Tilly’s
Annual Report 2014

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 OF 1934For the fiscal year ended January 31, 2015OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934Commission 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 of1934 during 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. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. Seethe 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 2, 2014, was $79,579,483 based on the closing sale price of $7.46 per share at August 1, 2014.The registrant had 11,976,582 shares of Class A common stock, par value $0.001 per share, outstanding at March 27, 2015. DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held June 10, 2015 are incorporated by reference into Part IIIof this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART IItem 1.Business5Item 1A.Risk Factors16Item 1B.Unresolved Staff Comments30Item 2.Properties30Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures32PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33Item 6.Selected Financial Data34Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations37Item 7A.Quantitative and Qualitative Disclosures About Market Risk56Item 8.Financial Statements and Supplementary Data57Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure83Item 9A.Controls and Procedures83Item 9B.Other Information84PART IIIItem 10.Directors, Executive Officers and Corporate Governance85Item 11.Executive Compensation85Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters85Item 13.Certain Relationships and Related Transactions, and Director Independence85Item 14.Principal Accounting Fees and Services85PART IVItem 15.Exhibits, Financial Statement Schedules86Signatures87 2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 projectionsrelating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-lookingstatements by 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 inconnection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we makerelating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives forfuture operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. Allforward-looking statements 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 efficiently utilize 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 arelocated; • 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 whichit will 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; 3Table of Contents • our ability to maintain comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile; • 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-looking statements included in this annual report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. 4Table of ContentsPART I Item 1.BusinessOur Company HistoryTilly’s is a destination specialty retailer of action sports inspired apparel, footwear and accessories. We believe we bring together an unparalleledselection of the most sought-after brands rooted in action sports, music, art and fashion. Our stores are designed to be a seamless extension of our teen andyoung adult consumers’ lifestyles with a balance of guys’ and womens’ merchandise in a stimulating environment. We believe our success across a variety ofreal estate venues and geographies in the United States demonstrates Tilly’s portability. Our motto “If it’s not here…it’s not happening” exemplifies our goalto 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, or “WOJT”, formed by our co-founders, which operatesunder the name “Tilly’s”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure ofWOJT in preparation for an initial public offering.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. ClassB 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.As used in this 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 its subsidiary afterthe 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 womens’ 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 engaging for our core customers. We believe that our differentiated in-store environment, evolvingselection of relevant brands and broader and deeper assortment positions us as a retail destination that appeals to a larger demographic thanmany other specialty retailers and encourages customers 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. 5Table of Contents • 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 January 31, 2015, we operated profitable stores in malls, power centers, neighborhood and lifestyle centers, outlet centersand street-front locations across 82 markets in 33 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. We distribute catalogs to potential and existing customers from our proprietary database to familiarize them with the Tilly’s brandand 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. We partner and collaborate with ourvendors on exclusive events and contests to build credibility with our target customers, actively involve them in our brands, and enhance theconnection between Tilly’s and the West Coast and action sports inspired lifestyle. We use social media to communicate directly with ourcustomers while also encouraging customers to interact with one another and provide feedback on our events and products. Also, through our“We Care Program”, we support and participate in various academic, art, and athletic programs at local schools and other organizations incommunities surrounding our stores. We implemented a customer loyalty program in January 2014, “The Tilly’s Hookup”, to further engage withour customers, build customer loyalty and gain customer insights. We also support Tilly’s Life Center, founded by Tilly Levine, our co-founder,which provides underprivileged youth a healthy and caring environment to help them create a well-defined sense of self, cultivate communitymindedness and release negative emotional stress. All of these programs are complemented by digital and email marketing as well as traditionalradio and print advertising to build customer awareness and loyalty, highlight key merchandise offerings, drive traffic to our stores and websiteand promote the Tilly’s brand. • Sophisticated systems and distribution/fulfillment infrastructure to support growth. Over the last seven years, we have invested approximately$50 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 thanmany of our competitors. Our distribution center allows us to quickly sort and process merchandise and deliver it to our stores in a floor-readyformat for immediate display. Our new e-commerce fulfillment center that we opened in the second quarter of fiscal year 2014 provides us 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 platform with minimal incrementalcapital investment. • Experienced management team. Our senior management team, led by Hezy Shaked and Daniel Griesemer, has extensive experience across a widerange of disciplines in the specialty retail and direct-to-consumer industries, including store operations, merchandising, distribution, real estate,and finance. Mr. Shaked, our Co-Founder, Executive Chairman of the Board of Directors, and Chief Strategy Officer, plays an important role indeveloping our long-term growth initiatives and cultivating our unique culture. Mr. Griesemer, our President and Chief Executive Officer, joinedTilly’s in February 2011 with 28 years of retail experience. He served in various roles with Coldwater Creek, Inc. from 2001 to 2009 includingmost recently as Chief Executive Officer. During his tenure, Coldwater Creek increased the store base from 13 to approximately 400 andincreased revenues from approximately $340 million to approximately $1.1 billion. Mr. Griesemer also served in leadership positions at Gap,Inc. and Macy’s, Inc. 6Table of ContentsGrowth 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 212 locations as of January 31, 2015 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 more thandoubled our store count over the last five years to 212 stores at January 31, 2015. We added 19 new stores in fiscal year 2014 and plan to add atleast 15 new stores in fiscal year 2015. Our new store expansion plan includes new store openings in both existing and new markets, and in mall,off-mall and outlet locations.As of January 31, 2015, we operated stores in 33 states. Over the past seven years we have grown our presence in existing markets andsuccessfully expanded into 64 new markets. We have entered new markets by opening stores in high traffic malls relevant to our core customer inorder to establish the Tilly’s brand, as well as in off-mall locations, including outlets, that effectively cover trade areas where our customers wantto shop. The opportunity exists to continue to significantly broaden our national footprint by entering new markets through both mall and off-mall locations, and outlet centers. • Refresh of Our Existing Stores. We believe that investing in our existing stores is strategically important to enhance customer loyalty, elevatethe customer experience, and in turn, drive comparable store sales and increase profitability. We expect to refresh at least 25 existing, high-volume stores in great locations within our original heritage markets, which includes stores in California, Arizona and Nevada, that have thepotential to see a meaningful improvement in customer satisfaction. • 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 and as we begin to refresh ourexisting stores. • 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. We believe that our target customer regularly shops online andwe see continued opportunity to grow our e-commerce platform significantly over time. Key factors driving growth include continuing oursuccessful catalog and online marketing efforts, adding more catalogs, offering a wider selection of Internet-exclusive merchandise andexpanding our online selection to ensure a broad and diverse offering of brands and products relative to our competition. We also believe we willsee continued growth in our e-commerce sales as we open additional stores and build brand awareness in the communities surrounding thoselocations. To support this growth, we opened our new e-commerce fulfillment center in May 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 previous investments in infrastructure, including our dedicated fulfillment center for e-commerce that opened inMay 2014, upgraded e-commerce platform, ongoing investments to upgrade our point-of-sale, merchandise allocation and merchandise planningsystems, as well as related work processes that we also expect to provide future leverage and growth. We also will continue to use establishedbusiness processes to identify and execute initiatives focused on lowering our unit costs and improving operational efficiency throughout ourorganization. 7Table of ContentsMerchandising, 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 womens’ 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 providesus better 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%,72% and 70% of our net sales is fiscal years 2014, 2013 and 2012, respectively, our largest brand accounted for between 4.2% and 4.8% of our net sales ineach of the last three fiscal years.Selected third-party brands include, in alphabetical order: • AYC• Adidas• Billabong• Converse• Famous Stars & Straps• Fox• G-Shock• GoPro• Hurley• JanSport• KR3W• Last Kings• Levi’s• LRG• Neff• Nike SB• Nixon• O’Neill• RayBan• 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, fillmerchandise gaps and provide a deeper selection of styles and colors for proven fashion items. Our own brands represented approximately 28%, 28% and30% of our net sales for fiscal years 2014, 2013 and 2012, respectively. 8Table of ContentsOur proprietary branded merchandise includes: BrandCategoryGuys’, boys’ and womens’ denim apparel and fragranceWomens’ and girls’ apparel, footwear and accessoriesGuys’ and boys’ apparel and accessoriesGuys’, boys’ and womens’ apparel and fragranceWe believe that our extensive selection of merchandise, from established and emerging third-party brands as well as our proprietary brands, caters to awide demographic 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 Chief Merchandising Officer, a Divisional VicePresident, divisional merchandise managers, a technical design and fashion trend team, buyers, associate buyers and assistant buyers. We believe a keyelement of our success is our team’s ability to identify 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 9Table of Contentsprovides us 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 rapidly identify and respond to trends and consistently offer proven fashion items that provide a broader demographicappeal. We work with more than 100 vendors based in the United States to supply us with our proprietary branded product. These vendors source from bothdomestic and international markets and either have their own factories or contract with owners of factories to source finished product. By sourcingmerchandise for our proprietary brands both domestically and internationally, we have the flexibility to benefit from shorter lead times associated withdomestic manufacturing and lower costs associated with 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 teamcontinually analyzes information from our management information system, including inventory levels and sell-through data, to regularly adjust theassortment at each store and the inventory levels for our company as a whole. Our broad third-party vendor base allows us to shift merchandise purchases toreact quickly to changing consumer preferences and market conditions. Furthermore, the vendor base for our proprietary products provides us flexibility todevelop our own branded products to quickly address emerging fashion trends and provide a deeper selection of styles, colors, and price points for provenfashion items. We modify our merchandising mix based upon store size, the season, and consumer preferences in different parts of the country. We are alsoable to react quickly to changing customer needs due to our shipment of merchandise to our stores multiple times per week. Finally, we coordinate closelywith our visual merchandise managers and marketing group in order to manage inventory levels in connection with our promotions and seasonality.StoresStore GrowthDuring fiscal year 2014, we continued Tilly’s national expansion by opening 19 new stores, representing approximately 8% in additional squarefootage over the prior year. In the past three years, we have more than doubled the number of states where we operate stores from 14 states at the end of fiscalyear 2011 to 33 states at the end of fiscal year 2014.As of January 31, 2015, we operated 212 stores throughout the United States. Our stores are located in mall, off-mall and outlet locations. In fiscal year2014, our stores averaged 7,652 square feet in size and generated an average net sales per brick-and-mortar store of $2.3 million and net sales per square footof $292.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: 2014 2013 2012 2011 2010 Regional Mall 108 102 89 71 62 Off-Mall (1) 88 86 74 64 59 Outlet 16 7 5 5 4 212 195 168 140 125 (1)Includes power centers, neighborhood and lifestyle centers and street-front locations. 10Table of ContentsAt January 31, 2015 we operated 212 stores in 33 states as shown below: State Number ofStores State Number ofStores Arizona 19 Nevada 6 California 88 New Jersey 5 Colorado 3 New Mexico 1 Delaware 1 New York 4 Florida 20 North Carolina 4 Georgia 2 Ohio 3 Illinois 7 Oklahoma 3 Indiana 5 Oregon 2 Iowa 1 Pennsylvania 3 Kansas 2 South Dakota 1 Kentucky 1 Tennessee 3 Maryland 2 Texas 5 Massachusetts 2 Utah 3 Michigan 2 Virginia 4 Minnesota 2 Washington 2 Missouri 2 Wisconsin 3 Nebraska 1 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, andfashion. 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 our customersand make shopping at Tilly’s a fun, social experience. Outside of our stores, we connect with our consumers using the same authentic approach, includingsocial media, community outreach and sponsorship of contests, demos, and other events. We believe the Tilly’s experience drives customer awareness,loyalty and repeat visits while generating a buzz and excitement for our brand.Expansion Opportunities and Site SelectionAs of January 31, 2015, 51% 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 2010 16 2 125 2011 16 1 140 2012 29 1 168 2013 28 1 195 2014 19 2 212 108 7 We plan to open at least 15 new stores in fiscal year 2015. Our new store openings are planned in both existing and new markets, for mall, off-mall andoutlet locations. We focus on locations that have above average incomes and an ability to draw from a sufficient population with attractive demographics.We have entered new markets by opening stores in high traffic malls, including outlets, 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. 11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, andwill increase 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 expertiseand supervisory skills. Our training programs and workshops are offered at the store, district and regional levels, allowing managers from multiple locationsto interact with each other and exchange ideas to better operate stores. Store associates receive training from their managers to improve their productexpertise and selling skills.E-CommerceIn October 2014, we launched a new responsive design e-commerce platform for desktop and mobile. Our e-commerce platform was established in 2004and has grown significantly since inception. In May 2014, we opened our new e-commerce fulfillment center in Irvine, California to accommodate ourgrowth. We believe our digital platform is an extension of our brand and retail stores, providing our customers a seamless shopping experience. We believethat our target customer regularly shops online through various digital channels. In fiscal 2014, we sold merchandise to customers in all 50 states andapproximately 8% of our e-commerce net sales were to customers in states without brick-and-mortar stores. Our website serves both as a sales channel and amarketing tool to our extended customer base, including those customers in markets where we do not currently have stores. We also believe our fullyintegrated digital platform reinforces the Tilly’s brand image and serves as an effective advertising vehicle for our retail stores. Our digital platform providesan expanded product offering relative to our stores and includes expanded product assortment and web exclusive merchandise. Similar to the merchandisingapproach in our stores, we frequently change the look of our website to highlight new brands and products and to encourage frequent visits. We utilizemultiple tools to drive traffic to our website, including our catalog, marketing materials in our retail stores, search engine marketing, internet ad placement,shopping site partnerships, third-party affiliations, email marketing, digital marketing and direct mail. In addition, we utilize the website to offer currentinformation on our upcoming events, promotions and store locations.Marketing and AdvertisingOur marketing approach is designed to create an authentic connection with our customers by consistently generating a buzz and excitement for ourbrand while staying true to our West Coast inspired, action sports heritage. We utilize a multi-pronged marketing strategy to connect with our customers anddrive traffic 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 image. In fiscal year 2014, we mailed approximately 10 million catalogs to addresses included in our growing proprietarydatabase, which currently includes key information on approximately 3.7 million customers. We send these catalogs, which include coupons thatcan be redeemed at stores or online, to the customers in our database several times a year, primarily around key shopping periods such as springbreak, back-to-school, and the winter holidays. 12Table of Contents • 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 2014, we organized hundreds of events, many involving musicians,celebrities and athletes in the entertainment, music and action sports industries. Through brand partnerships such as these, we are able to connectwith 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, Twitter and Snapchat posts as a viral marketing platform to communicate directly with ourcustomers while also allowing customers to interact with one another and provide feedback on our events and products. • Loyalty Program. In January 2014, we implemented our new customer loyalty program, “The Tilly’s Hookup”, which allows for more direct andtargeted communications with our customers, and provides 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. As ofJanuary 31, 2015, we had over one million members in “The Tilly’s Hookup” program. • 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. We also support Tilly’s Life Center,founded by our co-founder, Tilly Levine, which provides underprivileged youth a healthy and caring environment to help create a well-definedsense of self, cultivate community mindedness and release negative emotional stress. • 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 distribute all of our store merchandise through a 126,000 square foot distribution facility co-located with our headquarters in Irvine, California. Ourlease expires in December 2017 and we have two five-year renewal option periods. We designed this facility to allow us to manage our distributionoperations in an efficient, cost-effective manner and to provide support for our growth initiatives. Extensive investments have been made to the distribution-center infrastructure, focused around systems automation, material-handling equipment, radio frequency 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 higherlevel of efficiency and accuracy than many of our competitors.In May 2014, we opened our new e-commerce fulfillment center in Irvine, California. We have invested a total of approximately $18 million in the e-commerce fulfillment center to fulfill all e-commerce orders in a highly automated environment that leverages material handling equipment, automatedsystems and other technologies consistent with our current distribution facility. This investment will support our future e-commerce growth initiatives.We 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. 13Table of ContentsWe believe our distribution and fulfillment infrastructure can support a national retail footprint of in excess of 500 stores and significant growth of oure-commerce platform with minimal incremental capital investment.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 managementsystems to handle merchandise distribution. We utilize technology from Strategic Distribution, Inc. in our distribution and new fulfillment centers enablingus to automate our merchandise sortation and fulfillment processes, allowing us greater flexibility in scaling our operations for new store expansions andpeak season 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 Oracle, Inc. Our POS system consists of registers providing processing of retail transactions, price look-up, time and attendance and e-mail. Sales information, inventory tracking and payroll hours are uploaded to our central host system. The host system downloads price changes, performssystem maintenance and provides software updates to the stores through automated nightly two-way electronic communication with each store. We evaluateinformation obtained through nightly polling to implement merchandising decisions, including product purchasing/reorders, markdowns and allocation ofmerchandise 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,store locations, 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., Urban Outfitters, Inc., and Zumiez, Inc. In addition, we compete with independent specialty shops, department stores and direct marketers that sellsimilar 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.Competition 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 realestate strategy 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 ofany competitive advantage or special appeal that we might possess. See “Risk Factors—Risks Related to Our Business. We face intense competition in ourindustry and we may not be able to compete effectively.” 14Table of ContentsTrademarks“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 United States 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 United States. We vigorously protect our trademarks.EmployeesAs of January 31, 2015, we employed approximately 1,400 full-time and approximately 3,100 part-time employees, of which approximately 500 wereemployed at our corporate office and distribution facility and approximately 4,000 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 2014, varied between approximately 4,200 and 7,000employees. 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 ourrevenues and net income reflecting increased demand during the year-end holiday season, other holidays, such as Easter, the beginning of spring break andpeak shopping periods, such as the back-to-school season. Revenues generated during the holiday selling season generally contribute to our relatively higherfourth quarter net income. Revenues generated around the back-to-school season generally contribute to our relatively higher third quarter net income. If forany reason our revenues were below seasonal norms or expectations during these quarters, our annual results of operations could be adversely affected. Thelevel of our working capital reflects the seasonality of our business. We expect inventory levels, along with an increase in accounts payable and accruedexpenses, generally to reach their highest levels in anticipation of the increased revenues during these periods.Additional 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, or the Exchange Act, as soon as reasonably practicable after filing such material electronically with, or otherwise furnishing it to, theSecurities and Exchange Commission, or the SEC. The public may also read and copy any materials that we have filed with the SEC at the SEC’s PublicReference 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 atwww.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. 15Table of ContentsItem 1A.Risk FactorsOur business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business, prospects,financial condition and results of operations, any of which could subsequently have an adverse effect on the trading price of our Class A common stock,and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, inits entirety, in addition to other information contained in or incorporated by reference into this Annual Report on Form 10-K and our other public filingswith the SEC. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,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 cannot identify trendsin 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,identify and respond quickly to changing trends and consumer demands in order to provide the merchandise our customers seek and maintain our brandimage. If we cannot identify changing trends in advance, fail to react to changing trends or misjudge the market for a trend, our sales could be adverselyaffected and we may be faced with a substantial amount of unsold inventory or missed opportunities. As a result, we may be forced to mark down ourmerchandise in order to dispose of slow moving inventory, which may result in lower profit margins, negatively impacting our financial condition and resultsof 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. and Zumiez,Inc. In addition, we compete with independent specialty shops, department stores and direct marketers that sell similar lines of merchandise and targetcustomers through catalogs and e-commerce. Moreover, the internet and other new technologies facilitate competitive entry and comparison shopping in ourretail segment. While we offer a multichannel shopping experience and use social media as a way to interact with our customers and enhance their shoppingexperiences, multichannel retailing is rapidly evolving and we must keep pace with changing customer expectations and new developments by ourcompetitors. Competition with some or all of these retailers noted above could require us to lower our prices or risk losing customers. In addition, significantor 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.Furthermore, 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,which would put us at a competitive disadvantage. Moreover, we do not possess exclusive rights to many of the elements that comprise our in-storeexperience and product offerings. Our competitors may seek to emulate facets of our business strategy and in-store experience, which could result in areduction of any competitive advantage or special appeal that we might possess. In addition, most of our products are sold to us on a non-exclusive basis. Asa result, our current and future competitors may be able to duplicate or improve on some or all of our in-store experience or product offerings that we believeare important in differentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or improve on some or all of our in-store experience or product offerings, our competitive position and our business could suffer. 16Table of ContentsOur 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, salaryand wage levels, general business conditions, the availability of consumer credit and the level of housing, energy and food costs. These risks may beexacerbated for retailers like us who focus on specialty apparel and accessories. Our financial performance is particularly susceptible to economic and otherconditions in regions or states where we have a significant number of stores, such as the southwestern and northeastern United States and Florida. If periods ofdecreased consumer spending persist, our sales could decrease and our financial condition and results of operations could be adversely affected.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 andoperate new stores to help maintain this revenue growth. We opened 19 stores in 2014, 28 stores in 2013 and 29 stores in 2012. We plan to open at least 15new stores in 2015. However, there can be no assurance that we will open the planned number of new stores in fiscal year 2015 or thereafter. Our ability tosuccessfully open and operate 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.Expanding into new geographic markets may present challenges that are different from those we currently encounter. Failure to effectively adapt to thesenew 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 United States and do not significantly differentiate between our stores by visualdisplay or by the product offering. We also currently do not significantly differentiate our general store business plan from store to store. As we expand storelocations, we may face challenges that are different from those we currently encounter. Our expansion into new geographic markets could result incompetitive, merchandising, distribution and other challenges. In addition, as the number of our stores increases, we may face risks associated with marketsaturation of our product offerings and locations. Our vendors may also restrict their sales to us in new markets to the extent they are already saturating thatmarket with their products through other retailers or their own stores. There can be no assurance that any newly opened stores will be received as well as, orachieve net sales 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, orare unable to sustain, acceptable net sales and profitability levels, our business may be materially harmed and we may incur significant costs associated withclosing those stores and our brand image may be negatively impacted. 17Table of ContentsOur business largely depends on a strong brand image, and if we are not able to maintain and enhance our brand, particularly in new markets where wehave 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 maintainingand enhancing our brand image, particularly in new markets where we have limited brand recognition, is important to maintaining and expanding ourcustomer base. As we execute our growth strategy, our ability to successfully integrate new stores into their surrounding communities, to expand into newmarkets or to maintain the strength and distinctiveness of our brand image in our existing markets will be adversely impacted if we fail to connect with ourtarget 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 maynot ultimately be successful. Failure to successfully market our brand in new and existing markets could harm our business, results of operations and financialcondition.Our sales can significantly fluctuate based upon shopping seasons, which may cause our operating results to fluctuate disproportionately on a quarterlybasis.Because of a traditionally higher level of sales during the back-to-school and winter holiday shopping seasons, our sales are typically higher in thethird and 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 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 andthe cost 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 funds arenot 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 orsecurities convertible into equity securities, your ownership may be diluted. Any debt financing we may incur may impose on us covenants that restrict ouroperations, and will require interest payments that would create additional cash demands and financial risk for us.Our 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, powercenters, neighborhood and lifestyle centers, outlet centers and street-front locations, usually near prominent retailers, to generate customer traffic for ourstores. Customer traffic at these retail centers, and consequently our stores, could be adversely affected by economic downturns nationally or regionally,competition from Internet retailers, changes in consumer demographics, the closing or decrease in popularity of other retailers in the retail centers in whichour stores are located, our inability to obtain or maintain prominent store 18Table of Contentslocations within retail centers or the selection by prominent retailers and businesses of other locations. A reduction in customer traffic would likely lead to adecrease in our sales, and, if similar reductions in traffic occur at a number of our stores, this could have a material adverse effect on our financial conditionand 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 prices in order tosell 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 inventoryduring these 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 atall, 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 United States, particularly in California, Arizona and Nevada, Florida and northeastern United States willlikely have a greater impact on our sales because 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 orquantity of merchandise they sell us or raise prices at any time, which can have an adverse impact on our business. Deterioration in our relationships with oursuppliers could have a material adverse impact on our business, and there can be no assurance that we will be able to acquire desired merchandise insufficient quantities on terms acceptable to us in the future. Also, some of our vendors are vertically integrated, selling products directly from their own retailstores, and therefore are in direct competition with us. These vendors may decide at some point in the future to discontinue 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 or are unable to find alternative vendors to supplyus with substitute merchandise for lost products, our business may be adversely affected. 19Table of ContentsA rise in the cost of raw materials, labor and transportation could increase our cost of sales and cause our results of operations and margins to decline.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 of ourclothing 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. Wemay 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 effect on oursales and gross margin.Our proprietary branded merchandise represented approximately 28% of our net sales for the fiscal year ended January 31, 2015. 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 trade andother 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 UnitedStates or other foreign governments. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, against apparel items, aswell as United States or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and have amaterial adverse effect on our business, financial condition and results of operations. In addition, our merchandise supply could be impacted if our suppliers’imports become subject to existing or future duties and quotas, or if our suppliers face increased competition from other companies for production facilities,import quota capacity and shipping capacity. Any increase in the cost of our merchandise or limitation on the amount of merchandise we are able to purchasecould have a material 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 negatively impact ourbusiness.We purchase merchandise from independent third-party vendors and manufacturers. If any of these suppliers have practices that are not legal oraccepted in the United States, consumers may develop a negative view of us, our brand image could be damaged and we could become the subject ofboycotts by our customers and/or interest groups. Further, if the suppliers violate labor or other laws of their own country, these violations could causedisruptions or delays in their shipments of merchandise. For example, much of our merchandise is manufactured in China and Mexico, which have differentlabor practices than the United States. We do not independently investigate whether our suppliers are operating in compliance with all applicable laws andtherefore we rely upon the suppliers’ representations set forth in our purchase orders and vendor agreements concerning the suppliers’ compliance with suchlaws. If our goods are manufactured using illegal or unacceptable labor practices in these countries, or other countries from which our suppliers source theproduct we purchase, our ability to supply merchandise for our stores without interruption, our brand image and, consequently, our sales may be adverselyaffected. 20Table of ContentsIf 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 Chief ExecutiveOfficer, and we may be unable to retain their services. We also may be unable to retain other existing management personnel that are critical to our success,which could result in harm to our vendor and employee relationships, loss of key information, expertise or know-how and unanticipated recruitment andtraining 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 viewed in anegative light by investors and analysts, which could cause our Class A common stock price to decline. None of our employees, except for Mr. Griesemer, hasan employment agreement 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 and e-commerce fulfillment centers, or ourcorporate offices, our business 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 brandimage and, for many positions, have knowledge of our merchandise and the skill necessary to excel in a customer service environment. The turnover rate inthe retail industry is high and finding qualified candidates to fill positions may be difficult. If we cannot attract and retain corporate employees, districtmanagers, store managers and store associates with the qualifications we deem necessary, our ability to effectively operate and expand may be adverselyaffected. In addition, we rely on temporary personnel to staff our distribution and fulfillment centers, as well as seasonal part-time employees to provideincremental staffing to our stores in busy selling seasons such as the back-to-school and winter holiday seasons. We cannot guarantee that we will be able tofind adequate temporary or seasonal personnel to staff our operations when needed, which may strain our existing personnel and negatively impact ouroperations.Our corporate headquarters, distribution and e-commerce fulfillment centers and management information systems are in two locations in southernCalifornia, and if their operations are disrupted, we may not be able to operate our store support functions or ship merchandise to our stores, which wouldadversely affect our business.Our corporate headquarters, distribution center and management information systems are in two locations in Irvine, California. If we encounter anydisruptions to our operations within these buildings or if they were to shut down for any reason, including by fire or other natural disaster, then we may beprevented from effectively operating our stores, shipping and processing our merchandise and operating our e-commerce platform. Furthermore, the risk ofdisruption or shut down at these buildings are greater than it might be if they were located in another region, as southern California is prone to naturaldisasters such as earthquakes and wildfires. Any disruption or shut down at these locations could significantly impact our operations and have a materialadverse effect on our financial condition and results of operations.Our stores are mostly located in the southwestern and northeastern United States and in Florida, with a significant number of stores located in California,putting us at risk to region-specific disruptions.Out of a total of 212 stores as of January 31, 2015, we operated 88 stores in California, 19 stores in Arizona, six stores in Nevada, 20 stores in Floridaand 37 stores in the northeastern United States. Sales in these states could be more susceptible than the country generally to disruptions, such as fromeconomic and weather conditions, demographic and population changes and changes in fashion tastes, and consequently, we may be more susceptible tothese factors than more geographically diversified competitors. For example, because of the negative economic impact caused by the downturn in thehousing market that began several years ago, sales in these states 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 are exposed to a relatively high risk of damage from a major earthquake or wildfires, while stores inFlorida are exposed to a relatively high risk from hurricane damage. Any negative impact upon or disruption to the operations of stores in these states couldhave a material adverse effect on our financial condition and results of operations. 21Table of ContentsWe are required to make significant lease payments for our store leases, corporate offices, warehouses and distribution and e-commerce fulfillmentcenters, which may strain our cash flow.We lease all of our retail store locations as well as our corporate headquarters, warehouses, distribution and e-commerce fulfillment centers. We do notown 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 earlycancelation clauses which permit us to terminate the lease if certain sales thresholds are not met in certain periods of time. Our costs under these leases are asignificant amount of our expenses and are growing rapidly as we expand the number of locations and existing locations experience expense increases. Infiscal year 2014, our total operating lease rent expense was $47.2 million and our common area maintenance expense was $18.5 million. This increased from$43.4 million and $17.4 million, respectively, as compared to fiscal year 2013 and can be expected to continue to increase as we open more stores. We arerequired to pay additional rent under many of our lease agreements based upon achieving certain sales plateaus for each store location. In addition, we mustmake significant payments for common area maintenance and real estate taxes. Many of our lease agreements also contain provisions which increase the rentpayments on a set time schedule, causing the cash rent paid for a location to escalate over the term of the lease. In addition, rent costs could escalate whenmulti-year leases are renewed at the expiration of their lease term. These costs are significant, recurring and increasing, which places a consistent strain on ourcash 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 balanceof the 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 usto close 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 ourobligations under leases for stores that we close, our business, profitability and results of operations may be harmed.We rely on third parties to deliver merchandise to our stores located outside of southern California and therefore our business could be negativelyimpacted by disruptions in the operations of these third-party providers.We rely on third parties to ship our merchandise from our distribution center in Irvine, California to our stores located across the United States, as wellas to ship e-commerce sales packages directly to our customers. Relying on these third-party delivery services puts us at risk from disruptions in theiroperations, such as employee strikes, inclement weather and their ability to meet our shipping demands. If we are forced to use other delivery services, ourcosts could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain delivery terms as favorable as thosereceived from the transportation providers we currently use, which would further increase our costs. These circumstances may negatively impact our financialcondition and results of operations.We may continue to experience comparable store sales or sales per square foot declines, which may cause our results of operations to decline.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 during such periods. 22Table of ContentsIf 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 platform 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 platform 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 be disrupted bysystem security failures or breached by intentional attacks. These disruptions or attacks could negatively impact our sales, increase our expenses, andharm our reputation.Database privacy, network security and identify theft are matters of growing public concern. Hackers, computer programmers and internal users may beable to penetrate our network security and create system disruptions, cause shutdowns and misappropriate our confidential information or that of third parties,including our customers. Therefore, we could incur significant expenses addressing problems created by security breaches to our network. This risk isheightened because we collect and store customer information for marketing purposes, as well as credit card information. We must, and do, take precautionsto secure customer information and prevent unauthorized access to our database of confidential information. However, if unauthorized parties, includingexternal hackers or computer programmers, gain access to our database, they may be able to steal this confidential information. Our failure to secure thisinformation 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 obstacles will not arise as we expand our product lines and geographic scope. Theunauthorized use or misappropriation of our intellectual property could damage our brand identity and the goodwill we created for our company, whichcould cause our sales to decline. Moreover, litigation may be necessary to protect or enforce these intellectual property rights, which could result insubstantial costs and diversion of our resources, causing a material adverse effect on our business, financial condition, results of operations or cash flows. Ifwe cannot protect our intellectual property rights, our brand identity and the goodwill we created for our company may diminish, causing our sales todecline.Most of our intellectual property has not been registered outside of the United States and we cannot prohibit other companies from using ourunregistered trademarks in foreign countries. Use of our trademarks in foreign countries could negatively impact our identity in the United States and causeour 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 suchinfringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claimscould harm our brand image. In addition, any payments we are required to make and any injunction with which we are required to comply as a result of suchinfringement actions could adversely affect our financial results. 23Table of ContentsWe purchase merchandise from vendors that may utilize design copyrights, or design patents, or that may otherwise 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 aresult, we rely upon vendors’ representations set forth in our purchase orders and vendor agreements concerning their right to sell us the products that wepurchase from them. If a third-party claims to have licensing rights with respect to merchandise we purchased from a vendor, or we acquire unlicensedmerchandise, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of such merchandise if thedistributor or vendor is unwilling or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including actions torecover unpaid royalties and other damages and injunctions. Although our purchase orders and vendor agreement with each vendor require the vendor toindemnify us against such claims, a vendor may not have the financial resources to defend itself or us against such claims, in which case we may have to paythe costs and expenses associated with defending such claim. Any of these results could harm our brand image and have a material adverse effect on ourbusiness and growth.Our founders control a majority of the voting power of our common stock, which may prevent other stockholders from influencing corporate decisions andmay result in conflicts of interest.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 January 31, 2015, the Shaked and Levine family entities controlled approximately 93% 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 achange of control from occurring, even if the change of control could appear to benefit the stockholders. Mr. Shaked may also have interests that differ fromyours and may vote in a way with which you disagree and which may be adverse to your interests. This ownership concentration may adversely impact thetrading of 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.We have entered into tax indemnification agreements with the former shareholders of World of Jeans & Tops and could become obligated to makepayments to them for any additional federal, state or local income taxes assessed against them for fiscal periods prior to the completion of our initialpublic offering in May 2012.World of Jeans & Tops historically was treated as an “S” Corporation for United States 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. 24Table of ContentsWar, 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 shoppingcenter could close the mall or shopping center in response to security concerns. Such closures, as well as lower customer traffic due to security concerns,could result in 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 customer andemployee 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 significantlydifferent from our current compensation arrangements, it could increase our costs and adversely impact our profitability. Moreover, participation in laborunions could put us at increased risk of labor strikes and disruption of our operations.Violations 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, andother expansion of health care benefits and coverage. Some of the associated taxes and fees, as well as certain health care changes required by these acts, areexpected to result in increased health care costs for us. The costs of such legislation may adversely impact our results of operations. 25Table of ContentsIn 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 being a publicly traded company, our management is required to devote substantial time to complying with public company regulations.As a result of being a publicly traded company, we are obligated to file periodic reports with the SEC under the Exchange Act. We are also subject toother reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange, or NYSE, and certain provisions ofthe 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 required enhancedcorporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and standards result in increased administrativeexpenses and a diversion of management’s time and attention from revenue-generating activities. In addition, if we fail to implement or maintain therequirements with respect to our internal accounting and audit functions, our ability to continue to report our operating results on a timely and accurate basiscould be impaired and we could be subject to sanctions or investigation by regulatory authorities, such as the SEC or NYSE. Any such action could harm ourreputation and the confidence of investors and customers in our company and could materially adversely affect our business.Our failure to maintain adequate internal controls over our financial and management systems may cause errors in our financial reporting, which could inturn cause a loss of investor confidence.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 of 2012, or the JOBS Act, we arerequired to provide annually an assessment of the effectiveness of our internal controls over financial reporting and, starting with the year after we are nolonger an “emerging growth company” as defined in the JOBS Act, our independent registered public accounting firm will be required to provide anattestation on our assessment of our internal 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. 26Table of ContentsPrior to our initial public offering, we were treated as an “S” Corporation under Subchapter S of the Internal Revenue Code, and claims of taxingauthorities 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. Since that time, we have been treated as a“C” Corporation for federal and applicable state income tax purposes and 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 we will not have the right to reclaim taxdistributions 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.We maintain a credit facility with Wells Fargo Bank, National Association. The credit facility 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 creditfacility also contains financial covenants setting forth requirements for certain levels of liquidity and profitability. These limitations and covenants mayrestrict our ability to respond to changing business and economic conditions, and may therefore have a material adverse effect on our business. Although wedo not currently have any outstanding borrowings under credit facility, we may in the future. If we are unable to meet these limitations and covenants, wemay be in default under the credit facility, which could also have a material adverse effect on our business.We may engage in strategic transactions that could negatively impact our liquidity, increase our expenses and present significant distractions to ourmanagement.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 near andlong-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations andfinancial results.Our e-commerce platform subjects us to numerous risks that could have an adverse effect on our results of operations.We sell merchandise over the internet through our e-commerce website, www.tillys.com. Our e-commerce platform and its continued growth subject usto 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.Our failure to address and respond to these risks successfully could reduce e-commerce sales, increase costs and damage the reputation of our brand.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. Futurechanges to accounting rules or regulations, such as changes to lease accounting guidance or a requirement to convert to international financial reportingstandards, could negatively affect our results of operations and financial condition through increased cost of 27Table of Contentscompliance. For example, the Financial Accounting Standards Board, or FASB, recently issued a proposed update on lease accounting that would requireentities to recognize assets and liabilities arising from lease contracts on our balance sheet. We cannot presently determine the potential impact the proposedstandard will have on our results of operations. While we believe that the proposed standard, as currently drafted, likely will have a material impact on ourtiming and recognition of rent expense, we do not believe the standard will have a material impact on our liquidity. The actual impact of the proposedstandard, including the cost of complying with such standard, will not be known until it is finalized.We may incur substantial expenses related to our issuance of share-based compensation, which may have a negative impact on our operating results forfuture periods.We follow the provisions of FASB Accounting Standards Codification, or ASC, 718, Compensation-Stock Compensation, for share-basedcompensation. Our share-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 share-based compensation expense. In addition, an increase in thecompetitiveness of the market for qualified employees could result in an increased use of share-based compensation awards, which in turn would result inincreased share-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 corporate governancerequirements 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: • 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 charteraddressing the 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 continue to comply with these listing requirements even though we are a controlled company, there is no guarantee that we willnot take advantage of these exemptions in the future. Accordingly, so long as we are a controlled company, holders of our Class A common stock may nothave the same 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 A common stockcould 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 or ourbusiness. 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. 28Table of ContentsFinancial 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 our Class Acommon stock.As of January 31, 2015, we had 11,545,686 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.Future 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 January 31, 2015, we had 11,545,686 publicly traded shares of Class A common stock,excluding 2,880,040 shares of Class A common stock issuable upon the exercise of outstanding stock options, and 16,544,265 shares of Class B commonstock outstanding. All of these shares, other than the 16,544,265 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 could make it more difficult for astockholder to acquire us; 29Table of Contents • 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 votingpower of the company once the board of directors is divided into three classes and provides that director vacancies can only be filled by anaffirmative vote 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 of actions andproceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with usor 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 fiduciaryduty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of theDelaware General Corporation Law, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person purchasing or otherwiseacquiring any 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 andrestated bylaws. This choice-of-forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputeswith us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our amendedand restated bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costsassociated 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 decrease itsvalue.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. In addition, our current credit facility precludes, and any future debt agreements may preclude, us from paying dividends. Therefore,capital appreciation, if any, of our Class A common stock will be the sole source of gain for our Class A common stockholders for the foreseeable future. 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. 30Table of ContentsWe 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 for our e-commerce fulfillment center located at 17 Pasteur, Irvine, California. The lease began onNovember 1, 2011 and terminates on October 31, 2021.All of our 212 stores in 33 states, encompassing approximately 1.6 million total square feet as of January 31, 2015, are occupied under operatingleases. The store leases generally have a base lease term of 10 years and many have renewal option periods, and we are generally responsible for payment ofproperty taxes and utilities, common area maintenance and mall marketing fees.We consider all of our properties adequate for our present needs. 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 claimto which 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 couldhave a material adverse effect on our business” included in this report.Kristin Christiansen, Shellie Smith and Paul Haug, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, SuperiorCourt of California, County of Sacramento, Case No. 34-2013-00139010. On January 29, 2013, the plaintiffs in this matter filed a putative class actionlawsuit against us 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 our motion tostrike portions of the plaintiffs’ complaint and granted plaintiffs leave to amend. Plaintiffs have amended the complaint and the parties are proceeding withdiscovery on class certification issues. Class certification briefing is currently expected to conclude in July 2015 with a hearing in August 2015. Thecomplaint seeks certification 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 in thismatter filed a putative class action lawsuit against us alleging violations of California’s wage and hour, meal break and rest break rules and regulations, andunfair competition law, among other things. An amended complaint was filed on February 28, 2013, to include enforcement of California’s private attorneygeneral act. The complaint seeks an unspecified amount of damages and penalties. In April 2013, we filed a motion to compel arbitration, which was deniedin May 2013 and affirmed on appeal. In October 2014, we filed an answer to the amended complaint. We intend to defend this case vigorously.Karina Whitten, on behalf of herself and all others similarly situated, v. Tilly’s Inc., Superior Court of California, County of Los Angeles, Case No, BC548252. On June 10, 2014, plaintiff filed a putative class action and representative Private Attorney General Act lawsuit against us alleging violations ofCalifornia’s wage and hour, meal break and rest break rules and regulations, and unfair competition law, among other things. The complaint seeks classcertification, penalties, restitution, injunctive relief and attorneys’ fees and costs. Plaintiff filed a first amended complaint on December 3, 2014, removing theexpense reimbursement claim. We answered the complaint on January 8, 2015. We intend to defend this case vigorously. 31Table of ContentsHerbert Ortiz and Audra Haynes, individually, and on behalf of the generally public, v. Tilly’s Inc., United States District Court for the EasternDistrict of California, Case No, 1:15-CV-00108-MJS. On November 6, 2014, plaintiffs filed a putative class action and representative Private AttorneyGeneral Act lawsuit against us in the Superior Court of California, County of Fresno, alleging violations of California’s wage and hour, meal break and restbreak rules and regulations, and unfair competition law, among other things. The complaint seeks class certification, penalties, restitution, injunctive reliefand attorneys’ fees and costs. On January 21, 2015, We answered the complaint and removed the action to the United States District Court for the EasternDistrict of California. We intend to defend this case vigorously. Item 4.Mine Safety DisclosuresNot applicable. 32Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe following table sets forth for the quarters indicated the high and low sales prices of our Class A common stock, as reported by the NYSE under thesymbol “TLYS”. On March 27, 2015, the closing price of our Class A common stock was $15.05. High Low Fiscal 2014: Fourth Quarter $14.67 $6.65 Third Quarter 8.55 6.82 Second Quarter 11.95 7.32 First Quarter 13.10 10.70 Fiscal 2013: Fourth Quarter $15.95 $10.59 Third Quarter 15.80 12.44 Second Quarter 17.35 14.52 First Quarter 15.44 12.00 As of March 27, 2015, we had approximately 12 stockholders of record, six of whom were holders of our Class A common stock and six of whom wereholders of our Class B common stock. The number of stockholders of record is based upon the actual number of stockholders registered at such date and doesnot include holders of shares in “street names” or persons, partnerships, associates, corporations or other entities identified in security position listingsmaintained 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. In addition, our current credit facility precludes, and any futuredebt agreements may preclude, us from paying dividends.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 thediscretion of the board of directors. During fiscal year 2012, we paid distributions of $84.3 million to our shareholders, which included a final distribution(resulting from 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 2015 Annual Meeting ofStockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended January 31, 2015.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 January 31, 2015 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 400 ApparelRetail Index and assumes the reinvestment of dividends, if any. The graph also assumes that the initial prices of our Class A common stock, the S&P Midcap400 Index and the S&P 400 Apparel Retail Index on May 4, 2012 were the closing prices on that trading day. 33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 January 31, 2015. 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 selectedconsolidated statement of income data for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 and selected consolidated balancesheet data as of January 31, 2015 and February 1, 2014 are derived from our consolidated financial statements audited by Deloitte & Touche LLP, ourindependent registered public accounting firm, included in Item 8 of this report. The selected consolidated statement of income data for the fiscal years endedJanuary 28, 2012 and January 29, 2011 and the selected consolidated balance sheet data as of February 2, 2013, January 28, 2012 and January 29, 2011 arederived from our audited consolidated financial statements that have not been included elsewhere in this report. The historical results presented below are notnecessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial data in conjunction with theconsolidated financial statements and accompanying notes and the information under “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing elsewhere in this report. 34Table of Contents Fiscal Year Ended (1) January 31, February 1, February 2, January 28, January 29, 2015 2014 2013 2012 2011 (in thousands, except per share data) Consolidated Statements of Income Data: Net sales $518,294 $495,837 $467,291 $400,624 $332,604 Cost of goods sold (2) (3) 362,762 345,015 319,723 271,482 229,989 Gross profit (3) 155,532 150,822 147,568 129,142 102,615 Selling, general and administrative expenses (3) 132,343 121,085 116,178 94,217 77,668 Operating income 23,189 29,737 31,390 34,925 24,947 Interest expense, net 14 9 91 196 249 Income before income taxes 23,175 29,728 31,299 34,729 24,698 Income tax expense 9,100 11,591 7,406 389 282 Net income$14,075 $18,137 $23,893 $34,340 $24,416 Basic earnings per share of Class A andClass B common stock$0.50 $0.65 $0.93 $1.72 $1.22 Diluted earnings per share of Class A andClass B common stock$0.50 $0.65 $0.92 $1.68 $1.21 Weighted average basic shares outstanding 28,013 27,822 25,656 20,000 20,000 Weighted average diluted shares outstanding 28,078 28,116 26,076 20,500 20,098 Pro Forma Income Information (4):Pro forma income tax expense$12,520 $13,892 $9,879 Pro forma net income 18,779 20,837 14,819 Pro forma basic earnings per share of Class A and Class Bcommon stock$0.73 $1.04 $0.74 Pro forma diluted earnings per share of Class A and Class Bcommon stock$0.72 $1.02 $0.74 Fiscal Year Ended January 31, February 1, February 2, January 28, January 29, 2015 2014 2013 2012 2011 Operating Data (unaudited): Stores operating at beginning of period 195 168 140 125 111 Stores opened during the period 19 28 29 16 16 Stores closed during the period 2 1 1 1 2 Stores operating at end of period 212 195 168 140 125 Comparable store sales change (5) -2.8% -1.9% 2.2% 10.7% 6.7% Total square feet at end of period 1,622,156 1,513,138 1,318,803 1,094,419 967,011 Average square footage per store at end of period 7,652 7,760 7,850 7,817 7,736 Average net sales per brick-and-mortar store (in thousands) (6)$2,250 $2,396 $2,676 $2,718 $2,528 Average net store sales per square foot (6)$292 $307 $341 $350 $326 Capital expenditures (in thousands)$23,636 $42,701 $33,298 $20,223 $15,674 ‘ As of January 31, February 1, February 2, January 28, January 29 2015 2014 2013 2012 2011 (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities $84,746 $60,355 $57,182 $25,091 $29,338 Working capital 97,988 80,710 73,891 27,673 33,907 Total assets 257,551 232,407 205,381 140,819 130,974 Total capital lease obligation (7) 2,500 3,258 3,970 4,638 5,266 Stockholders’ equity 158,686 140,923 117,296 60,424 62,092 (1)The fiscal years ended January 31, 2015, February 1, 2014, January 28, 2012 and January 29, 2011 each included 52 weeks. The fiscal year endedFebruary 2, 2013 included 53 weeks.(2)Includes buying, distribution and occupancy costs.(3)Gross profit in fiscal years 2013 and 2012 includes a $1.5 million and $2.6 million, respectively, reclassification of share-based compensation andbenefits from selling, general and administrative expenses to cost of goods sold to correct for an immaterial prior period error. See “Note 1: Descriptionof the Company and Basis of Presentation- Correction to the Consolidated Statements of Income” in the notes to our consolidated financial statementsfound elsewhere in this Annual Report on Form 10-K. 35Table of Contents(4)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%.(5)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 notchanged by more than 20% and the store was not closed for more than five days in any fiscal month. Comparable store sales include sales through oure-commerce store but exclude gift card breakage income and e-commerce shipping and handling fee revenue. The comparable store sales change forthe period ended February 2, 2013 excludes the 53rd week in fiscal year 2012.(6)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.(7)Comprised solely of a capital lease for our corporate headquarters and distribution center. 36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 the informationcontained in other sections of this report, particularly under the headings “Risk Factors”, “Selected Consolidated Financial Data” and “Business”. Thisdiscussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, ourmanagement. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, aswell as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements”. These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors”. Our actual results could differmaterially 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 ending onthe Saturday closest to January 31 of the following year. References to ‘fiscal year 2014” or fiscal 2014” refer to the fiscal year ended January 31, 2015,references to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year ended February 1, 2014 and references to “fiscal year 2012” or “fiscal 2012” referto the fiscal year ended February 2, 2013. Fiscal years 2014 and 2013 each consisted of a 52-week period, and fiscal year 2012 consisted of a 53-weekperiod.OverviewTilly’s is a destination specialty retailer of West Coast and 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 West Coast heritage dates back to 1982 when HezyShaked and Tilly Levine opened our first store in Orange County, California. As of January 31, 2015, we operated 212 stores in 33 states, averagingapproximately 7,652 square feet. We also sell our products through our e-commerce website, www.tillys.com.We increased net sales 5%, to $518.3 million in fiscal year 2014 from $495.8 million in fiscal year 2013 as we opened 19 new stores and expanded ourpresence in both existing and new markets. Operating income decreased 22%, to $23.2 million in fiscal year 2014 from $29.7 million in fiscal year 2013,primarily due to a decline in our comparable store sales. Our comparable store sales decreased 2.8% in fiscal year 2014 after a 1.9% decrease in fiscal year2013.We believe there is significant opportunity to grow our national footprint from the 212 store locations as of January 31, 2015 to more than 500 storesover time. We plan to add at least 15 new stores in mall, off-mall and outlet locations in fiscal year 2015. We expect to fund our continued store expansionthrough our cash from operations. We believe our success operating in different retail venues and geographies demonstrates the portability of Tilly’s andprovides us with flexibility for future expansion.We also believe that investing in our existing stores is strategically important to enhance customer loyalty, elevate the customer experience and inturn, drive comparable store sales and increase profitability. We expect to refresh at least 25 existing high-volume stores in locations within our originalheritage markets that have the potential to see a meaningful improvement in customer satisfaction.We believe e-commerce will be an important component of future sales growth. Over the past few years, we have invested significantly in our digitalinitiatives to maximize this opportunity in e-commerce. Key investments include a new e-commerce fulfillment center facility and a responsive design e-commerce platform for desktop computers and mobile devices. We have also established a new loyalty program, “The Tilly’s Hookup”, that has over onemillion members and that we believe has enhanced the integration of e-commerce and store operations and fulfillment. We expect to further leverage theseinvestments and omni-channel capabilities to give our customers seamless access and increased ease of shopping and to continue to build our Tilly’s brand.We also intend to continue our catalog and online marketing efforts, offering a wider selection of Internet-exclusive merchandise and expanding our onlineselection. In addition, we believe our new automated e-commerce fulfillment center will continue to allow us to more efficiently fulfill e-commerce ordersand support the future growth of the business. 37Table of ContentsOver the last seven years, we have invested approximately $50 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 fulfillment infrastructure can support a national retail footprint of at least500 stores and the growth of our e-commerce platform with minimal incremental capital investment.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, that we may not be able to grow our comparable sales, and that we may not be able to effectivelymanage our future growth. In addition, our financial results can be expected to be directly impacted by trends in the general economy. A decline in consumerspending or a substantial increase in product costs due to commodity cost increases or general inflation could lead to a reduction in our sales as well asgreater margin pressure as costs may not be able to be passed on to consumers and the competitive environment could become more highly promotional. See“Risk Factors” for other important factors that could adversely impact us and our results of operations. We strive to ensure that addressing these risks does notdivert our attention from continuing to build on the strengths that 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 financial conditionand operating performance of our business are net sales, comparable store sales, gross profit, selling, general and administrative expenses and operatingincome.Net SalesNet sales reflect revenue from the sale of our merchandise at store locations as well as sales of merchandise through our e-commerce platform, 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 redeemed to purchase merchandise.However, over time, the redemption of some gift cards becomes remote, which is referred to as gift card breakage. Revenue from estimated gift card breakageis also included 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 compared to the first two quarters of thefiscal year.Comparable Store SalesComparable store sales is a measure that indicates the change in year-over-year comparable store sales which allows us to evaluate how our store base isperforming. Numerous factors affect our comparable 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; • changes in our product mix; • pricing; • the level of customer service that we provide in stores; 38Table of Contents • 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.Comparable store sales are sales from our e-commerce platform and stores open at least 12 full fiscal months as of the end of the current reportingperiod. A remodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store was notchanged by more than 20% and the store was not closed for more than five days in any fiscal month. We include sales from our e-commerce platform as partof comparable store sales as we manage and analyze our business on a single omni-channel and have substantially integrated our investments and operationsfor our stores and e-commerce platform to give our customers seamless access and increased ease of shopping. Comparable store sales exclude gift cardbreakage income and e-commerce shipping and handling fee revenue. Some of our competitors and other retailers may calculate comparable 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 similar data made available byother retailers.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 tocome from 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 and e-commerce fulfillment centers, to our e-commerce customersand between store locations. Occupancy costs include the rent, common area maintenance, utilities, real estate and property taxes, security, and depreciationcosts of all store locations. These costs are significant and can be expected to continue to increase as our company grows. The components of our reportedcost of goods sold may not be comparable to those 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 as bysales mix shifts within and between brands and between major product categories such as guys’ and womens’ apparel, footwear or accessories. A substantialshift 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 of sales havehistorically been higher in the third and fourth quarters of the fiscal year, as these periods include the back-to-school and winter holiday selling seasons. Thisreflects 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, impairment charges and other centralized services. Store selling expensesgenerally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to netsales and store growth, but will be expected to increase over time to support the needs of our growing company. SG&A expenses as a percentage of net salesare usually higher in lower volume periods and lower in higher volume periods. 39Table of ContentsThe 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 ongoing compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could result insignificant incremental legal, accounting and other overhead costs.Operating 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 recognizethe “S” Corporation status). On May 2, 2012, our “S” Corporation status terminated and we became subject to corporate-level federal and state income taxesat prevailing corporate rates. 40Table of ContentsResults 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 January 31,2015 February 1,2014 February 2,2013 (in thousands) Statements of Income Data: Net sales $518,294 $495,837 $467,291 Cost of goods sold (2) 362,762 345,015 319,723 Gross profit (2) 155,532 150,822 147,568 Selling, general and administrative expenses (2) 132,343 121,085 116,178 Operating income 23,189 29,737 31,390 Other expense, net 14 9 91 Income before income taxes 23,175 29,728 31,299 Income tax expense 9,100 11,591 7,406 Net income$14,075 $18,137 $23,893 Percentage of Net Sales:Net sales 100.0% 100.0% 100.0% Cost of goods sold 70.0% 69.6% 68.4% Gross profit 30.0% 30.4% 31.6% Selling, general and administrative expenses 25.5% 24.4% 24.9% Operating income 4.5% 6.0% 6.7% Interest expense, net 0.0% 0.0% 0.0% Income before income taxes 4.5% 6.0% 6.7% Income tax expense 1.8% 2.3% 1.6% Net income 2.7% 3.7% 5.1% Pro Forma Data (unaudited) (1):Income before income taxes$31,299 Pro forma income tax expense 12,520 Pro forma net income$18,779 (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%.(2)Gross profit in fiscal years 2013 and 2012 includes a $1.5 million and $2.6 million, respectively, reclassification of share-based compensation andbenefits from selling, general and administrative expenses to cost of goods sold to correct for an immaterial prior period error.The following table presents store operating data for the periods indicated: Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Store Operating Data: Stores operating at end of period 212 195 168 Comparable store sales change (1) -2.8% -1.9% 2.2% Total square feet at end of period 1,622,156 1,513,138 1,318,803 Average net sales per brick-and-mortar store (in thousands) (2) $2,250 $2,396 $2,676 Average net sales per square foot (2) $292 $307 $341 (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 notchanged by more than 20% and the store was not closed for more than five days in any fiscal month. Comparable store sales include sales through oure-commerce store but exclude gift card breakage income and e-commerce shipping and handling fee revenue. The comparable store sales change forthe period ended February 2, 2013 excludes the 53rd week in fiscal year 2012. 41Table of Contents(2)E-commerce sales, e-commerce shipping and handling fee revenue and gift card breakage are excluded from net sales in deriving average net sales perbrick-and-mortar store.Fiscal Year 2014 Compared to Fiscal Year 2013 Fiscal Year Ended Change January 31,2015 February 1,2014 $ % (in thousands) Statements of Income Data: Net sales $518,294 $495,837 $22,457 4.5% Cost of goods sold 362,762 345,015 17,747 5.1% Gross profit 155,532 150,822 4,710 3.1% Selling, general and administrative expenses 132,343 121,085 11,258 9.3% Operating income 23,189 29,737 (6,548) -22.0% Other expense, net 14 9 5 55.6% Income before income taxes 23,175 29,728 (6,553) -22.0% Income tax expense 9,100 11,591 (2,491) -21.5% Net income$14,075 $18,137 $(4,062) -22.4% Net SalesNet sales increased mainly due to an increase in the average number of stores opened during fiscal year 2014, partially offset by a comparable storesales decrease of $13.2 million, or 2.8%, in fiscal year 2014 as compared to fiscal year 2013. The comparable store sales decrease was due to lower net sales inall departments, partially offset by an increase in kid’s sales compared to the prior year. There were 188 comparable brick-and-mortar stores and 24 non-comparable brick-and-mortar stores open as of January 31, 2015.Gross ProfitGross profit increased $4.7 million in fiscal year 2014 as compared to fiscal year 2013 primarily due to higher net sales. As a percentage of net sales,gross profit was 30.0% and 30.4% during fiscal years 2014 and 2013, respectively. Of the 40 basis point decrease in gross profit, 50 basis points related toincreased occupancy costs due to new stores opened during the year and the decrease in comparable store sales, which was offset by a 20 basis point increasein product margins due to improved initial markup and a decrease in markdowns. Buying and distribution costs as a percentage of net sales increased 10 basispoints over fiscal year 2013 due to these costs increasing at a higher rate than net sales.Selling, General and Administrative ExpensesSG&A expenses increased 9.3% in fiscal year 2014 as compared to fiscal year 2013. As a percentage of net sales, SG&A expenses were 25.5% and24.4% during fiscal years 2014 and 2013, respectively.Store selling expenses increased $8.8 million to $93.8 million in fiscal year 2014 as compared to $85.0 million in fiscal year 2013. As a percentage ofnet sales, store selling expenses were 18.1% and 17.1% during fiscal years 2014 and 2013, respectively.The following primarily contributed to the increase in store selling expenses as a percentage of net sales: • store, regional and e-commerce fulfillment payroll, payroll benefits and related personnel costs increased $6.8 million, or 80 basis points as apercentage of net sales, as these costs increased at a faster rate than net sales, partially due to an increase in the number of stores; • marketing costs increased $1.6 million, or 20 basis points as a percentage of sales, primarily due to higher spend on catalogs and other marketingactivities; 42Table of Contents • field processing costs increased $0.2 million, but as a percentage of net sales remained consistent with fiscal year 2013; and • supplies and other costs increased $0.2 million, but as a percentage of net sales remained consistent with fiscal year 2013.General and administrative expenses increased $2.4 million to $38.5 million in fiscal year 2014 from $36.1 million in fiscal year 2013. As a percentageof net sales, general and administrative expenses were 7.4% and 7.3% during fiscal years 2014 and 2013, respectively.The following primarily contributed to the increase in general and administrative expenses as a percentage of sales: • depreciation and maintenance related to capital investments increased $1.1 million, or 20 basis points as a percentage of net sales; • payroll, payroll benefits and related costs for corporate office personnel increased $0.8 million, but as a percentage of net sales remainedconsistent with fiscal year 2013; • other expense increased $0.7 million, or 10 basis points as a percentage of net sales • legal, audit, tax and consulting expenses increased $0.3 million, but as a percentage of net sales remained consistent with fiscal year 2013; and • ongoing share-based compensation expense increased $0.3 million due to additional equity awards granted during fiscal year 2014 but remainedconsistent with fiscal 2013 as a percentage of net sales.However, the increases in general and administrative expenses were partially offset by a $0.8 million decrease in impairment charges, or 20 basis pointsas a percentage of net sales, as compared to fiscal year 2013.Operating IncomeOperating income decreased $6.5 million, or 22.0%, to $23.2 million in fiscal year 2014 from $29.7 million in fiscal year 2013. As a percentage of netsales, operating income was 4.5% and 6.0% during fiscal years 2014 and 2013, 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 Expense, NetOther expense, net, was $14 thousand and $9 thousand in fiscal years 2014 and 2013, respectively. Other expense, net, comprises interest earned oncash balances and tenant construction allowances received from landlords and realized gains on marketable securities, offset by interest paid on a capitallease of our corporate office and distribution center and costs related to maintaining our unused revolving credit facility.Income Tax ExpenseOur effective income tax rates were 39.3% and 39.0% in fiscal years 2014 and 2013, respectively.In fiscal years 2014 and 2013, the Company was taxed as a “C” Corporation. In fiscal year 2014, its effective tax rate reflected the benefit of certain taxcredits. In fiscal year 2013, the effective tax rate reflected a one-time tax benefit recorded in the fourth quarter of fiscal year 2013 related to certain return toprovision adjustments. The Company’s expected annual effective long-term tax rate is 40%.Net IncomeNet income decreased due to the factors discussed above.Basic and diluted earnings per share of Class A and Class B common stock was $0.50 in fiscal year 2014, compared to $0.65 per share of Class A andClass B common stock in fiscal year 2013. 43Table of ContentsFiscal Year 2013 Compared to Fiscal Year 2012 Fiscal Year Ended Change February 1,2014 February 2,2013 $ % (in thousands) Statements of Income Data: Net sales $495,837 $467,291 $28,546 6.1% Cost of goods sold 345,015 319,723 25,292 7.9% Gross profit 150,822 147,568 3,254 2.2% Selling, general and administrative expenses 121,085 116,178 4,907 4.2% Operating income 29,737 31,390 (1,653) -5.3% Other expense, net 9 91 (82) -90.1% Income before income taxes 29,728 31,299 (1,571) -5.0% Income tax expense 11,591 7,406 4,185 56.5% Net income$18,137 $23,893 $(5,756) -24.1% Net SalesNet sales increased mainly due to net sales from stores opened during fiscal year 2013 that were not open during fiscal year 2012. The increase waspartially offset by a comparable store sales decrease of 1.9%, or $8.6 million, in fiscal year 2013 compared to fiscal year 2012. The comparable store salesdecrease was due to lower net sales of guys’, footwear and accessories, which was partially offset by an increase in womens’ and girls’ sales compared to theprior year. There were 166 comparable brick-and-mortar stores and 29 non-comparable brick-and-mortar stores open as of February 1, 2014.Gross ProfitGross profit increased $3.3 million in fiscal year 2013 as compared to fiscal year 2012 primarily due to higher net sales. As a percentage of net sales,gross profit was 30.4% and 31.6% during fiscal years 2013 and 2012, respectively. Of the 120 basis point decrease in gross profit, 160 basis points related tooccupancy costs increasing at a higher rate than net sales due to new stores opened during the year and a comparable store sales decrease, as well as a 10 basispoint increase in distribution costs. This was offset by a 20 basis point increase in product margins due to improved initial markup and a 30 basis pointdecrease in buying costs.Selling, General and Administrative ExpensesSG&A expenses increased 4.2% in fiscal year 2013 as compared to fiscal year 2012. As a percentage of net sales, SG&A expenses were 24.4% and24.9% during fiscal years 2013 and 2012, respectively.Store selling expenses increased $6.5 million to $85.0 million in fiscal year 2013 from $78.5 million in fiscal year 2012. As a percentage of net sales,store selling expenses were 17.1% and 16.8% during fiscal years 2013 and 2012, respectively.The following primarily contributed to the increase in store selling expenses as a percentage of net sales: • store, regional and e-commerce fulfillment payroll, payroll benefits and related personnel costs increased $6.4 million as compared to fiscal year2012, or 60 basis points as a percentage of net sales, as these costs increased at a faster rate than net sales, partially due to an increase in thenumber of stores; and • field processing costs increased $0.4 million as compared to fiscal year 2012, but as a percentage of net sales remained consistent with fiscal year2012. 44Table of ContentsHowever, the increases in store selling expenses were partially offset by the following decreases as a percentage of net sales: • supplies and other support costs decreased $0.3 million as compared to fiscal year 2012, or 10 basis points as a percentage of net sales; and • marketing costs were consistent with fiscal year 2012, but as a percentage of sales decreased 20 basis points due to lower catalog, distributionand other marketing activities.General and administrative expenses decreased $1.6 million to $36.1 million in fiscal year 2013 as compared to $37.7 million in fiscal year 2012. As apercentage of net sales, general and administrative expenses were 7.3% and 8.1% during fiscal years 2013 and 2012, respectively.The following primarily contributed to the decrease in general and administrative expenses as a percentage of sales: • stock-based compensation decreased $5.2 million as compared to fiscal year 2012, or 110 basis points as a percentage of sales, primarily due to aone-time charge in fiscal year 2012 to recognize life-to-date share-based compensation expense for stock options, recognition that was triggeredby the consummation of our initial public offering, partially offset by an increase in ongoing share-based compensation expense due toadditional equity awards granted during fiscal year 2013; and • payroll, payroll benefits and related costs for corporate office personnel decreased $0.3 million, or 30 basis points, as compared to fiscal year2012, as these costs increased more slowly than sales.However, the decreases in general and administrative expenses were partially offset by the following increases as a percentage of sales: • impairment charges increased $1.8 million, or 40 basis points as a percentage of net sales, as compared to fiscal year 2012; • depreciation and maintenance related to capital investments increased $1.2 million, or 20 basis points as a percentage of net sales, as comparedto fiscal year 2012; • other expense increased $0.6 million, but remained consistent with fiscal 2012 as a percentage of net sales; and • legal, audit, tax and consulting expenses increased $0.3 million, but remained consistent with fiscal 2012 as a percentage of net sales.Operating IncomeOperating income decreased $1.7 million, or 5.3%, to $29.7 million in fiscal year 2013 as compared to $31.4 million in fiscal year 2012. As apercentage of net sales, operating income was 6.0% and 6.7% during fiscal years 2013 and 2012, respectively. The decrease in operating income as apercentage of net sales was due to the decrease in comparable store sales combined with the increase in expenses discussed above.Other Expense, NetOther expense, net was $9 thousand and $91 thousand in fiscal years 2013 and 2012, respectively. Other expense, net comprises interest earned on cashbalances and tenant construction allowances received from landlords and realized gains on marketable securities, offset by interest paid on a capital lease ofour corporate office and distribution center and costs related to maintaining our unused revolving credit facility.Income Tax ExpenseOur effective income tax rates 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 inthe fourth quarter of fiscal year 2013 related to certain return to provision adjustments. The Company’s expected annual effective long-term tax rate is 40%. 45Table of ContentsIn 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.Net IncomeNet income decreased due to the factors discussed above. Applying a pro forma 40% “C” Corporation effective tax rate to fiscal year 2012, rather thanthe blended “S” Corporation and “C” Corporation tax rates that actually applied to us during that period, pro forma net income was $18.8 million in fiscalyear 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. Diluted earningsper 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 and ClassB common stock was $0.72 in fiscal year 2012.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 not drawn funds from or issued letters of creditfinancing 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 and the expansion of our distribution and fulfillment facilities, marketing and information technology expenditures and shareholderdistributions. As a result of our conversion to a “C” Corporation for income tax purposes, we no longer make “S” Corporation distributions to shareholders. Inaddition to cash and cash equivalents and marketable securities, the most significant components of our working capital are merchandise inventories,accounts payable and accrued expenses. We believe that cash flows from operating activities, the availability of cash under our revolving credit facility, ifnecessary, and our cash and marketable securities on hand will be sufficient to cover working capital requirements and anticipated capital expenditures forthe next 12 months. If cash flows from operations and borrowings under our existing revolving credit facility are not sufficient or available to meet ourcapital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debtfinancing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our stockholders. 46Table of ContentsCash Flow AnalysisA summary of operating, investing and financing activities is shown in the following table: Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 (in thousands) Net cash provided by operating activities $48,288 $43,794 $41,730 Net cash used in investing activities (23,479) (37,530) (72,326) Net cash (used in) provided by financing activities (432) 1,834 22,819 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 share-based compensation expense, plus the effect on cash of changes during the year in our assets and liabilities.Net cash provided by operating activities increased in fiscal year 2014 as compared to fiscal year 2013 primarily due to an $8.4 million increase incash generated from working capital mainly due to the timing of payments to vendors and a decrease in receivables and prepaid expenses and other assets,partially offset by an increase in inventory as a result of the opening of 19 new stores. The cumulative increase in cash generated from working capital waspartially offset by lower net income, net of non-cash adjustments, of $3.9 million.Net cash provided by operating activities increased in fiscal year 2013 as compared to 2012 primarily due to a $16.4 million increase in cash generatedfrom working capital mainly due to a decrease in merchandise inventories and prepaid expenses, partially offset by an increase in receivables mainly due toan income tax receivable which was payable in fiscal year 2012 and a decrease in deferred rent. The cumulative increase in cash generated from workingcapital was partially offset by lower net income, net of non-cash adjustments, of $14.3 million.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 andequipment at existing stores, investments in information technology, distribution center enhancements, expansion into the new e-commerce fulfillmentcenter, assets at our corporate headquarters and the addition or replacement of company vehicles. Investing activities also consist of the purchase and sale ofmarketable securities.Net cash used in investing activities was $23.5 million in fiscal year 2014. Capital expenditures totaled $23.6 million, with spending on new storesand the remodeling or other improvements of existing stores comprising $16.3 million of this total. The remaining capital expenditures were for ourinvestment in our new e-commerce fulfillment center, information technology systems and other distribution and corporate facility enhancements. Wepurchased $59.9 million of marketable securities and received proceeds of $60.0 million from the maturities of marketable securities during fiscal year 2014.Net cash used in investing activities was $37.5 million in fiscal year 2013. Capital expenditures totaled $42.7 million, with spending on new storesand the remodeling or other improvements of existing stores comprising $24.7 million of this total. The remaining capital expenditures were for ourinvestment in our new e-commerce fulfillment center, information technology systems and other distribution and corporate facility enhancements. Wepurchased $44.9 million 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 ourinvestment in information technology systems and distribution and corporate facility enhancements. In addition, we received $0.8 million of insuranceproceeds 47Table of Contentsrelated to fixed 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 $75.4million of marketable securities and received proceeds of $35.5 million from the sale of marketable securities during the period.Capital expenditures during fiscal year 2015 are expected to be between $23 million and $26 million. We expect to spend the majority on new stores,refreshes of existing stores and store improvements and improvements of our capabilities across our digital channels. These expenditures are expected to befunded 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 share-based compensation and, prior to the Reorganization, distributions to our shareholders. In fiscal year 2012, net proceeds from our initial public offering wereincluded in financing activities.Net cash used in financing activities was $0.4 million in fiscal year 2014, consisting of payments on our capital lease obligation totaling $0.8 millionpartially offset by $0.3 million of proceeds from the exercise of stock options.Net cash provided by financing activities was $1.8 million in fiscal year 2013. This included $2.5 million of proceeds from the exercise of stockoptions and excess tax benefits from share-based compensation; partially offset by $0.7 million in payments towards our capital lease obligation during fiscalyear 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.Credit FacilityWe maintain a credit facility with Wells Fargo Bank, N.A. that provides for a $25.0 million revolving line of credit with a maturity date of May 31,2017. The interest charged on borrowings is either at LIBOR plus 1.00%, or at the bank’s prime rate. We have the ability to select between the prime rate orLIBOR-based rate at the time of a cash advance. The credit facility is secured by substantially all of our assets. As a sub-feature under the revolving creditfacility 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 covenantsrequire certain levels of leverage and profitability, such as (i) an aggregate maximum net loss after taxes not to exceed $5 million (measured at the end ofeach fiscal quarter), with no more than one annual net loss after taxes for any fiscal year (in either case, excluding all charges for impairment of goodwill,other intangibles and store assets impairment on the balance sheet of WOJT, in an aggregate amount of up to $2.0 million for the relevant period), and (ii) amaximum ratio of 2.00 to 1.00 for “balance sheet leverage”, defined as total liabilities divided by total tangible net worth.As of January 31, 2015, we were in compliance with all of its covenants and had no outstanding borrowings under the credit facility.Contractual ObligationsWe enter into long-term contractual obligations and commitments in the normal course of business, primarily noncancellable capital and operatingleases.We 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 48Table of Contentsrenewal commencing on January 1, 2013. The lease now expires on December 31, 2017, with two remaining five-year renewal option periods. The landcomponent of this lease is accounted for as an operating lease and the building component is accounted for as a capital lease. The obligation under thecapital lease was $2.5 million and $3.3 million as of January 31, 2015 and February 1, 2014, respectively. The gross amount of the building under capitallease was $7.8 million as of each of January 31, 2015 and February 1, 2014. The accumulated depreciation of the building under capital lease was $6.3million and $5.8 million as of January 31, 2015 and February 1, 2014, respectively. We incurred rent expense of $0.9 million in each of the fiscal years 2014,2013 and 2012 to the operating (land component) of this 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 for our e-commerce distribution center from a company that is owned by one of the co-founders of Tilly’s.This building is located at 17 Pasteur, Irvine, California. The lease is accounted for as an operating lease and expires on October 31, 2021.Prior to signing each of the related party leases above, we received an independent market analysis regarding the property and therefore believe thatthe terms 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 non-cancellable operating leases expiring at various dates through fiscal year 2027. Certain leases provide for additional rent based on a percentage of sales andannual rent increases based upon the Consumer Price Index. In addition, many of our store leases contain certain co-tenancy provisions that permit us to payrent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in such lease.As of January 31, 2015, our contractual cash obligations over the next several periods are set forth below (in thousands). Payments Due by Period Total Less Than1 Year 1 -2 Years 3 -5 Years More Than5 Years (in thousands) Capital Lease Obligations (a) $2,740 $940 $1,800 $— $— Operating Lease Obligations (b) 311,250 49,717 93,076 77,819 90,638 Purchase Obligations (c) 2,240 1,069 1,171 — — Total$316,230 $51,726 $96,047 $77,819 $90,638 (a)Capital lease obligations consist of the building portion of our corporate headquarters and distribution center, including interest.(b)Operating leases include minimum lease commitments, including fixed common area maintenance charges, if any, for our stores, the land portion of ourcorporate headquarters and distribution center and warehouse leases. Our store leases generally have initial lease terms of 10 years and many alsoinclude renewal options on substantially the same terms and conditions as the original lease. We include renewal options to extend the lease term thatare reasonably assured of being exercised.(c)Purchase obligations consist primarily of software maintenance commitments.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 asdiscussed above. 49Table of ContentsCritical Accounting Policies and EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the appropriateapplication of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amountsreported in our consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results willinevitably differ from our estimates.We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies andestimates are 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 potentiallyhave a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in theconsolidated financial statements have not been materially impacted by such variances. Our accounting policies are more fully described in Note 2“Summary of Significant Accounting Policies” in the notes to our consolidated financial statements. Management has discussed the development andselection of these critical accounting 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 accountingpolicies with respect to revenue recognition, merchandise inventories, long-lived assets, share-based compensation and accounting for income taxes, whichare more fully 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. Foronline sales, revenue is recognized at the estimated time goods are received by customers. On average, customers receive goods within three days of beingshipped. The estimate of the transit times for these shipments is based on shipping terms and historical delivery times. Shipping and handling fees billed tocustomers for online sales are included in net sales and the related shipping and handling costs are classified as cost of goods sold in the ConsolidatedStatements of Income. For fiscal years 2014, 2013 and 2012, shipping and handling fee revenue included in net sales was $2.6 million, $3.3 million and $3.7million, 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 at each of January 31,2015 and February 1, 2014. Should the returns rate as a percentage of net sales significantly change in future periods, it could have a material impact on ourresults of operations.We recognize sales from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain an unearned revenue liability forunredeemed gift card balances. Our gift cards do not have expiration dates; however, over time, the redemption of some gift cards is remote and there is noobligation to remit the unredeemed gift cards to relevant jurisdictions, which is referred to as 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 a determination of the ultimate breakagerate based upon our historical redemption experience. This date of assessment has historically been two full fiscal years after the fiscal year in which the cardswere activated. At the time of assessment a breakage estimate is calculated and recorded in net sales. Breakage revenue for gift cards was $0.8 million, $0.6million and $0.4 million in fiscal years 2014, 2013 and 2012, respectively. If the gift card breakage experience were to change significantly in future periods,it could have a material impact on our results of operations. 50Table of ContentsMerchandise InventoriesMerchandise inventories are stated at the lower of cost or market. Market is determined based on the estimated net realizable value, which generally isthe merchandise selling price. Cost is calculated using the retail inventory method. Under the retail inventory method, inventory is stated at its current retailselling value 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. Theretail inventory method inherently requires management judgments and estimates, such as the amount and timing of markdowns needed in order to sellthrough slow-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 theultimate sale 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 $37.0 million, $35.7 million and $32.2 million andrepresented 7.1%, 7.2% and 6.9% of net sales in fiscal years 2014, 2013 and 2012, respectively. We accrued $0.9 million for planned but unexecutedmarkdowns, including markdowns related to slow-moving merchandise, as of each of January 31, 2015 and February 1, 2014.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 orbrand preferences of our customers, we may experience lower sales, excessive inventories and more frequent and extensive markdowns, which wouldadversely affect our 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 January 31, 2015 and February 1, 2014 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-periodoperating or cash flow loss combined with a history of operating or cash flow losses and a forecast that indicates continuing losses or insufficient incomeassociated 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 is recognized,measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted cash flows using our weighted-averagecost of capital, with such estimated fair values determined using the best information available. Quarterly, we assess whether events or changes incircumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. 51Table of ContentsOur evaluation during the fourth quarter of fiscal years 2014 and 2013 indicated that operating losses or insufficient operating income existed at twoand four retail stores, respectively, with a projection that the operating losses or insufficient operating income for these locations would continue. As such,the Company recorded noncash charges of $1.0 million and $1.8 million in selling, general and administrative expenses in fiscal years 2014 and 2013,respectively, to write down the carrying value of these stores’ long-lived assets to their estimated fair values. We did not record any impairment charges infiscal 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 valueof certain of our retail stores may prove to be unrecoverable and we may incur additional impairment charges in the future.Share-based CompensationWe account for share-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation, or ASC 718,which establishes accounting for equity instruments exchanged for employee services. Under the provisions of this statement, share-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 optionsgranted which are not expected to vest. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of ourshare-based compensation expense.Determining the fair value of share-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: • 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, our commonstock was not publicly traded. Therefore, we estimated the fair value of our common stock, as discussed below under the heading “Determinationof the Fair Value of Common Stock Granted Prior to Our Initial Public Offering”. • Expected Term. We have limited historical information regarding expected option term. Accordingly, we determined the expected stock optionterm of 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 equalto the 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 United States Treasury securities with maturities similar to the expected term ofthe stock 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. 52Table of ContentsIf any of the assumptions used in the Black-Scholes model change significantly, share-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 January 31, 2015 February 1, 2014 February 2, 2013 Expected option term 5.0 years 5.0 years 5.0 years Expected volatility factor 44.4% - 46.9% 55.0% - 56.2% 57.6% - 62.9% Risk-free interest rate 1.6% - 1.8% 0.8% - 1.7% 0.6% - 0.8% 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 within thecompany and the vesting period of the awards.Determination of the Fair Value of Common Stock Granted Prior to Our Initial Public OfferingPrior 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 our 2007 Stock Option Plan was determined by our board of directors, which intended all stock options granted to be exercisable at aprice per share not less than the per share fair value of our common stock underlying those stock options on the date of grant. We determined the estimatedper share fair value of our common stock using a contemporaneous valuation consistent with the American Institute of Certified Public Accountants PracticeAid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation”, or the Practice Aid. In conducting this valuation, we considered allobjective and subjective factors that we believed to be relevant, including our best estimate of our business condition, prospects and operating performanceat the valuation date. Within this contemporaneous valuation performed by management, with the assistance of third-party valuation specialists hired by us, arange of factors, assumptions and methodologies were used. The significant factors included: • 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 United States 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 Initial Public OfferingFor the contemporaneous valuation of our common stock, management estimated, as of January 28, 2012, the latest valuation date prior to our initialpublic offering, our enterprise value on a continuing operations basis primarily using the income and market approaches which are both acceptable valuationmethods in accordance with the Practice Aid. The income approach utilized a discounted cash flow methodology based on our financial forecasts andprojections, as detailed below. The market approach utilized both the guideline public company and the guideline merged and acquired methodologiesbased on data obtained on comparable public companies, as detailed below. Management considered both objective and subjective factors, includinginformation provided by a third-party valuation firm, to determine its best estimate of the fair market value of our common stock. 53Table of ContentsFor 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 adetailed financial forecast for the next five fiscal years as well as growth and profitability assumptions for subsequent years that are specific to Tilly’sbusiness 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 revenueand EBITDA multiples from other companies to apply to Tilly’s, we considered differences between Tilly’s and eleven comparable companies in terms ofsize, profitability and growth, among other factors. Given the timely nature of the public company data and the quantity of the public companies in the groupthat were in the same or similar retail sector as Tilly’s, the guideline public company method was given a weighting of 40%. We weighted the guidelinepublic company method less than the discounted cash flow method due to the fact that the stock price and earnings estimates for the comparable publiccompanies were 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.We believe that the procedures employed in the discounted cash flow, guideline public company and guideline merged and acquired methodologiesare reasonable 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 Valueof StockOptionsGranted 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 January 31, 2015, the last trading day of fiscal year 2014, the aggregate intrinsic value ofvested stock options outstanding as of January 31, 2015 was approximately $2.9 million, and the aggregate intrinsic value of unvested stock optionsoutstanding as of January 31, 2015 was $1.5 million.Significant factors considered by our board of directors in determining the fair value of our common stock at the above grant dates included: 54Table of ContentsOctober 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 United States economy had been recovering from recession in 2010, the recovery was weaker than in many past recoveryperiods. The financial results of many of our comparable companies reflected weak performance driven generally by either negative or only modestlypositive year-to-date comparable store sales through August. Our comparable store sales trends for this same period were consistent with our comparablecompanies, with close to zero comparable store sales growth, lower income than the same year-to-date period in the prior year and sales and income runningwell below the forecast for fiscal year 2010 that was incorporated in the prior valuation of our common stock. As a result of these factors, we lowered ourfinancial forecast and expectations for growth in fiscal year 2010 and, because they were building upon 2010 expected results, the forecasted sales andincome in fiscal year 2011 and beyond. The marketability discount was 15%, based upon expectations that an initial public offering would not occur until atleast early in 2012. This valuation determined the value of our common stock to be $8.98 per share. Our board of directors granted stock options withexercise prices at $8.98 per share on October 8, 2010, the date the valuation was finalized, after determining that the fair value of our common stock wouldnot have materially changed between the valuation date and the date of the grant. In addition, stock options previously granted with exercise prices greaterthan $8.98 per share were re-priced to $8.98 per 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 year 2010 and our comparable companies’ results generally improved substantially in the fourth quarter of fiscal year2010. Our results, similarly, improved substantially, with a double-digit comparable store sales increase in the fourth quarter of fiscal year 2010 compared tothe fourth quarter of fiscal year 2009 and profitability for the quarter well above the prior year’s fourth quarter. Therefore, profitability for fiscal year 2010ended up being well above the revised forecast used in the August 2010 valuation. This greatly improved sales and profit trend continued into February andMarch of fiscal year 2011. As a result, we increased the financial forecast and expectations for growth in fiscal year 2011 and beyond. Concurrently, ourcomparable companies’ financial results led to, in many cases, increased market prices for their common stock. The marketability discount was 10%, basedupon expectations that an initial public offering would not occur until mid-2011 at the earliest. This valuation determined the value of our common stock tobe $16.26 per share. Our board of directors granted stock options with exercise prices at $16.26 per share on March 31, 2011, the date the valuation wasfinalized, after determining that 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 $14.47 werere-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 share-based compensation expense of $0.6 million. Expense related to vested stock options was recognized upon the consummation of ourinitial public offering, and expense related to unvested stock options is being amortized over the remaining vesting period of the stock options. Ourassumptions used to estimate the fair value of the original awards immediately before the re-pricing and the fair value of the re-priced awards requiredsignificant judgment. 55Table of ContentsAccounting 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 subjectto corporate-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, or 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 considerall available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, taxplanning strategies 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 PronouncementsWe do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements. 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 ofJanuary 31, 2015 and February 1, 2014, we had no outstanding borrowings under our credit facility.Impact of InflationOur results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact ofinflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial conditionhave been immaterial.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. 56Table of ContentsItem 8.Financial Statements and Supplementary DataTilly’s, Inc.Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets as of January 31, 2015 and February 1, 2014 59 Consolidated Statements of Income for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 60 Consolidated Statements of Comprehensive Income for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 61 Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 62 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2015, February 1, 2014and February 2, 2013 63 Notes to Consolidated Financial Statements 64 57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 January 31, 2015 andFebruary 1, 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three yearsin the period ended January 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on the 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 considerationof internal 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 auditalso includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principlesused and 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 January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 31,2015, in conformity with accounting principles generally accepted in the United States of America./s/ Deloitte & Touche LLPCosta Mesa, CaliforniaApril 1, 2015 58Table of ContentsTilly’s, Inc.Consolidated Balance Sheets(In thousands, except per share data) January 31,2015 February 1,2014 ASSETS Current assets: Cash and cash equivalents $49,789 $25,412 Marketable securities 34,957 34,943 Receivables 4,682 8,545 Merchandise inventories 51,507 46,266 Prepaid expenses and other current assets 12,349 11,772 Total current assets 153,284 126,938 Property and equipment, net 101,335 100,936 Other assets 2,932 4,533 Total assets$257,551 $232,407 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable$23,109 $19,645 Accrued expenses 12,325 9,241 Current portion of deferred rent 6,070 5,395 Deferred revenue 7,075 6,214 Accrued compensation and benefits 5,911 4,975 Current portion of capital lease obligation (Note 9) 806 758 Total current liabilities 55,296 46,228 Long-term portion of deferred rent 41,875 42,756 Long-term portion of capital lease obligation (Note 9) 1,694 2,500 Total long-term liabilities 43,569 45,256 Total liabilities 98,865 91,484 Commitments and contingencies (Note 10)Stockholders’ equity:Common stock (Class A), $0.001 par value; January 31, 2015—100,000 shares authorized, 11,546 shares issued andoutstanding; February 1, 2014—100,000 shares authorized, 11,361 shares issued and outstanding 11 11 Common stock (Class B), $0.001 par value; January 31, 2015—35,000 shares authorized, 16,544 shares issued andoutstanding; February 1, 2014—35,000 shares authorized, 16,642 shares issued and outstanding 17 17 Preferred stock, $0.001 par value; January 31, 2015 and February 1, 2014—10,000 shares authorized, no shares issued oroutstanding — — Additional paid-in capital 126,565 122,886 Retained earnings 32,072 17,997 Accumulated other comprehensive income 21 12 Total stockholders’ equity 158,686 140,923 Total liabilities and stockholders’ equity$257,551 $232,407 The accompanying notes are an integral part of these consolidated financial statements. 59Table of ContentsTilly’s, Inc.Consolidated Statements of Income(In thousands, except per share data) Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Net sales $518,294 $495,837 $467,291 Cost of goods sold (includes buying, distribution, and occupancy costs) (Note 1) 362,762 345,015 319,723 Gross profit 155,532 150,822 147,568 Selling, general and administrative expenses (Note 1) 132,343 121,085 116,178 Operating income 23,189 29,737 31,390 Other expense, net 14 9 91 Income before income taxes 23,175 29,728 31,299 Income tax expense 9,100 11,591 7,406 Net income$14,075 $18,137 $23,893 Basic earnings per share of Class A and Class B common stock$0.50 $0.65 $0.93 Diluted earnings per share of Class A and Class B common stock$0.50 $0.65 $0.92 Weighted average basic shares outstanding 28,013 27,822 25,656 Weighted average diluted shares outstanding 28,078 28,116 26,076 Pro forma income information (Note 1):Historical income before income taxes$31,299 Pro forma income tax expense (unaudited) 12,520 Pro forma net income (unaudited)$18,779 Pro forma basic earnings per share of Class A and Class B common stock (unaudited)$0.73 Pro forma diluted earnings per share of Class A and Class B common stock (unaudited)$0.72 The accompanying notes are an integral part of these consolidated financial statements. 60Table of ContentsTilly’s, Inc.Consolidated Statements of Comprehensive Income(In thousands) For the Fiscal Years Ended January 31,2015 February 1,2014 February 2,2013 Net income $14,075 $18,137 $23,893 Other comprehensive income, net of tax: Net change in unrealized gain/loss on available-for-sale securities 9 (5) 17 Other comprehensive income (loss), net of tax 9 (5) 17 Comprehensive income$14,084 $18,132 $23,910 The accompanying notes are an integral part of these consolidated financial statements. 61Table of ContentsTilly’s, Inc.Consolidated Statements of Stockholders’ Equity(In thousands) Number of Shares CommonStock AdditionalPaid-inCapital RetainedEarnings(Deficit) AccumulatedOtherComprehensiveIncome TotalStockholders’Equity CommonStock(Class A) CommonStock(Class B) CommonStock(WOJT) Balance at January 28, 2012 — — 20,000 $20 $150 $60,254 — $60,424 Net income — — — — — 23,893 — 23,893 Reorganization (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” Corporation shareholders — — — — — (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 tax benefit of $74 92 — — 1 889 — — 890 Net change in unrealized gain (loss) on available-for-salesecurities — — — — — — 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 tax benefit of $42 280 — — — 2,389 — — 2,389 Net change in unrealized gain (loss) on available-for-salesecurities — — — — — — (5) (5) Balance at February 1, 2014 11,361 16,642 — 28 122,886 17,997 12 140,923 Net income — — — — — 14,075 — 14,075 Shares converted by founders 98 (98) — — — — — — Stock-based compensation expense — — — — 3,499 — — 3,499 Excess tax deficiencies from stock-based compensation — — — — (124) — — (124) Restricted stock 49 — — — — — — — Exercise of stock options, 38 — — — 304 — — 304 Net change in unrealized gain (loss) on available-for-salesecurities — — — — — — 9 9 Balance at January 31, 2015 11,546 16,544 — $28 $126,565 $32,072 $21 $158,686 The accompanying notes are an integral part of these consolidated financial statements. 62Table of ContentsTilly’s, Inc.Consolidated Statements of Cash Flows(In thousands) Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Cash flows from operating activitiesNet income$14,075 $18,137 $23,893 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization 21,237 19,367 16,679 Loss on disposal of assets 118 140 111 Impairment of assets 1,007 1,840 — (Gain) loss on sales and maturities of marketable securities (116) (176) 28 Deferred income taxes (1,156) 304 6,689 Stock-based compensation expense 3,499 3,106 9,570 Excess tax benefit from stock-based compensation (22) (157) (95) Changes in operating assets and liabilities:Receivables 3,863 (2,611) 21 Merchandise inventories (5,241) 329 (9,927) Prepaid expenses and other assets 2,051 (1,861) (12,930) Accounts payable 3,720 1,554 1,431 Accrued expenses 3,662 (1,796) (1,470) Accrued compensation and benefits 936 (1,119) (1,442) Deferred rent (206) 5,976 8,584 Deferred revenue 861 761 588 Net cash provided by operating activities 48,288 43,794 41,730 Cash flows from investing activitiesPurchase of property and equipment (23,636) (42,701) (33,298) Proceeds from sale of property and equipment 41 79 17 Insurance proceeds from casualty loss — — 822 Purchases of marketable securities (59,884) (44,908) (75,377) Maturities of marketable securities 60,000 50,000 35,510 Net cash used in investing activities (23,479) (37,530) (72,326) Cash flows from financing activitiesPayment of capital lease obligation (758) (712) (668) Net proceeds from initial public offering — — 106,789 Proceeds from exercise of stock options 304 2,389 890 Excess tax benefit from stock-based compensation 22 157 95 Distributions — — (84,287) Net cash (used in) provided by financing activities (432) 1,834 22,819 Change in cash and cash equivalents 24,377 8,098 (7,777) Cash and cash equivalents, beginning of period 25,412 17,314 25,091 Cash and cash equivalents, end of period$49,789 $25,412 $17,314 Supplemental disclosures of cash flow informationInterest paid$182 $253 $299 Income taxes paid$4,511 $14,969 $13,727 Supplemental disclosure of non-cash activitiesUnpaid purchases of property and equipment$1,513 $2,348 $2,875 The accompanying notes are an integral part of these consolidated financial statements. 63Table of ContentsTilly’s, Inc.Notes to Consolidated Financial StatementsNote 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 the Company, Tilly’s, we, or us, refers toWOJT before 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 212 and 195 stores as of January 31, 2015 and February 1, 2014, 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 2014, 2013 and 2012 ended on January 31, 2015, February 1, 2014and February 2, 2013, respectively. Fiscal years 2014 and 2013 each included 52 weeks, and fiscal year 2012 included 53 weeks.Segment ReportingAccounting principles generally accepted in the United States (“GAAP”) has established guidance for reporting information about a company’soperating segments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company has onereportable segment. All of the Company’s identifiable assets are in the United States.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 weightedaverage shares outstanding was a decrease of approximately 20,000 shares in fiscal year 2012.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 stock andcertain selling stockholders sold 400,000 shares of Class A common stock. In addition, on May 9, 2012, the underwriters exercised their option to purchasean 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 was 9,200,000shares 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. The9,200,000 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 from the saleof shares by the selling stockholders. 64Table of ContentsAs a result of the IPO, the Company received net proceeds of approximately $106.6 million, after deducting the underwriting discount of $8.7 millionand related 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 notespreviously issued to the shareholders of WOJT. These notes represented WOJT’s undistributed taxable income from the date of its formation through the dateof termination of its “S” Corporation status.Correction to the Consolidated Statements of IncomeThe Company identified a prior period error related to the classification of share-based compensation and benefits. The Company identified $1.5million and $2.6 million of share-based compensation and benefits in fiscal years 2013 and 2012, respectively, previously included in selling, general andadministrative expenses that should have been presented as a component of cost of goods sold. Accordingly, the Company has corrected the accompanyingconsolidated statements of income for fiscal years 2013 and 2012, resulting in an increase in cost of goods sold, a decrease in gross profit and a decrease inselling, general and administrative expenses of $1.5 million and $2.6 million for fiscal years 2013 and 2012, respectively, from amounts previously reported.The error had no impact on the amounts previously reported in the Company’s consolidated balance sheets and statements of comprehensive income, andcash flows and had no impact on net income. Management has evaluated the materiality of the error quantitatively and qualitatively and has concluded thatthe correction of this error is immaterial to the consolidated statements of income and the consolidated financial statements as a whole.Note 2: 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 lowerof 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 Companybelieves that the retail inventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $6.7 million, $6.6 millionand $5.6 million in fiscal years 2014, 2013 and 2012, respectively, are included in cost of goods sold in the consolidated statements of operations.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 $37.0 million, $35.7 million and $32.2 million in fiscal years 2014, 2013 and 2012, respectively. In addition,the Company accrued $0.9 million for planned but unexecuted markdowns, including markdowns related to slow moving merchandise, as of January 31,2015 and February 1, 2014. 65Table of ContentsProperty and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimateduseful lives of the assets. Equipment is depreciated over five to seven years. Furniture and fixtures are depreciated over five years. Computer software isdepreciated over three years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the lease or theestimated useful life of the improvement. The cost of assets sold or retired and the related accumulated depreciation is removed from the accounts with anyresulting 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 extendthe useful 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 relatedassets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the differencebetween the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates theCompany’s weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computerhardware and software, the Company considers the assets at each individual retail store to represent an asset group. In addition, the Company has consideredthe relevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted estimated future cash flowapproach provides 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 2014 and 2013 indicated that operating losses orinsufficient operating income existed at two and four retail stores, respectively, with a projection that the operating losses or insufficient operating income forthese locations would continue. As such, the Company recorded noncash charges of $1.0 million and $1.8 million in selling, general and administrativeexpenses in fiscal years 2014 and 2013, respectively, to write down the carrying value of these stores’ long-lived assets to their estimated fair values. TheCompany did not record any impairment charges in fiscal year 2012.If 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.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. The Company recognizes rent expense on a straight-line basis over the lease term, excluding contingent rent, andrecords the difference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on apercentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent isprobable.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 basisstarting from the date of possession and records the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent alsoincludes tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rentexpense on a straight-line basis over the term of the lease starting at the date of possession. 66Table of ContentsRevenue 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, the Company recognizes revenue, net of sales taxes and estimated sales returns, and the relatedcost of goods sold at the time the merchandise is received by the customer. The Company defers e-commerce revenue and the associated product andshipping costs for shipments that are in-transit to the customer. Customers typically receive goods within three days of shipment. Amounts related toshipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the ConsolidatedStatements of Income. For fiscal years 2014, 2013 and 2012, shipping and handling fee revenue included in net sales was $2.6 million, $3.3 million and $3.7million, respectively.The Company accrues for estimated sales returns by customers based on historical sales return results. Sales return accrual activity for fiscal years 2014,2013 and 2012 is as follows (in thousands): Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Beginning balance $573 $703 $609 Provisions 16,875 15,938 14,850 Usage (16,800) (16,068) (14,756) Ending balance$648 $573 $703 The 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 $7.1 million and $6.2 million as of January 31, 2015 and February 1, 2014,respectively, and is included in deferred revenue on the balance sheets. The Company’s s gift cards do not have expiration dates; however, over time, theredemption of some gift cards becomes remote and in most cases there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (giftcard “breakage”). An assessment of the ultimate non-redemption rate of gift cards is performed when enough time has passed since the activation of the cardsto enable a determination of the ultimate breakage rate based upon historical redemption experience. This date of assessment has historically been two fullfiscal years after the fiscal year the cards were activated. At the time of assessment a breakage estimate is calculated and recorded in net sales. Breakagerevenue for gift cards was $0.8 million, $0.6 million and $0.4 million in fiscal years 2014, 2013 and 2012, respectively.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 of inventory. 67Table of Contents • Costs of buying and distribution of merchandise include: • payroll and benefit costs and incentive compensation for merchandise purchasing personnel; • customer shipping and handling expenses; • costs associated with operating our distribution and fulfillment center, including payroll and benefit costs for our distribution center,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, e-commerce and corporate employees; • Occupancy and maintenance costs of corporate office facilities; • Depreciation 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, travel and lodging; and • Charitable contributions.Store 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 $9.6million, $9.1 million and $8.4 million in fiscal years 2014, 2013 and 2012, respectively.Share-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, share-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expenseon a 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 share-based compensation expense. Refer to “Note 12: Share-based Compensation” for furtherinformation.Income TaxesThe 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. 68Table of ContentsThe 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. Refer to “Note 14: IncomeTaxes”, for further information.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 65 thousand, 294 thousand and 420 thousand in fiscal years 2014, 2013 and 2012, respectively, were used in the calculation of diluted earnings pershare. Refer to “Note 15: Earnings Per Share”, for further information.Concentration of Credit RiskFinancial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents. At January 31, 2015 andFebruary 1, 2014, 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.Use 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,management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. Note3: Marketable SecuritiesMarketable securities are classified as available-for-sale and, as of January 31, 2015 and February 1, 2014, 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 January 31, 2015 and February 1, 2014 (in thousands): January 31, 2015 Cost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses FairValue Commercial paper $34,922 $35 $— $34,957 . February 1, 2014 Cost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses FairValue Commercial paper $34,923 $23 $(3) $34,943 69Table of ContentsFor the fiscal years ended January 31, 2015 and February 1, 2014, the Company recognized gains on investments of $0.1 million and $0.2 million,respectively, for commercial paper which matured during the periods. Upon recognition of the gains, the Company reclassified these amounts out ofaccumulated other comprehensive income and into other expense, net, on the consolidated statements of income.Note 4: ReceivablesAt January 31, 2015 and February 1, 2014, receivables consisted of the following (in thousands): January 31,2015 February 1,2014 Credit and debit card receivables $2,685 $2,372 Tenant allowances due from landlords 1,789 2,849 Income tax receivable — 2,964 Other 208 360 Total receivables$4,682 $8,545 Note 5: Prepaid Expenses and Other Current AssetsAt January 31, 2015 and February 1, 2014, prepaid expenses and other current assets consisted of the following (in thousands): January 31,2015 February 1,2014 Prepaid rent $6,596 $6,204 Deferred taxes 3,594 3,379 Prepaid maintenance agreements 753 892 Prepaid insurance 704 532 Other 702 765 Total prepaid expenses and other current assets$12,349 $11,772 Note 6: Property and EquipmentAt January 31, 2015 and February 1, 2014, property and equipment consisted of the following (in thousands): January 31,2015 February 1,2014 Leasehold improvements $124,809 $99,719 Furniture and fixtures 37,796 35,043 Machinery and equipment 28,819 26,990 Building under capital lease 7,840 7,840 Computer hardware and software 24,622 19,796 Construction in progress 1,448 16,998 Vehicles 1,470 1,381 226,804 207,767 Accumulated depreciation (125,469) (106,831) Property and equipment, net$101,335 $100,936 70Table of ContentsDepreciation expense related to property and equipment was $21.2 million, $19.4 million and $16.7 million in fiscal years 2014, 2013 and 2012,respectively.The Company incurred costs of $22.8 million, $42.2 million and $34.0 million for capital expenditures in fiscal years 2014, 2013 and 2012,respectively.Note 7: Accrued ExpensesAt January 31, 2015 and February 1, 2014, accrued expenses consisted of the following (in thousands): January 31,2015 February 1,2014 Sales and use taxes payable $1,611 $1,566 Accrued construction 1,202 1,780 Minimum rent and common area maintenance 927 870 Accrued merchandise returns 648 572 Income taxes payable 600 — Other 7,337 4,453 Total accrued expenses$12,325 $9,241 Note 8: 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, which was effective as of February 3, 2014, continues to provide for a $25.0 million revolvingline of credit with a maturity date of May 31, 2017. The interest charged on borrowings is either at LIBOR plus 1.00%, or at the bank’s prime rate. TheCompany has the ability to select between the prime rate or LIBOR-based rate at the time of a cash advance. The revolving credit facility is secured bysubstantially all of the Company’s assets. As a sub-feature under the revolving credit facility the bank may issue stand-by and commercial letters of credit upto $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 (i) an aggregate maximum net loss after taxes not to exceed $5 million (measured at theend of each fiscal quarter), with no more than one annual net loss after taxes for any fiscal year (in either case, excluding all charges for impairment ofgoodwill, other intangibles and store assets impairment on the balance sheet of WOJT, in an aggregate amount of up to $2.0 million for the relevant period),and (ii) a maximum ratio of 2.00 to 1.00 for “balance sheet leverage”, defined as total liabilities divided by total tangible net worth.At January 31, 2015, the Company was in compliance with all of its covenants and had no outstanding borrowings under the line of credit.Note 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 salesand annual rent increases generally based upon the Consumer Price Index. In addition, many of the store leases contain certain co-tenancy provisions thatpermit the Company to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established inthe lease. 71Table of ContentsOperating leasesThe 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 Company occupied the building on June 29, 2012 and incurred rent expense of $0.3 million in fiscal years 2014 and 2013 and $0.2 million in fiscal year2012, related to the lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside UrbanConsumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase. The lease expires on June 30, 2022.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 Company usesthis property as its e-commerce distribution center. Pursuant to the lease agreement, the Company requested during fiscal year 2012 that the landlord expandthe building. Upon commencement of the building expansion, the Company returned the building to the landlord. As of February 2, 2013, the landlordreturned the expanded building to the Company. The Company incurred rent expense of $1.0 million, $1.1 million and $0.6 million in fiscal years 2014,2013 and 2012, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the LosAngeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase. The lease expires onOctober 31, 2021.The Company previously leased warehouse space (15 Chrysler, Irvine, California) that is owned by one of the co-founders of Tilly’s. The leaseprovided for base monthly payments of $16,118 which increased every twelve months at $0.03 per square foot per month. The Company incurred rentexpense of $0.1 million, $0.2 million and $0.2 million in fiscal years 2014, 2013 and 2012, respectively, related to this lease. The lease expired onOctober 31, 2014. The Company subleased part of the building to an unrelated third party. The sublease began on December 1, 2010 and terminated onMay 31, 2014. Sublease income was $0.1 million in fiscal years 2014, 2013 and 2012.Future minimum rental commitments, by year and in the aggregate, under noncancellable operating leases for the above buildings at 11 Whatney and17 Pasteur and all of the Company’s store locations as of January 31, 2015 are as follows (in thousands): Fiscal Year RelatedParty Other Total 2015 $2,210 $47,507 $49,717 2016 2,247 45,949 48,196 2017 2,205 42,675 44,880 2018 1,503 42,200 43,703 2019 1,430 32,686 34,116 Thereafter 2,756 87,882 90,638 Total$12,351 $298,899 $311,250 Rent expense under noncancellable operating leases for fiscal years 2014, 2013 and 2012 was as follows (in thousands): January 31,2015 February 1,2014 February 2,2013 Minimum rentals $47,010 $43,353 $37,324 Contingent rentals 166 38 19 Total rent expense$47,176 $43,391 $37,343 72Table of ContentsCapital leaseThe 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. At January 31, 2015, the monthly paymentsunder the operating portion of the lease were $80,046. The obligation under the capital lease was $2.5 million and $3.3 million as of January 31, 2015 andFebruary 1, 2014, respectively. The gross amount of the building under capital lease was $7.8 million as of January 31, 2015 and February 1, 2014. Theaccumulated amortization of the building under capital lease was $6.3 million and $5.8 million as of January 31, 2015 and February 1, 2014, respectively.The Company incurred rent expense of $0.9 million in each of the fiscal years 2014, 2013 and 2012 related to the operating (land component) of this lease.Future commitments under the Company’s related party capital lease obligation as of January 31, 2015 are as follows (in thousands): Fiscal Year 2015 $940 2016 940 2017 860 Total minimum lease payments 2,740 Less amount representing interest 240 Present value of net minimum lease payments 2,500 Less current portion 806 Long-term portion$1,694 Prior 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.See “Note 16: Related Party Transactions”, for further information.Note 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 January 31, 2015.Indemnifications, Commitments, and GuaranteesDuring the normal course of business, the Company has made certain indemnifications, commitments, and guarantees under which it may be requiredto make payments for certain transactions. These indemnifications include those given to various lessors in connection with facility leases for certain claimsarising from such facility or lease, and indemnifications to directors and officers of the Company to the maximum extent permitted under the laws of the stateof California. The majority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potential futurepayments 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. 73Table of ContentsSoftware Maintenance CommitmentsAt January 31, 2015, our future minimum payments under agreements to purchase services for software maintenance aggregated to $2.2 million,payable as follows: $1.1 million in fiscal 2015, $0.9 million in fiscal 2016 and $0.2 million in fiscal 2017.Legal ProceedingsFrom time to time, the Company may become involved in lawsuits and other claims arising from its ordinary course of business. The Company 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 losson any pending litigation or claim. Because of the unpredictable nature of these matters, the Company cannot provide any assurances regarding the outcomeof any 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 disclosedbelow, 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 costs and the outcome of litigation could have a material adverse effect on our business” included in this report.Kristin Christiansen, Shellie Smith and Paul Haug, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, SuperiorCourt of California, County of Sacramento, Case No. 34-2013-00139010. On January 29, 2013, the plaintiffs in this matter filed a putative class actionlawsuit against the Company alleging violations of California Civil Code Section 1747.08, which prohibits requesting or requiring personal identificationinformation from 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 the partiesare proceeding with discovery on class certification issues. Class certification briefing is currently expected to conclude in July 2015 with a hearing inAugust 2015. The complaint seeks certification of a class, unspecified damages, injunctive relief and attorneys’ fees. The Company intends to defend thiscase 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 in thismatter 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, we filed a motion to compel arbitration,which was denied in May 2013 and affirmed on appeal. In October 2014, the Company filed an answer to the amended complaint. The Company intends todefend this case vigorously.Karina Whitten, on behalf of herself and all others similarly situated, v. Tilly’s Inc., Superior Court of California, County of Los Angeles, Case No, BC548252. On June 10, 2014, plaintiff filed a putative class action and representative Private Attorney General Act lawsuit against the Company allegingviolations of California’s wage and hour, meal break and rest break rules and regulations, and unfair competition law, among other things. The complaintseeks class certification, penalties, restitution, injunctive relief and attorneys’ fees and costs. Plaintiff filed a first amended complaint on December 3, 2014,removing the expense reimbursement claim. The Company answered the complaint on January 8, 2015. The Company intends to defend this case vigorously.Herbert Ortiz and Audra Haynes, individually, and on behalf of the generally public, v. Tilly’s Inc., United States District Court for the EasternDistrict of California, Case No, 1:15-CV-00108-MJS. On November 6, 2014, 74Table of Contentsplaintiffs filed a putative class action and representative Private Attorney General Act lawsuit against the Company in the Superior Court of California,County of Fresno, alleging violations of California’s wage and hour, meal break and rest break rules and regulations, and unfair competition law, amongother things. The complaint seeks class certification, penalties, restitution, injunctive relief and attorneys’ fees and costs. On January 21, 2015, the Companyanswered the complaint and removed the action to the United States District Court for the Eastern District of California. The Company intends to defend thiscase vigorously.Note 11: 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 atthe measurement 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 thefull term 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 2014 and 2013. Furthermore, as ofJanuary 31, 2015 and February 1, 2014, the Company did not have any Level 3 financial assets. The Company conducts reviews on a quarterly basis to verifypricing, 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): January 31, 2015 February 1, 2014 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents: Money market securities $34,433 $— $— $25,316 $— $— Marketable securities: Commercial paper — 34,957 — — 34,943 — During fiscal years 2014 and 2013, certain long-lived assets with carrying values totaling $1.0 million and $1.8 million at two and four of theCompany’s retail stores, respectively, were determined to be unable to recover their carrying values and, therefore, were written down to their fair value,resulting in a loss on impairment of assets of $1.0 million and $1.8 million in fiscal years 2014 and 2013, respectively. The fair value of these assets wasdetermined using Level 3 inputs and the valuation techniques are described in “Note 2: Summary of Significant Accounting Policies”. The Company has noother financial instruments that would be considered significant for fair value measurement purposes. 75Table of ContentsNote 12: Share-Based CompensationIn June 2007, the Compensation Committee of the Company’s Board of Directors adopted the 2007 Stock Option Plan, (the “2007 Plan”), whichauthorized the issuance of options to acquire up to 1,600,000 shares of the Company’s Class A common stock for certain employees, consultants anddirectors. These share-based awards were granted at an exercise price equal to the fair market value of our common stock at the date of grant. These awardsvest in equal installments over a four year period (service period) and generally expire at the earlier of 30 days after employment or services are terminated orten years from the date of grant. The awards included a performance condition that prevented the awards from becoming exercisable until the consummationof the Company’s initial public offering. As the awards contained both a service requirement and a performance condition, compensation expense was notrecognized in the financial statements until the consummation of our initial public offering on May 3, 2012. On that date, we recognized $7.6 million ofshare-based compensation expense relating to the stock options previously granted to employees and directors under the 2007 Plan. This amount representedthe cumulative share-based compensation expense from the inception of the 2007 Plan through the date of the Company’s initial public offering, as theCompany had not previously recognized any share-based compensation expense for these awards due to the performance condition wherein, if the stockoptions were vested, they would only become exercisable upon the consummation of the Company’s initial public offering. In connection with therecognition of share-based compensation, the Company recorded an increase in noncurrent deferred tax assets and income taxes payable of $3.0 million. Nostock options were granted from the 2007 Plan during fiscal year 2012, and stock options may no longer be issued from the 2007 Plan subsequent to theinitial public offeringIn April 2012, the Compensation Committee adopted the Tilly’s 2012 Equity and Incentive Award Plan, (the “2012 Plan”), which authorized theissuance of options, shares or rights to acquire up to 2,913,900 shares of the Company’s Class A common stock. In June 2014, the Company’s stockholdersapproved the Amended and Restated Tilly’s 2012 Equity and Incentive Award Plan, which increased the aggregate number of shares reserved for issuancethereunder by 1,500,000 shares, from 2,913,900 shares to a total of 4,413,900 shares; and added operating income and comparable store sales growth asadditional performance goals that may be used in connection with performance-based awards granted under the amended 2012 Plan. As of January 31, 2015,there were 2,831,159 shares still available for future issuance under the 2012 Plan.OptionsThe Compensation Committee has granted stock options to certain existing and new employees to acquire the Company’s Class A common stockunder its stock plans to certain of the Company’s employees and executives. The exercise price of options granted is equal to the closing price per share ofthe Company’s stock at the date of grant. The nonqualified options generally vest ratably over a four-year period beginning on the first anniversary of thedate of grant, provided that the award recipient continues to be employed by the Company through each of those vesting dates, and expire ten years from thedate of grant. 76Table of ContentsThe following table summarizes the Company’s stock option activity for fiscal year 2014: StockOptions Grant DateWeightedAverageExercise Price WeightedAverageRemainingContractualLife (in Years) AggregateIntrinsicValue(1) (in years) (in thousands) Outstanding at February 1, 2014 2,356,790 $13.31 Granted 837,500 $12.19 Exercised (38,250) $7.94 Forfeited (173,500) $13.69 Expired (102,500) $13.41 Outstanding at January 31, 2015 2,880,040 $13.03 7.0 $4,412 Vested and expected to vest at January 31, 2015 2,782,319 $13.04 7.0 $4,296 Exercisable at January 31, 2015 1,297,540 $12.65 5.4 $2,878 (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 marketvalue per share was $13.74 at January 31, 2015.The total intrinsic value of options exercised in fiscal years 2014, 2013 and 2012 was $0.1 million, $1.6 million and $0.7 million, respectively.The total fair value of options vested in fiscal years 2014, 2013 and 2012 was $3.5 million, $3.0 million and $1.5 million, respectively.The total proceeds received from the exercise of stock options in fiscal years 2014, 2013 and 2012 was $0.3 million, $2.3 million and $0.8 million,respectively. The tax benefit realized from stock options exercised in fiscal years 2014, 2013 and 2012 was $0.1 million, $0.7 million and $0.3 million,respectively.The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used toestimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of the Company’s stock over theoption’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’sestimate of pre-vesting forfeitures, or forfeiture rate, was based on its internal analysis, which included the award recipients’ positions within the Companyand 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 2014, 2013 and 2012 were estimated on the grant dates using the following assumptions: Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013Average fair value per option granted $5.19 $6.31 $9.01Expected option term(1) 5.0 years 5.0 years 5.0 yearsExpected volatility factor(2) 44.4% - 46.9% 55.0% - 56.2% 57.6% - 62.9%Risk-free interest rate(3) 1.6% - 1.8% 0.8% - 1.7% 0.6% - 0.8%Expected annual dividend yield 0% 0% 0% (1)The Company has limited historical information regarding expected option term. Accordingly, the Company determined the expected option term ofthe awards using the latest historical data available from comparable public companies and management’s expectation of exercise behavior. 77Table of Contents(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.Restricted StockThe Company has also granted restricted stock under the 2012 Plan to the Company’s independent directors. The value of the shares are measured onthe date of grant based upon the closing price of the Company’s Class A common stock and vest ratably over two years beginning on the date of grantprovided that the respective award recipient continues to serve on the Company’s board of directors through each of those vesting dates.A summary of the status of non-vested restricted stock as of January 31, 2015 and changes during fiscal year 2014 are presented below: Shares Weighted-AverageGrant-DateFair Value Nonvested at February 1, 2014 30,096 $15.95 Granted 38,696 $8.27 Vested (20,208) $15.83 Nonvested at January 31, 2015 48,584 $9.88 The weighted-average grant-date fair value of restricted stock granted during the years ended February 1, 2014 and February 2, 2013 was $16.18 and$15.50, respectively.The total fair value of restricted stock vested was $0.2 million in fiscal years 2014 and 2013. There was no vested restricted stock during fiscal year2012.The Company recorded a total of $3.5 million, $3.1 million and $9.6 million of share-based compensation expense in fiscal years 2014, 2013 and2012, respectively. Share-based compensation expense in fiscal year 2012 includes the one-time charge of $7.6 million as noted above. At January 31, 2015,there was $7.4 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock awards. This cost has aweighted average remaining recognition period of 2.3 years.The following table summarizes share-based compensation recorded in the Consolidated Statements of Income: Fiscal Year Ended 2014 2013 2012 Cost of goods sold $750 $694 $1,948 Selling, general and administrative expenses 2,749 2,412 7,622 Stock-based compensation$3,499 $3,106 $9,570 78Table of ContentsNote 13: 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 allemployees that have attained age 21 and completed at least three months of employment tenure. Company matching contributions to the 401(k) Plan are atthe discretion of the Board of Directors. Total employer contributions to the 401(k) Plan totaled $0.7 million, $0.6 million and $0.5 million in fiscal years2014, 2013 and 2012, respectively.Note 14: Income TaxesOn May 2, 2012, as part of the Reorganization described in “Note 1: Description of the Company and Basis of Presentation”, the Company’s “S”Corporation status was terminated and the Company became subject to corporate-level federal and state income taxes at prevailing corporate rates. Prior tothe Reorganization, income tax expense was mainly comprised of a 1.5% California franchise tax.The components of income tax expense for fiscal years 2014, 2013 and 2012 were as follows (in thousands): Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Current: Federal $6,433 $9,591 $11,311 State 1,517 2,304 2,796 7,950 11,895 14,107 Deferred:Federal 1,387 (293) (4,257) State (237) (11) (2,444) 1,150 (304) (6,701) Total income tax expense$9,100 $11,591 $7,406 A reconciliation of income tax expense to the amount computed at the federal statutory rate for fiscal years 2014, 2013 and 2012 (in thousands) is asfollows: Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Federal taxes at statutory rate $8,111 $10,405 $10,955 State and local income taxes, net of federal benefit 885 1,517 1,299 Return to provision adjustments (15) (369) — Impact of change in tax status — — (2,962) Tax effect of earnings not subject to federal income tax due to“S” Corporation status — — (2,094) Other 119 38 208 Total income tax expense$9,100 $11,591 $7,406 79Table of ContentsDeferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes and (b) operating loss and tax credit carry-forwards. The Company records net deferred taxassets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positiveand negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies andrecent financial operations. Significant components of deferred tax assets and liabilities as of January 31, 2015 and February 1, 2014 were as follows (inthousands): January 31,2015 February 1,2014 Deferred tax assets: Deferred rent $5,134 $4,970 Stock-based compensation 5,127 4,245 Accrued expenses 1,262 1,334 Inventories 2,206 1,816 Compensation and benefits 630 575 Capital lease 388 485 Deferred revenue 227 425 Tax credits 119 — Total deferred tax assets 15,093 13,850 Deferred tax liabilities:Property and equipment (8,279) (5,840) Prepaid expenses (717) (763) Marketable securities (14) (8) Total deferred tax liabilities (9,010) (6,611) Net deferred tax asset$6,083 $7,239 Included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets are $3.6 million at January 31, 2015 and $3.4 million atFebruary 1, 2014 of current deferred tax assets and included in “Other assets” in the Consolidated Balance Sheets are noncurrent deferred tax assets of $2.5million at January 31, 2015 and $3.8 million at February 1, 2014.Uncertain Tax PositionsAs of January 31, 2015 and February 1, 2014, 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 arerecorded in income tax expense. The Company did not recognize any interest or penalties related to unrecognized tax benefits during fiscal years 2014, 2013and 2012.In the third quarter of fiscal year 2014, the Internal Revenue Service (“IRS”) began an examination of our federal income tax return for the C-Corporation short period year ended February 2, 2013. The Company does not anticipate any material adjustments as a result of the examination. 80Table of ContentsThe Company files income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal course ofbusiness, the Company is subject to examination by taxing authorities. The fiscal tax years 2011 through 2013 remain subject to examination for federalpurposes and the fiscal tax years 2010 through 2013 remain subject to examination in significant state jurisdictions.Note 15: 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, except withrespect 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.The components of basic and diluted earnings per share of Class A and Class B common stock, in aggregate, for fiscal years 2014, 2013 and 2012 are asfollows (in thousands, except per share amounts): Fiscal Year Ended January 31,2015 February 1,2014 February 2,2013 Net income $14,075 $18,137 $23,893 Weighted average basic shares outstanding 28,013 27,822 25,656 Dilutive effect of stock options and restricted stock 65 294 420 Weighted average shares for diluted earnings per share 28,078 28,116 26,076 Basic earnings per share of Class A and Class B common stock$0.50 $0.65 $0.93 Diluted earnings per share of Class A and Class B common stock$0.50 $0.65 $0.92 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 2,364,000, 1,766,000 and 1,263,500 as of January 31, 2015, February 1, 2014 and February 2, 2013, respectively, have beenexcluded from the calculation of diluted earnings per share as the effect of including these stock options would have been anti-dilutive.Note 16: Related Party TransactionsAs discussed in “Note 9: Leases”, the Company leases its corporate headquarters, distribution center, warehouse space and e-commerce fulfillmentcenter from companies that are owned by the co-founder of Tilly’s.Tilly’s Life Center, (“TLC”), is a charitable organization which provides underprivileged youth a healthy and caring environment. The Company’s co-founder is also the founder and President of TLC. In June 2014, the Company’s Board of Directors approved support for TLC of up to $20,000. We incurredcosts of approximately $10,000 related to printing of the program’s materials during the fiscal year ended January 31, 2015. The Company also providessupport for marketing and website services to TLC. 81Table of ContentsNote 17: 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. Fiscal Year Ended January 31, 2015 First Second Third Fourth Quarter Quarter Quarter Quarter (unaudited) (unaudited) (unaudited) (unaudited) Net sales $111,134 $123,060 $131,283 $152,817 Gross profit 31,327 34,655 40,548 49,002 Operating income 1,077 2,329 8,577 11,206 Net income 591 1,266 5,113 7,105 Basic earnings per share 0.02 0.05 0.18 0.25 Diluted earnings per share 0.02 0.05 0.18 0.25 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 (1) 31,806 37,888 37,843 43,285 Operating income 3,917 7,199 10,150 8,471 Net income 2,308 4,267 6,145 5,417 Basic earnings per share 0.08 0.15 0.22 0.19 Diluted earnings per share 0.08 0.15 0.22 0.19 (1)Includes share-based compensation and benefits of $0.4 million, $0.3 million, $0.3 million and $0.5 million in the first quarter, second quarter, thirdquarter and fourth quarter, respectively, previously reported in selling, general and administrative expenses that should have been presented as acomponent of cost of goods sold. Refer to “Note 1: Description of the Company and Basis of Presentation” for further information. 82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 designingand evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,can provide 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 theirevaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered bythis report, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports wefile and submit under 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 financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes thosepolicies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositionsof our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our managementand members of our board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of our assets that 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 inherentlimitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment andbreakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because ofsuch limitations, 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 not eliminate, this risk. 83Table of ContentsManagement conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of January 31, 2015using the framework set forth in the report entitled, “Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizationsof the Treadway Commission, or the COSO Report. Based on management’s evaluation and the criteria set forth in the COSO Report, management concludedthat our internal control over financial reporting was effective as of January 31, 2015. Our internal control over financial reporting was not subject toattestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us, as an emerging growth company, to provideonly management’s report in this annual report.Changes in Internal Control over Financial ReportingManagement has determined that, as of January 31, 2015, there were no changes in our internal control over financial reporting that occurred duringour most recent fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting. Item 9B.Other InformationNone. 84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 2015 Annual Meeting ofStockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended January 31, 2015 (the “2015 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 intendto promptly 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 2015 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 2015 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 2015 Proxy Statement. Item 14.Principal Accounting Fees and ServicesThe information required by this Item is incorporated herein by reference to the Company’s 2015 Proxy Statement. 85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 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 theconsolidated financial statements or the accompanying notes.ExhibitsThe exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this report. 86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, 2015. 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 her trueand 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 any andall 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 documents inconnection 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, 2015. Signature Title/s/ Daniel GriesemerDaniel Griesemer President, Chief Executive Officer and Director(Principal Executive Officer)/s/ Jennifer L. EhrhardtJennifer L. Ehrhardt Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)/s/ Hezy ShakedHezy Shaked Executive Chairman of the Board and Chief Strategy Officer/s/ Doug CollierDoug Collier Director/s/ Seth JohnsonSeth Johnson Director/s/ Janet KerrJanet Kerr Director/s/ Jason NazarJason Nazar Director/s/ Bernard ZeichnerBernard Zeichner Director 87Table of ContentsEXHIBIT INDEX ExhibitNo. Description of Exhibit3.1 Amended and Restated Certificate of Incorporation of Tilly’s, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Amendment No.2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)3.2 Amended and Restated Bylaws of Tilly’s, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed onNovember 20, 2013)4.1 Form of Class A common stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 5 to the RegistrationStatement on Form S-1 (Registration No. 333-175299), filed on April 23, 2012)10.1 Form of indemnification agreement between Tilly’s and each of its directors and officers (incorporated by reference to Exhibit 10.1 to theRegistrant’s Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)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) (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1(Registration No. 333-175299), filed on July 1, 2011)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) (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-175299),filed on July 1, 2011)10.4 Amendment #1 to Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated as of November 1, 2010 (15Chrysler, Irvine, California) (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (RegistrationNo. 333-175299), filed on July 1, 2011)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) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period endedJuly 28, 2012)10.6# Form of Amended and Restated Tilly’s 2007 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Amendment No.2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)10.7# Form of Stock Option Agreement Pursuant to 2007 Plan (Senior Executive Form) (incorporated by reference to Exhibit 10.12 to theRegistrant’s Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)10.8# Form of Stock Option Agreement Pursuant to 2007 Plan (Non-Executive Form) (incorporated by reference to Exhibit 10.13 to the Registrant’sAmendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)10.9# Form of re-priced stock option grant agreement pursuant to the 2007 Plan (incorporated by reference to Exhibit 10.14 to the Registrant’sAmendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)10.10# Tilly’s Inc. Amended and Restated 2012 Equity and Incentive Award Plan (incorporated by reference to Appendix A to the Registrant’s ProxyStatement on Schedule 14A, filed on May 1, 2014)10.11# Form of Stock Option Award Agreement Pursuant to 2012 Plan (incorporated by reference to Exhibit 10.16 to the Registrant’s Amendment No.3 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on March 23, 2012)10.12# Form of Restricted Stock Award Agreement Pursuant to 2012 Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s AmendmentNo. 3 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on March 23, 2012)10.12.1# Form of Tilly’s, Inc. Amended and Restated 2012 Equity and Incentive Award Plan Restricted Stock Unit Award Agreement Pursuant to 2012Plan Grant Notice (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 25, 2015)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 (incorporated byreference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-175299), filed on July 1, 2011) 88Table of Contents10.14Cancellation of Loan Guaranty for World of Jeans & Tops dated March 9, 2011 from Union Bank (incorporated by reference to Exhibit 10.21to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on August 11, 2011)10.15Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated September 2, 2011 (11 Whatney, Irvine,California) (incorporated by reference to Exhibit 10.22 to the Registrant’s Amendment No. 2 to the Registration Statement on Form S-1(Registration No. 333-175299), filed on September 7, 2011)10.16Office and Warehouse Lease between Amnet Holdings, LLC and World of Jeans & Tops, dated November 1, 2011 (17 Pasteur, Irvine,California) (incorporated by reference to Exhibit 10.23 to the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1(Registration No. 333-175299), filed on March 23, 2012)10.17Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo Bank, NA dated as of May 3, 2012 (incorporated byreference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012)10.18Form of General Pledge Agreement between Tilly’s, Inc. and Wells Fargo Bank, NANational Association dated as of May 3, 2012(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012)10.19Form of Amended and Restated Security Agreement-Equipment, between World of Jeans & Tops and Wells Fargo Bank, NANationalAssociation dated as of May 3, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for theperiod ended April 28, 2012)10.20Form of Amended and Restated Security Agreement-Rights to Payment and Inventory, between World of Jeans & Tops and Wells Fargo Bank,NANational Association dated as of May 3, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Qfor the period ended April 28, 2012)10.21Form of Continuing Guaranty of Tilly’s, Inc. with Wells Fargo Bank, NANational Association dated as of May 3, 2012 (incorporated byreference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012)10.22Form of Revolving Credit Agreement Note from World of Jeans & Tops dated as of May 3, 2012 (incorporated by reference to Exhibit 10.6 tothe Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012)10.23Form 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) (incorporated by reference to Exhibit 10.19 tothe Registrant’s Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September 7, 2011)10.24Form of Share Exchange Agreement among Tilly’s, Inc., World of Jeans & Tops and the shareholders of World of Jeans & Tops (incorporatedby reference to Exhibit 10.20 to the Registrant’s Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299),filed on September 7, 2011)10.25#Offer Letter between Tilly’s, Inc. and Jennifer Ehrhardt entered into on August 28, 2013 (incorporated by reference to Exhibit 10.1 to theRegistrant’s Current Report on Form 8-K filed on August 28, 2013)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 January 31, 2015 formatted in eXtensible BusinessReporting Language (XBRL): (i) Consolidated Balance Sheets as of January 31, 2015 and February 1, 2014; (ii) Consolidated Statements ofIncome for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013; (iii) Consolidated Statements of ComprehensiveIncome for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013; (iv) Consolidated Statements of Stockholders’Equity for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013; (v) Consolidated Statements of Cash Flows for thefiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013; and (vi) the Notes to the Consolidated Financial Statements. *Filed herewith 89Table of Contents**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.#Management contract or compensatory plan. 90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 Nos. 333-181148 and 333-198676 on Form S-8 of our report dated April 1, 2015,relating to the consolidated financial statements of Tilly’s, Inc., appearing in the Annual Report on Form 10-K of Tilly’s, Inc. for the year ended January 31,2015.Costa Mesa, CaliforniaApril 1, 2015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 January 31, 2015; 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 thisreport; 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 forexternal purposes 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, 2015 /s/ Daniel GriesemerDaniel GriesemerPresident, Chief Executive Officer and 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 January 31, 2015; 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 thisreport; 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 forexternal purposes 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, 2015 /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 January 31, 2015(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, 2015 /s/ Daniel GriesemerDaniel GriesemerPresident, Chief Executive Officer and 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 January 31, 2015 (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, 2015 /s/ Jennifer L. EhrhardtJennifer L. EhrhardtChief Financial Officer

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