fiscal years 2013, 2012 and 2011, respectively, are included in cost of goods sold in the consolidated statements ofoperations.The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear this merchandise. At any giventime, merchandise inventories include items that have been marked down to management’s best estimate of their fair market value at retail price, with aproportionate write-down to the cost of the inventory. Management bases the decision to mark down merchandise primarily upon its current sell-through rateand the age of the item, among other factors. These markdowns may have an adverse impact on earnings, depending on the extent and amount of inventoryaffected. Markdowns are recorded as an increase to cost of goods sold in the consolidated statements of income. Total markdowns, including permanent andpromotional markdowns, on a cost basis were $35.7 million, $32.2 million and $23.2 million in fiscal years 2013, 2012 and 2011, respectively. In addition,the Company accrued $0.9 million and $0.5 million for planned but unexecuted markdowns, including markdowns related to slow moving merchandise, asof February 1, 2014 and February 2, 2013, respectively.Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method overthe estimated useful lives of the assets. Equipment is depreciated over five to seven years. Furniture and fixtures are depreciated over five years. Computersoftware is depreciated over three years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the leaseor the estimated useful life of the improvement. The cost of assets sold or retired and the related accumulated depreciation or amortization is removed from theaccounts with any resulting gain or loss included in net income.Repairs and maintenance costs are charged directly to expense as incurred. Major renewals, replacements and improvements that substantially extend theuseful life of an asset are capitalized and depreciated.Impairment of Long-Lived AssetsImpairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amountsmay not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant underperformancerelative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in the Company’s businessstrategies. An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assetsfor the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between thecarrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates the Company’sweighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware andsoftware, the Company considers the assets at each individual retail store to represent an asset group. In addition, the Company has considered the 63Table of Contentsrelevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted estimated future cash flow approachprovides the most relevant and reliable means by which to determine fair value in this circumstance.At least quarterly, the Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. The Company’s evaluation during the fourth quarter of fiscal years 2013 and 2011 indicated that operating losses orinsufficient operating income existed at four retail stores and one retail store, respectively, with a projection that the operating losses or insufficient operatingincome for these locations would continue. As such, the Company recorded noncash charges of $1.8 million and $0.6 million in selling, general andadministrative expenses in fiscal years 2013 and 2011, respectively, to write down the carrying value of these stores’ long-lived assets to their estimated fairvalues. The Company did not record any impairment charges in fiscal year 2012. See Note 12 to the Consolidated Financial Statements for further details.Deferred Offering CostsDeferred offering costs of $1.5 million were included in other assets on the Company’s balance sheet as of January 28, 2012. Upon consummation ofthe IPO, all deferred offering costs were offset against the proceeds from the offering. There were no amounts capitalized as of February 1, 2014 andFebruary 2, 2013.Accrued ExpensesThe major components of accrued expenses at February 1, 2014 and February 2, 2013 included sales and use taxes payable, rent-related liabilities,accrued construction, accrued merchandise returns and accruals for various other administrative expenses.Operating LeasesThe Company leases its retail stores under noncancellable operating leases. Most store leases include tenant allowances from landlords, rent escalationclauses and/or contingent rent provisions. Tilly’s recognizes rent expense on a straight-line basis over the lease term, excluding contingent rent, and records thedifference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a percentage of sales inexcess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.Deferred Rent and Tenant AllowancesDeferred rent is recognized when a lease contains fixed rent escalations. The Company recognizes the related rent expense on a straight-line basis startingfrom the date of possession and records the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includestenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on astraight-line basis over the term of the lease starting at the date of possession.Fair Value of Certain Financial Assets and LiabilitiesThe Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”) which requires disclosure of the estimatedfair value of certain assets and liabilities defined by the guidance as financial instruments. As of February 1, 2014 and February 2, 2013, managementbelieves that the carrying amounts of cash and cash equivalents, receivables and payables approximate their respective fair value because of their short-termmaturities.Revenue RecognitionRevenue is recognized for store sales when the customer receives and pays for the merchandise at the register. Taxes collected from the Company’scustomers are recorded on a net basis. For e-commerce sales, Tilly’s recognizes revenue, net of sales taxes and estimated sales returns, and the related cost ofgoods sold at the time the merchandise is received by the customer. The Company defers e-commerce revenue and the associated product and shipping costsfor shipments that are in-transit to the customer. Customers typically receive goods within a few days of shipment. Deferred revenue and the associatedproduct costs relating to e-commerce sales were immaterial as of February 1, 2014 and February 2, 2013. Amounts related to shipping and handling that arebilled to customers are reflected in net sales, and the related costs are reflected in cost of goods sold. 64Table of ContentsThe Company recognizes revenue from gift cards as they are redeemed for merchandise. Prior to redemption, the Company maintains a current liabilityfor unredeemed gift card balances. The customer liability balance was $6.2 million and $5.5 million as of February 1, 2014 and February 2, 2013,respectively, and is included in deferred revenue on the balance sheets. Tilly’s gift cards do not have expiration dates; however, over time, the redemption ofsome gift cards becomes remote and in most cases there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card “breakage”).An assessment of the ultimate non-redemption rate of gift cards is performed when enough time has passed since the activation of the cards to enable adetermination of the ultimate breakage rate based upon historical redemption experience. This date of assessment has historically been two full fiscal yearsafter the fiscal year the cards were activated. At the time of assessment a breakage estimate is calculated and recorded in net sales. Breakage revenue for giftcards was $0.6 million, $0.4 million and $0.5 million in fiscal years 2013, 2012 and 2011, respectively.The Company accrues for estimated sales returns by customers based on historical sales return results. Sales return accrual activity for fiscal years2013, 2012 and 2011 is as follows (in thousands): Fiscal Year Ended February 1,2014 February 2,2013 January 28,2012 Beginning balance $703 $609 $510 Provisions 15,938 14,850 12,245 Usage (16,068) (14,756) (12,146) Ending balance $573 $703 $609 Cost of Goods Sold and Selling, General and Administrative ExpensesThe following illustrates the primary costs classified in each major expense category:Cost of Goods Sold • Total cost of products sold include: • Freight expenses associated with moving merchandise inventories from our vendors to our distribution center; • Vendor allowances; • Cash discounts on payments to merchandise vendors; • Physical inventory losses; and • Markdowns. • Costs of buying and distribution of merchandise include: • Payroll costs and incentive compensation for merchandise purchasing personnel; • Customer shipping and handling expenses; • Costs associated with operating our distribution center, including payroll and benefit costs, occupancy costs, and depreciation; and • Freight expenses associated with moving merchandise inventories from our distribution center to our stores and e-commerce customers. • Store occupancy costs including rent, maintenance, utilities, property taxes, business licenses, security costs and depreciation.Selling, General and Administrative Expenses • Payroll, benefit costs and incentive compensation for store, regional and corporate employees; • Occupancy and maintenance costs of corporate office facilities; • Depreciation and amortization related to corporate office assets; • Advertising and marketing costs, net of reimbursement from vendors; • Tender costs, including costs associated with credit and debit card interchange fees; • Long-lived asset impairment charges; • Other administrative costs such as supplies, consulting, audit and tax preparation fees, and travel and lodging; and • Charitable contributions. 65Table of ContentsStore Opening CostsStore opening costs consist primarily of occupancy costs, which are included in cost of goods sold, and payroll expenses, which are included in selling,general and administrative expenses, in the statements of operations.AdvertisingThe Company expenses advertising costs as incurred, except for direct-mail advertising expenses which are recognized at the time of mailing.Advertising costs include such things as production and distribution of catalogs, print advertising costs, radio advertisements and grand openings and otherevents. Advertising expense, which is classified in selling, general and administrative expenses in the accompanying statements of operations, was $9.1million, $8.4 million and $6.6 million in fiscal years 2013, 2012 and 2011, respectively.Stock-Based CompensationThe Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718,Compensation-Stock Compensation (“ASC 718”), for accounting for equity instruments exchanged for employee services. Under the provisions of thisstatement, stock-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense ona straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). As required under this guidance, theCompany estimates forfeitures for options granted which are not expected to vest. Changes in these inputs and assumptions can materially affect themeasurement of the estimated fair value of the Company’s stock-based compensation expense.Income TaxesPrior to May 2, 2012, the Company was taxed as an “S” Corporation for income-tax purposes under section 1362 of the Internal Revenue Code andtherefore was not subject to federal and state income taxes (subject to exception in a limited number of state and local jurisdictions that did not recognize the “S”Corporation status). On May 2, 2012, the Company’s “S” Corporation status terminated as part of the Reorganization and the Company became subject tocorporate-level federal and state income taxes at prevailing corporate rates.As a result of this conversion, effective May 2, 2012, the Company accounts for income taxes and the related accounts using the asset and liabilitymethod in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Under this method, the Company accrues income taxes payable or refundableand recognizes deferred tax assets and liabilities based on differences between GAAP and tax bases of assets and liabilities. The Company measures deferredtax assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse, and recognizes the effect of a change inenacted rates in the period of enactment.The Company establishes assets and liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-notrecognition threshold. The Company includes in income tax expense any interest and penalties related to uncertain tax positions.Earnings per ShareBasic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using theweighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Incrementalshares of 294 thousand, 420 thousand and 500 thousand in fiscal years 2013, 2012 and 2011, respectively, were used in the calculation of diluted earningsper share.Concentration of Credit RiskFinancial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents. At February 1, 2014 andFebruary 2, 2013, and at various times throughout these years, the Company had cash in financial institutions in excess of the $250,000 amount insured bythe Federal Deposit Insurance Corporation. The Company typically invests its cash in highly rated, short-term commercial paper or in interest-bearing moneymarket funds. 66Table of ContentsUse of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates andassumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements andthe reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, managementreviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.Recent Accounting PronouncementsIn July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized TaxBenefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues TaskForce)”. The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating losscarryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reductionto a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such anunrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures.The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments inASU No. 2013-11 are not expected to have a material impact on the Company’s financial position, results of operations or liquidity. 3.Marketable SecuritiesMarketable securities are classified as available-for-sale and, as of February 1, 2014 and February 2, 2013, consisted entirely of commercial paper, allof which were less than one year from maturity.The following table summarizes the Company’s investments in marketable securities at February 1, 2014 and February 2, 2013 (in thousands): February 1, 2014 Cost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value Commercial paper $34,923 $23 $(3) $34,943 February 2, 2013 Cost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value Commercial paper $39,839 $31 $(2) $39,868 For the fiscal year ended February 1, 2014, the Company recognized gains on investments of $0.2 million for commercial paper which matured duringthe period. Upon recognition of the gains, the Company reclassified these amounts out of accumulated other comprehensive income and into other income(expense), net, on the consolidated statements of income. 4.ReceivablesAt February 1, 2014 and February 2, 2013, receivables consisted of the following (in thousands): February 1,2014 February 2,2013 Credit and debit card receivables $2,372 $2,116 Tenant allowances due from landlords 2,849 3,339 Income tax receivable 2,964 — Other 360 479 Total receivables $8,545 $5,934 67Table of Contents5.Prepaid Expenses and Other Current AssetsAt February 1, 2014 and February 2, 2013, prepaid expenses and other current assets consisted of the following (in thousands): February 1,2014 February 2,2013 Prepaid rent $6,204 $5,411 Prepaid maintenance agreements 892 576 Prepaid insurance 532 367 Deferred taxes 3,379 4,533 Other 765 500 Total prepaid expenses and other current assets $11,772 $11,387 6.Property and EquipmentAt February 1, 2014 and February 2, 2013, property and equipment consisted of the following (in thousands): February 1,2014 February 2,2013 Leasehold improvements $99,719 $84,242 Furniture and fixtures 35,043 31,104 Machinery and equipment 26,990 25,073 Building under capital lease 7,840 7,840 Computer hardware and software 19,796 14,422 Construction in progress 16,998 5,938 Vehicles 1,381 1,205 207,767 169,824 Accumulated depreciation and amortization (106,831) (88,898) Property and equipment, net $100,936 $80,926 Depreciation and amortization expense related to property and equipment was $19.4 million, $16.7 million and $15.1 million in fiscal years 2013,2012 and 2011, respectively.The Company incurred costs of $42.2 million, $34.0 million and $21.8 million for capital expenditures in fiscal years 2013, 2012 and 2011,respectively. 7.Accrued ExpensesAt February 1, 2014 and February 2, 2013, accrued expenses consisted of the following (in thousands): February 1,2014 February 2,2013 Sales and use taxes payable $1,566 $2,200 Minimum rent and common area maintenance 870 853 Accrued construction 1,780 2,875 Accrued merchandise returns 572 703 Income taxes payable — 156 Other 4,453 5,345 Total accrued expenses $9,241 $12,132 68Table of Contents8.Line of CreditOn May 3, 2012, the Company entered into an amended and restated credit agreement with Wells Fargo Bank, N.A., which the Company amended onMarch 17, 2014 to extend the maturity date, reduce the borrowing rate, eliminate a fee of 0.10% on the average daily unused amount on the line of credit,eliminate certain financial covenants related to current liabilities, funded debt and net profits, and add certain new covenants relating to total net losses andmaximum balance sheet leverage. The amended credit facility continues to provide for a $25.0 million revolving line of credit with a maturity date of May 31,2017. The interest charged is either at the London Interbank Offered Rate, or LIBOR, plus 1.00%, or at the bank’s prime rate. The Company has the ability toselect between the prime rate or LIBOR-based rate at the time of a cash advance. The revolving credit facility is secured by substantially all of the Company’sassets. As a sub-feature under the revolving credit facility the bank may issue stand-by and commercial letters of credit up to $15.0 million.The Company is required to maintain certain financial and nonfinancial covenants in accordance with the revolving credit facility. The financialcovenants require certain levels of leverage and profitability, such as an aggregate maximum net loss after taxes not to exceed $5 million, and a maximum ratioof 2.00 to 1.00 for “balance sheet leverage”, defined as total liabilities divided by total tangible net worth.As of February 1, 2014 and February 2, 2013, the Company was in compliance with all of its covenants and had no outstanding borrowings under theline of credit. 9.LeasesThe Company conducts all of its retail sales and corporate operations in leased facilities. Lease terms generally range up to ten years and provide forescalations in base rents. The Company is generally not obligated to renew leases. Certain leases provide for additional rent based on a percentage of sales andannual rent increases generally based upon the Consumer Price Index. In addition, many of the store leases contain certain co-tenancy provisions that permitthe Company to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease.The Company leases warehouse space (15 Chrysler, Irvine, California) that is owned by one of the co-founders of Tilly’s. The lease expires onOctober 31, 2014 and is being accounted for as an operating lease. The lease provides for base monthly payments of $16,118 which increase every twelvemonths at $0.03 per square foot per month. As of February 1, 2014, the Company’s monthly lease payment was $17,166. The Company incurred rentexpense of $0.2 million in both of the fiscal years 2013 and 2012 related to this lease. The Company subleases part of the building to an unrelated third party.The sublease began on December 1, 2010 and terminates on May 31, 2014. The sublease provides for base monthly payments of $11,223, which increasesannually at a rate of $0.03 per square foot. As of February 1, 2014, the Company’s monthly income was $12,754 related to this sublease.The Company leases office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tilly’s.The lease expires on June 30, 2022 and is being accounted for as an operating lease. The lease provides for base monthly payments of $27,037 which adjustannually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase.As of February 1, 2014, the Company’s monthly lease payment was $27,848. The Company occupied the building on June 29, 2012 and incurred rentexpense of $0.4 million and $0.2 million in fiscal years 2013 and 2012, respectively, related to the lease.The Company leases a building (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tilly’s. The lease expires onOctober 31, 2021 and is being accounted for as an operating lease. The Company intends to use this property as its e-commerce distribution center. Pursuantto the lease agreement, the Company requested during fiscal 69Table of Contentsyear 2012 that the landlord expand the building. Upon commencement of the building expansion, the Company returned the building to the landlord. As ofFebruary 2, 2013, the landlord returned the expanded building to the Company. The lease provides for base monthly payments of $51,942, however the leasealso provides for increased base monthly payments of $68,174 after the building was expanded by the landlord. The lease payments adjust annually basedupon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase. Monthly leasepayments of $73,854 commenced in February 2013, and the Company incurred rent expense of $1.1 million and $0.6 million in fiscal years 2013 and 2012,respectively, related to this lease.Future minimum rental commitments, by year and in the aggregate, under noncancellable operating leases for the above three buildings and all of theCompany’s store locations as of February 1, 2014 are as follows (in thousands): Fiscal Year Related Party Other Total 2013 $2,129 $41,553 $43,682 2014 2,209 44,228 46,437 2015 2,247 41,769 44,016 2016 2,206 38,455 40,661 2017 1,503 37,498 39,001 Thereafter 4,186 93,487 97,673 Total $14,480 $296,990 $311,470 Rent expense under noncancellable operating leases for fiscal years 2013, 2012 and 2011 was as follows (in thousands): February 1,2014 February 2,2013 January 28,2012 Minimum rentals $43,353 $37,324 $30,661 Contingent rentals 38 19 50 Total rent expense $43,391 $37,343 $30,711 The Company leases its corporate headquarters and distribution center (10 and 12 Whatney, Irvine, California) from a company that is owned by theco-founders of Tilly’s. On June 29, 2012, the Company exercised the first of its three five-year renewal options on this lease, with the renewal commencing onJanuary 1, 2013. The lease now expires on December 31, 2017. The land component of this lease is accounted for as an operating lease (included in theoperating lease commitments schedule above) and the building component is accounted for as a capital lease. The monthly payments under the operatingportion of the lease were $77,438 as of February 1, 2014. The obligation under the capital lease was $3.3 million and $4.0 million as of February 1, 2014 andFebruary 2, 2013, respectively. The gross amount of the building under capital lease was $7.8 million as of February 1, 2014 and February 2, 2013. Theaccumulated depreciation of the building under capital lease was $5.8 million and $5.3 million as of February 1, 2014 and February 2, 2013, respectively.The Company incurred rent expense of $0.9 million in each of the fiscal years 2013, 2012 and 2011 related to the operating (land component) of this lease.Future commitments under the Company’s related party capital lease obligation as of February 1, 2014 are as follows (in thousands): Fiscal Year 2014 860 2015 940 2016 940 2017 860 2018 — Thereafter — Total minimum lease payments 3,600 Less amount representing interest 410 Present value of net minimum lease payments 3,190 Less current portion 758 Long-term portion $2,432 70Table of ContentsPrior to signing each of the related party leases above, the Company received an independent market analysis regarding the property and thereforebelieves that the terms of each lease are reasonable and not materially different from terms the Company would have obtained from an unaffiliated third party. 10.Commitments and ContingenciesEmployment AgreementsOn February 21, 2011, Daniel Griesemer joined the Company as its President and Chief Executive Officer. The Company is subject to an employmentagreement with Mr. Griesemer which provides for compensation and certain other benefits. The employment agreement also provides for severance paymentsunder certain circumstances. The Company did not have any other employment agreements as of February 1, 2014.Indemnifications, Commitments, and GuaranteesDuring the normal course of business, the Company has made certain indemnifications, commitments, and guarantees under which Tilly’s may berequired to make payments for certain transactions. These indemnifications include those given to various lessors in connection with facility leases for certainclaims arising from such facility or lease, and indemnifications to directors and officers of the Company to the maximum extent permitted under the laws ofthe state of California. The majority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potentialfuture payments the Company could be obligated to make, and their duration may be indefinite. The Company has not recorded any liability for theseindemnifications, commitments, and guarantees in the accompanying balance sheets as the impact is expected to be immaterial.Legal ProceedingsFrom time to time, the Company may become involved in lawsuits and other claims arising from our ordinary course of business. Management iscurrently unable to predict the ultimate outcome of any litigation or claim, determine whether a liability has been incurred or make an estimate of thereasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss onany pending litigation or claim. Because of the unpredictable nature of these matters, the Company cannot provide any assurances regarding the outcome ofany litigation or claim to which it is a party or that the ultimate outcome of any of the matters threatened or pending against it, including those disclosed below,will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. See Item 1A “Risk Factors—Litigation costsand the outcome of litigation could have a material adverse effect on our business” included in this report.Kristin Christiansen and Shellie Smith, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, Superior Court ofCalifornia, County of Sacramento, Case No. 34-2013-00139010. On January 29, 2013, the plaintiffs in this matter filed a putative class action lawsuitagainst the Company alleging violations of California Civil Code Section 1747.08, which prohibits requesting or requiring personal identification informationfrom a customer paying for goods with a credit card and recording such information, subject to exceptions. In June 2013, the Court granted theCompany’s motion to strike portions of the plaintiffs’ complaint and granted plaintiffs leave to amend. Plaintiffs have amended the complaint and discoveryis in the early stages. The complaint seeks certification of a class, unspecified damages, injunctive relief and attorneys’ fees. The Company intends to defendthis case vigorously.Maria Rebolledo, individually and on behalf of all others similarly situated and on behalf of the general public vs. Tilly’s, Inc.; World of Jeans &Tops, Superior Court of the State of California, County of Orange, Case No. 30-2012-00616290-CU-OE-CXC. On December 5, 2012, the plaintiff inthis matter filed a putative class action lawsuit against the Company alleging violations of California’s wage and hour, meal break and rest break rules andregulations, and unfair competition law, among other things. An amended complaint was filed on February 28, 2013, to include enforcement of California’sprivate attorney general act. The complaint seeks an unspecified amount of damages and penalties. In April 2013, the Company filed a motion to compelarbitration, which was denied in May 2013. The Company has appealed the denial of the motion to compel arbitration. The Company intends to defend thiscase vigorously. 71Table of Contents11.Fair Value MeasurementsASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value isdefined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at themeasurement date. ASC 820 established the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value: • Level 1 – Quoted prices in active markets for identical assets and liabilities. • Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the fullterm of the assets or liabilities. • Level 3 – Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities.The Company measures certain financial assets at fair value on a recurring basis, including its marketable securities, which are classified as available-for-sale securities, and certain cash equivalents, specifically money market accounts. The money market accounts are valued based on quoted market pricesin active markets. The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or othermodels that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party entities.The Company did not make any transfers between Level 1 and Level 2 financial assets during fiscal years 2013 and 2012. Furthermore, as ofFebruary 1, 2014 and February 2, 2013, the Company did not have any Level 3 financial assets. The Company conducts reviews on a quarterly basis toverify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.In accordance with the provisions of ASC 820, the Company categorized its financial assets based on the priority of the inputs to the valuationtechnique for the instruments as follows (in thousands): February 1, 2014 February 2, 2013 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents: Money market securities $25,316 $— $— $15,224 $— $— Marketable securities: Commercial paper — 34,943 — — 39,868 — During fiscal year 2013, certain long-lived assets with carrying values totaling $1.8 million at four of the Company’s retail stores were determined to beunable to recover their carrying values and, therefore, were written down to their fair value, resulting in a loss on impairment of assets of $1.8 million. Thefair value of these assets was determined using Level 3 inputs and the valuation techniques are described in Note 2 to the Consolidated Financial Statements.The Company has no other financial instruments that would be considered significant for fair value measurement purposes. 12.Impairment of Long-Lived AssetsThe Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the net carrying amounts of suchassets may not be recoverable. Based on management’s review of the historical operating performance, including sales trends, gross margin rates, current cashflows from operations and the projected outlook for each of the Company’s stores, the Company determined in the fourth quarter of fiscal years 2013 and2011 that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover the Company’s investment inthe respective stores. As a result, the Company recorded a $1.8 million impairment charge related to four stores in fiscal year 2013 and a $0.6 millionimpairment charge related to one store in fiscal year 2011. The impaired long-lived assets consisted primarily of leasehold improvements, furniture, fixturesand equipment. The Company concluded that there was no impairment of long-lived assets at any of its retail stores in fiscal year 2012. 72Table of ContentsIf the Company is not able to achieve its projected key financial metrics, the Company may incur additional impairment in the future for those retailstores tested and not deemed to be impaired in its analysis, as well as for additional retail stores not tested in its most recent analysis. 13.Stock-Based CompensationThe Tilly’s 2007 Stock Option Plan (“2007 Plan”) authorized the Company to issue options to employees, consultants and directors to purchase up to atotal of 1,600,000 shares of common stock. The 2007 Plan provided for awards in the form of incentive stock options or nonqualified stock options. As ofFebruary 1, 2014, all awards granted by the Company have been nonqualified stock options. Under the 2007 Plan, stock options were granted at an exerciseprice equal to the fair value of the Company’s common stock at the date of grant. The stock options have graded vesting over a four-year period and generallyexpire at the earlier of 30 days after employment or services are terminated, or ten years from the date of the grant. No stock options were granted from the 2007Plan during fiscal years 2013 and 2012, and stock options may no longer be issued from the 2007 Plan subsequent to the IPO.On May 3, 2012, in connection with the completion of the IPO, the Company recognized $7.6 million of stock-based compensation expense relating tostock options previously granted to employees and directors under the Tilly’s 2007 Stock Option Plan (the “2007 Plan”). This amount represented thecumulative stock-based compensation expense from the inception of the 2007 Plan through the IPO date, as the Company had not previously recognized anystock-based compensation expense for these awards due to the performance condition wherein, if the stock options were vested, they would only becomeexercisable upon the consummation of the Company’s IPO. In connection with the recognition of stock-based compensation, the Company recorded an increasein noncurrent deferred tax assets and income taxes payable of $3.0 million.During fiscal year 2012, the Company granted certain existing and new employees with options to purchase a total of 730,500 shares of Class Acommon stock under the Tilly’s 2012 Equity and Incentive Award Plan (“2012 Plan”). The exercise prices of these awards range between $15.50 and $18.37per share, and were set equal to the Company’s closing stock price on the date of each grant.During fiscal year 2013, the Company granted certain existing and new employees with options to purchase a total of 619,500 shares of Class Acommon stock under the 2012 Plan. The exercise prices of these awards range between $12.82 and $16.24 per share, and were set equal to the Company’sclosing stock price on the date of each grant.All stock options granted in fiscal years 2013 and 2012 vest in four equal annual installments beginning on the first anniversary of the date of grant,provided that the respective award recipient continues to be employed by the Company through each of those vesting dates. The total grant date fair value ofstock options granted in fiscal years 2013 and 2012 was $3.9 million and $6.6 million, respectively, before applying an estimated forfeiture rate, with grantdate fair values ranging from $6.17 to $7.83 per share in fiscal year 2013 and from $7.69 to $9.65 per share in fiscal year 2012. The Company isrecognizing the expense relating to these stock options, net of estimated forfeitures, on a straight-line basis over the four year service period of the awards.The stock option awards discussed above were measured at fair value on the grant date using the Black-Scholes option valuation model. Key inputassumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of theCompany’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected annual dividend yield,if any. The Company’s estimate of pre-vesting forfeitures, or forfeiture rate, was based on its internal analysis, which included the award recipients’ positionswithin the Company and the vesting period of the awards. The Company will issue shares of Class A common stock when the options are exercised.The fair values of stock options granted in fiscal years 2013, 2012 and 2011 were estimated on the grant dates using the following assumptions: Fiscal Year Ended February 1,2014 February 2,2013 January 28,2012Expected option term(1) 5.0 years 5.0 years 5.0 yearsExpected volatility factor(2) 55.0% - 56.2% 57.6% - 62.9% 59.7%Risk-free interest rate(3) 0.8% - 1.7% 0.6% - 0.8% 2.2%Expected annual dividend yield 0% 0% 0% 73Table of Contents(1)The Company has limited historical information regarding expected option term. Accordingly, the Company determined the expected option term of theawards using the latest historical data available from comparable public companies and management’s expectation of exercise behavior.(2)Stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s competitors’ common stockover the most recent period equal to the expected option term of the Company’s awards.(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grantdate.The following table summarizes the Company’s stock option activity for fiscal year 2013 (aggregate intrinsic value in thousands): StockOptions Grant DateWeightedAverageExercise Price WeightedAverageRemainingContractualLife (in Years) AggregateIntrinsicValue(1) Outstanding at February 2, 2013 2,133,625 $12.83 Granted 619,500 $13.12 Exercised (280,460) $8.37 Forfeited (115,875) $15.36 Outstanding at February 1, 2014 2,356,790 $13.31 7.3 $1,894 Vested and expected to vest at February 1, 2014 2,170,421 $13.20 $7.2 $1,883 Exercisable at February 1, 2014 993,665 $11.65 5.7 $1,836 (1)Intrinsic value for stock options is defined as the difference between the market price of the Company’s Class A common stock on the last business dayof the fiscal quarter and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market valueper share was $11.61 at January 31, 2014.A summary of the status of non-vested stock options as of February 1, 2014 and changes during fiscal years 2013, 2012 and 2011 are presented below: Shares Weighted-AverageGrant-DateFair Value Nonvested at January 29, 2011 429,375 $4.70 Granted 578,000 8.52 Vested (241,500) 5.42 Nonvested shares forfeited (9,250) 6.41 Nonvested at January 28, 2012 756,625 $7.37 Granted 730,500 9.01 Vested (226,500) 6.71 Nonvested shares forfeited (40,750) 8.15 Nonvested at February 2, 2013 1,219,875 $8.44 Granted 619,500 6.31 Vested (386,500) 7.80 Nonvested shares forfeited (89,750) 8.89 Nonvested at February 1, 2014 1,363,125 $7.63 On May 4, 2012, the Company granted 5,161 restricted shares of Class A common stock to each of its four independent directors under the 2012 Plan.These shares vest in two equal annual installments beginning on May 4, 2013, provided that the respective award recipient continues to serve on theCompany’s board of directors through each of those vesting dates. The grant date fair value of these awards totaled $0.3 million. The Company is recognizingthe expense relating to these awards on a straight line basis over a two-year service period commencing on the date of grant.On June 12, 2013, the Company granted 4,944 restricted shares of Class A common stock to each of its four independent directors under the 2012 Plan.These shares vest in two equal annual installments beginning on June 12, 2014, provided that the respective award recipient continues to serve on theCompany’s board of directors through each of those vesting dates. The grant date fair value of these awards totaled $0.3 million. The Company is recognizingthe expense relating to these awards on a straight line basis over a two-year service period commencing on the date of grant. 74Table of ContentsThere are a total of 2,913,900 shares issuable under the 2012 Plan, of which 1,633,145 shares were still available for issuance as of February 1, 2014.The Company recorded a total of $3.1 million and $9.6 million of stock-based compensation expense in fiscal years 2013 and 2012, respectively.Stock-based compensation expense in fiscal year 2012 includes the one-time charge of $7.6 million noted above. At February 1, 2014, there was $6.0 millionof total unrecognized stock-based compensation expense related to unvested stock options and restricted stock grants. This cost has a weighted averageremaining recognition period of 2.4 years. 14.Retirement Savings PlanThe Tilly’s 401(k) Plan (the “401(k) Plan”) is a qualified plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan covers all employeesthat have attained age 21 and completed at least three months of employment tenure. Company matching contributions to the 401(k) Plan are at the discretionof the Board of Directors. Total employer contributions to the 401(k) Plan totaled $0.6 million, $0.5 million and $0.5 million in fiscal years 2013, 2012 and2011, respectively. 15.Income TaxesOn May 2, 2012, as part of the Reorganization described in Note 1 to the Consolidated Financial Statements, the Company’s “S” Corporation statuswas terminated and the Company became subject to corporate-level federal and state income taxes at prevailing corporate rates. Prior to the Reorganization,income tax expense was mainly comprised of a 1.5% California franchise tax.The components of income tax expense for fiscal years 2013 and 2012 were as follows (in thousands): Fiscal Year Ended February 1,2014 February 2,2013 Current: Federal $9,591 $11,311 State 2,304 2,796 11,895 14,107 Deferred: Federal (293) (4,257) State (11) (2,444) (304) (6,701) Total income tax expense $11,591 $7,406 The Company’s income tax expense was $0.4 million in fiscal year 2011.A reconciliation of income tax expense to the amount computed at the federal statutory rate for fiscal years 2013 and 2012 (in thousands) is as follows: Fiscal Year Ended February 1,2014 February 2,2013 Federal taxes at statutory rate $10,405 $10,955 State and local income taxes, net of federal benefit 1,517 1,299 Impact of change in tax status — (2,962) Tax effect of earnings not subject to federal income tax due to “S” Corporationstatus — (2,094) Return to provision adjustments (369) — Other 38 208 Total income tax expense $11,591 $7,406 75Table of ContentsAs a result of the Reorganization, the Company recorded an increase in current deferred tax assets of $3.6 million, an increase in noncurrent deferred taxliabilities of $0.6 million and a one-time deferred tax benefit of $3.0 million during the second quarter of fiscal year 2012.Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes and (b) operating loss and tax credit carry-forwards. The Company records net deferred tax assets tothe extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negativeevidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financialoperations. Significant components of deferred tax assets and liabilities as of February 1, 2014 and February 2, 2013 were as follows (in thousands): February 1,2014 February 2,2013 Deferred tax assets: Deferred rent $4,970 $4,481 Stock-based compensation 4,245 3,616 Accrued expenses 1,334 1,553 Inventories 1,816 2,223 Compensation and benefits 575 602 Capital lease 485 561 Deferred revenue 425 545 Total deferred tax assets 13,850 13,581 Deferred tax liabilities: Property and equipment (5,840) (6,256) Prepaid expenses (763) (378) Marketable securities (8) (12) Total deferred tax liabilities (6,611) (6,646) Net deferred tax asset $7,239 $6,935 The Company’s net deferred tax asset was $0.2 million at January 28, 2012.Uncertain Tax PositionsAs of February 1, 2014 and February 2, 2013, there were no material unrecognized tax benefits. The Company does not anticipate that there will be amaterial change in the balance of the unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recordedin income tax expense. The Company did not recognize any interest or penalties related to unrecognized tax benefits during fiscal years 2013, 2012 and 2011.The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. Income tax returns for fiscal year2009 to present are open for examination in the federal jurisdiction and in significant state jurisdictions. 16.Earnings Per ShareThe Company’s common stock consists of two classes: Class A and Class B. The Class A and Class B common stock have identical rights, exceptwith respect to voting and conversion.Earnings per share is computed under the provisions of ASC Topic 260, Earnings Per Share. Basic earnings per share is computed based on theweighted average number of common shares outstanding during the period. Diluted earnings per share for Class A common stock is calculated using the “if-converted” method, which assumes the conversion of all shares of Class B common stock to Class A common stock on a one-for-one basis, as this method ismore dilutive than the two-class method. Diluted earnings per share for Class B common stock does not assume conversion of Class B common stock toshares of Class A common stock. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect ofdilutive potential common shares outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortizedcompensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by the Company to purchase the common shares atthe average market price during the period. Dilutive potential common shares represent outstanding stock options and restricted stock awards. The dilutiveeffect of stock options and restricted stock is applicable only in periods of net income. 76Table of ContentsThe components of basic and diluted earnings per share of Class A and Class B common stock, in aggregate, for fiscal years 2013, 2012 and 2011 areas follows (in thousands, except per share amounts): Fiscal Year Ended February 1,2014 February 2,2013 January 28,2012 Net income $18,137 $23,893 $34,340 Weighted average basic shares outstanding 27,822 25,656 20,000 Dilutive effect of stock options and restricted stock 294 420 500 Weighted average shares for diluted earnings per share 28,116 26,076 20,500 Basic earnings per share of Class A and Class B common stock $0.65 $0.93 $1.72 Diluted earnings per share of Class A and Class B common stock $0.65 $0.92 $1.68 The earnings per share amounts are the same for Class A and Class B common stock, in aggregate, and individually for Class A and Class B commonstock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Shares of Class A andClass B common stock vote together as a single class on all matters submitted to a vote of stockholders. Holders of Class A common stock are entitled to onevote per shares and holders of Class B common stock are entitled to 10 votes per share.Total stock options of 1,766,000, 1,263,500 and 576,000 as of February 1, 2014, February 2, 2013 and January 28, 2012, respectively, have beenexcluded from the calculation of diluted earnings per share as the effect of including these stock options would have been anti-dilutive. 17.Related PartiesAs discussed in Note 9 to the Consolidated Financial Statements, the Company leases its corporate headquarters, distribution center and warehousespace from companies that are owned by the co-founder of Tilly’s.There were no other related party transactions in fiscal years 2013, 2012 and 2011. 77Table of Contents18.Quarterly Financial Information (Unaudited)The tables below set forth selected quarterly financial data for each of the last two fiscal years (in thousands, except per share data). Each of the quarterspresented was thirteen weeks in duration, except the fourth quarter of fiscal year 2012, which was fourteen weeks. Fiscal Year Ended February 1, 2014 First Second Third Fourth Quarter Quarter Quarter Quarter (unaudited) (unaudited) (unaudited) (unaudited) Net sales $109,119 $123,043 $123,779 $139,896 Gross profit 32,198 38,155 38,192 43,750 Operating income (loss) 3,917 7,199 10,150 8,471 Net income (loss) 2,308 4,267 6,145 5,417 Basic earnings (loss) per share 0.08 0.15 0.22 0.19 Diluted earnings (loss) per share 0.08 0.15 0.22 0.19 Fiscal Year Ended February 2, 2013 FirstQuarter SecondQuarter (1) ThirdQuarter FourthQuarter (unaudited) (unaudited) (unaudited) (unaudited) Net sales $96,524 $105,101 $124,895 $140,771 Gross profit 30,418 31,144 41,808 46,825 Operating income 6,026 (3,318) 13,868 14,814 Net income 5,914 (1,156) 9,294 9,841 Basic earnings per share 0.30 (0.04) 0.34 0.36 Diluted earnings per share 0.29 (0.04) 0.33 0.35 (1)As discussed in Notes 1, 2 and 14 to the Consolidated Financial Statements, during the second quarter of fiscal year 2012 (fiscal year endedFebruary 2, 2013) the Company converted from an “S” Corporation to a “C” Corporation for income tax purposes. Also during that quarter, asdiscussed in Note 12 to the Consolidated Financial Statements, the Company recognized $7.6 million of compensation expense related to stock optionsthat became exercisable upon the consummation of the Company’s May 3, 2012 IPO. 19.Subsequent EventsAs disclosed in Note 8 to the Consolidated Financial Statements, the Company amended its credit agreement with Wells Fargo Bank, N.A. on March17, 2014. 78Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresNone. Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresAs required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management hasevaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report.Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports wefile or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of theSecurities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing andevaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating andimplementing possible controls and procedures.We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluationand subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report,the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submitunder the Exchange Act is recorded, processed, summarized and reported as and when required.Management’s Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act.Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief FinancialOfficer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies andprocedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of ourboard of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assetsthat could have a material effect on our financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of suchlimitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However,these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though noteliminate, this risk. 79Table of ContentsManagement conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of February 1, 2014 usingthe framework set forth in the report entitled, “Internal Control — Integrated Framework (1992 framework), issued by the Committee of SponsoringOrganizations of the Treadway Commission, or the COSO Report. Based on management’s evaluation and the criteria set forth in the COSO Report,management concluded that our internal control over financial reporting was effective as of February 1, 2014. Our internal control over financial reporting wasnot subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit the Company, as an emerginggrowth company, to provide only management’s report in this annual report.Changes in Internal Control over Financial ReportingManagement has determined that, as of February 1, 2014, there were no changes in our internal control over financial reporting that occurred during ourmost recent fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other InformationNone. 80Table of ContentsPART III Item 10.Directors, Executive Officers and Corporate GovernanceThe information required by this Item is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting ofStockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 1, 2014 (the “2014 Proxy Statement”).In addition, our Board of Directors has adopted a Code of Business Ethics that applies to all of our directors, employees and officers, including ourChief Executive Officer, Chief Financial Officer and Principal Accounting Officer. The current version of the Code of Business Ethics is available on ourwebsite under the Investor Relations section at www.tillys.com. In accordance with rules adopted by the SEC and the New York Stock Exchange, we intend topromptly disclose any amendments to certain provisions of the Code of Business Ethics, or waivers of such provisions granted to executive officers anddirectors, on our website under the Investor Relations section at www.tillys.com. Item 11.Executive CompensationThe information required by this Item is incorporated herein by reference to the Company’s 2014 Proxy Statement. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated herein by reference to the Company’s 2014 Proxy Statement. Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is incorporated herein by reference to the Company’s 2014 Proxy Statement. Item 14.Principal Accounting Fees and ServicesThe information required by this Item is incorporated herein by reference to the Company’s 2014 Proxy Statement. 81Table of ContentsPART IV Item 15.Exhibits, Financial Statement SchedulesFinancial Statements and Financial Statement SchedulesSee “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omittedbecause they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidatedfinancial statements or the accompanying notes.ExhibitsThe exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. 82Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized, on April 1, 2014. Tilly’s, Inc./s/ Daniel GriesemerDaniel GriesemerPresident, Chief Executive Officer and Director (PrincipalExecutive Officer)/s/ Jennifer L. EhrhardtJennifer L. EhrhardtChief Financial Officer (Principal Financial Officer andPrincipal Accounting Officer)POWER OF ATTORNEYEach person whose signature appears below constitutes and appoints Daniel Griesemer and Jennifer L. Ehrhardt, and each of them singly, his or hertrue and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in anyand all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all other documentsin connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do andperform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or hersubstitute or substitutes may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons in the capacities and as ofthe dates indicated on April 1, 2014. Signature Title/s/ Daniel GriesemerDaniel Griesemer President, Chief Executive Officer and Director (Principal Executive Officer)/s/ Jennifer L. Ehrhardt Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Jennifer L. Ehrhardt /s/ Hezy Shaked Executive Chairman of the Board and Chief Strategy OfficerHezy Shaked /s/ Doug Collier DirectorDoug Collier /s/ Seth Johnson DirectorSeth Johnson /s/ Janet Kerr DirectorJanet Kerr /s/ Bernard Zeichner DirectorBernard Zeichner 83Table of ContentsEXHIBIT INDEX Exhibit No. Description of Exhibit3.1 Amended and Restated Certificate of Incorporation of Tilly’s, Inc.(3)3.2 Amended and Restated Bylaws of Tilly’s, Inc.(9)4.1 Form of Class A common stock certificate(5)10.1 Form of indemnification agreement between Tilly’s and each of its directors and officers(3)10.2 Amended and Restated Office and Warehouse Lease between Shaked Holdings, LLC and World of Jeans & Tops, dated as of September 21,2007 (10 and 12 Whatney, Irvine, California)(1)10.3 Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated as of November 1, 2010 (15 Chrysler,Irvine, California)(1)10.4 Amendment #1 to Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated as of November 1, 2010(15 Chrysler, Irvine, California)(1)10.5 Amendment #2 to Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated as of July 1, 2012 (15Chrysler, Irvine, California)(7)10.6 Form of Amended and Restated Tilly’s 2007 Stock Option Plan(3)10.7 Form of Stock Option Agreement Pursuant to 2007 Plan (Senior Executive Form)(3)10.8 Form of Stock Option Agreement Pursuant to 2007 Plan (Non-Executive Form)(3)10.9 Form of re-priced stock option grant agreement pursuant to the 2007 Plan(3)10.10 Form of Tilly’s 2012 Equity and Incentive Award Plan(4)10.11 Form of Stock Option Award Agreement Pursuant to 2012 Plan(4)10.12 Form of Restricted Stock Award Agreement Pursuant to 2012 Plan(4)10.12.1 Form of Amended Restricted Stock Award Agreement Pursuant to 2012 Plan(10)10.13 Offer Letter, dated as of January 15, 2011, by and between Daniel Griesemer and World of Jeans & Tops, d/b/a Tilly’s(1)10.14 Cancellation of Loan Guaranty for World of Jeans & Tops dated March 9, 2011 from Union Bank(2)10.15 Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated September 2, 2011 (11 Whatney, Irvine,California)(3)10.16 Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated November 1, 2011 (17 Pasteur, Irvine,California)(4)10.17 Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo Bank, NA dated as of May 3, 2012(6) 84Table of Contents10.18 Form of General Pledge Agreement between Tilly’s, Inc. and Wells Fargo Bank, NA dated as of May 3, 2012(6)10.19 Form of Amended and Restated Security Agreement-Equipment, between World of Jeans & Tops and Wells Fargo Bank, NA dated as of May3, 2012(6)10.20 Form of Amended and Restated Security Agreement-Rights to Payment and Inventory, between World of Jeans & Tops and Wells Fargo Bank,NA dated as of May 3, 2012(6)10.21 Form of Continuing Guaranty of Tilly’s, Inc. with Wells Fargo Bank, NA dated as of May 3, 2012(6)10.22 Form of Revolving Credit Agreement Note from World of Jeans & Tops dated as of May 3, 2012(6)10.23 Form of S Corporation Termination, Tax Allocation and Indemnification Agreement among Tilly’s, Inc., World of Jeans & Tops and theshareholders of World of Jeans & Tops (including Form of Promissory Note as Exhibit A thereto)(3)10.24 Form of Share Exchange Agreement among Tilly’s, Inc., World of Jeans & Tops and the shareholders of World of Jeans & Tops (3)10.25 Offer Letter between Tilly’s, Inc. and Jennifer Ehrhardt entered into on August 28, 2013(8)21.1* Subsidiaries of Tilly’s, Inc.23.1* Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm24.1+ Power of Attorney (included on signature page)31.1* Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1* Section 1350 Certifications101 The following materials from Tilly’s, Inc.’s Annual Report on Form 10-K for the year ended February 1, 2014 formatted in eXtensibleBusiness Reporting Language (XBRL): (i) Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013; (ii) ConsolidatedStatements of Income for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012; (iii) Consolidated Statements ofComprehensive Income for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012; (iv) Consolidated Statementsof Stockholders’ Equity for the fiscal years ended February 1, 2014 and February 2, 2013 and January 28, 2012; (v) ConsolidatedStatements of Cash Flows for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012; and (vi) the Notes to theConsolidated Financial Statements.** *Filed herewith**Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of a registrationstatement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 ofthe Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.(1)Filed as an exhibit to the Form S-1 (File No: 333-175299) filed July 1, 2011.(2)Filed as an exhibit to the Amendment No. 1 to the Form S-1 (File No.: 333-175299) filed August 11, 2011. 85Table of Contents(3)Filed as an exhibit to the Amendment No. 2 to the Form S-1 (File No.: 333-175299) filed September 7, 2011.(4)Filed as an exhibit to the Amendment No. 3 to the Form S-1 (File No.: 333-175299) filed March 23, 2012.(5)Filed as an exhibit to the Amendment No. 5 to the Form S-1 (File No.: 333-175299) filed April 23, 2012.(6)Filed as an exhibit to the quarterly report on Form 10-Q for the period ended April 28, 2012.(7)Filed as an exhibit to the quarterly report on Form 10-Q for the period ended July 28, 2012.(8)Filed as Exhibit 10.1 to the current report on Form 8-K filed August 28, 2013.(9)Filed as Exhibit 3.1 to the current report on Form 8-K filed November 19, 2013.(10)Filed as Exhibit 10.12.1 to the annual report on Form 10-K filed April 3, 2013. 86Exhibit 21.1Tilly’s, Inc.Subsidiaries Subsidiary State of Incorporation/FormationWorld of Jeans & Tops CaliforniaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-181148 on Form S-8 of our report dated April 1, 2014, relating to theconsolidated financial statements of Tilly’s, Inc., appearing in this Annual Report on Form 10-K of Tilly’s, Inc. for the year ended February 1, 2014./s/ Deloitte & Touche LLPCosta Mesa, CaliforniaApril 1, 2014Exhibit 31.1CERTIFICATIONSI, Daniel Griesemer, certify that: 1.I have reviewed this annual report on Form 10-K of Tilly’s, Inc. for the fiscal year ended February 1, 2014; 2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: April 1, 2014 /s/ Daniel GriesemerDaniel GriesemerPresident, Chief Executive Officerand DirectorExhibit 31.2CERTIFICATIONSI, Jennifer L. Ehrhardt, certify that: 1.I have reviewed this annual report on Form 10-K of Tilly’s, Inc. for the fiscal year ended February 1, 2014; 2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: April 1, 2014 /s/ Jennifer L. EhrhardtJennifer L. EhrhardtChief Financial OfficerExhibit 32.1Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002I, Daniel Griesemer, the Chief Executive Officer of Tilly’s, Inc, certify that (i) the annual report on Form 10-K for the fiscal year ended February 1,2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained inthe Report fairly presents, in all material respects, the financial condition and results of operations of Tilly’s, Inc. as of the dates and for the periods set forththerein.Date: April 1, 2014 /s/ Daniel GriesemerDaniel GriesemerPresident, Chief Executive Officerand DirectorI, Jennifer L. Ehrhardt, the Chief Financial Officer of Tilly’s, Inc, certify that (i) the annual report on Form 10-K for the fiscal year ended February 1, 2014(the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in theReport fairly presents, in all material respects, the financial condition and results of operations of Tilly’s, Inc. as of the dates and for the periods set forththerein.Date: April 1, 2014 /s/ Jennifer L. EhrhardtJennifer L. EhrhardtChief Financial Officer

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