Tilly’s Annual Report 2015

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 30, 2016OR ¨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 of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer: ¨ Accelerated filer:x Nonaccelerated 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 xAs of August 1, 2015, the aggregate market value of voting stock held by nonaffiliates of the registrant as of the last business day of the registrant’smost recently completed second fiscal quarter, at August 1, 2015, was $103,776,667 based on the closing sale price of $9.05 per share at July 30, 2015.As of March 24, 2016, the registrant had 12,429,335 shares of Class A common stock, par value $0.001 per share, outstanding, and 16,069,097 shares ofClass B common stock, par value $0.001 per share, outstanding.______________________________________________ DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held June 8, 2016 are incorporated by reference into Part IIIof this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART I Item 1. Business 5Item 1A. Risk Factors 14Item 1B. Unresolved Staff Comments 26Item 2. Properties 26Item 3. Legal Proceedings 26Item 4. Mine Safety Disclosures 27 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28Item 6. Selected Financial Data 29Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43Item 8. Financial Statements and Supplementary Data 44Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69Item 9A. Controls and Procedures 69Item 9B. Other Information 70 PART III Item 10. Directors, Executive Officers and Corporate Governance 70Item 11. Executive Compensation 71Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 71Item 13. Certain Relationships and Related Transactions, and Director Independence 71Item 14. Principal Accounting Fees and Services 71 PART IV Item 15. Exhibits, Financial Statement Schedules 71 Signatures 742Table of ContentsForward-Looking StatementsThis annual report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or currentfact included in this annual report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating toour financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements bythe fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”,“plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with anydiscussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimatedand projected earnings, revenues, comparable store sales, operating income, earnings per share, costs, expenditures, cash flows, growth rates and financialresults, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigationare forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially fromthose that we expected, including: •our ability to successfully open new stores and profitably operate our existing stores;•our ability to attract customers to our e-commerce website;•our ability to efficiently utilize our e-commerce fulfillment center;•effectively adapting to new challenges associated with our expansion into new geographic markets;•our ability to establish, 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 both in stores and online;•containing the increase in the cost of mailing catalogs, paper and printing;•the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located;•our ability to attract customers in the various retail venues and geographies in which our stores are located;•our ability to adapt to downward trends in traffic for our stores and changes in our customers' purchasing patterns;•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;•our ability to compete in social media marketing platforms;•price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it willbe 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 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 trade conditions;•failure of our vendors and their manufacturing sources to use acceptable labor or other practices;•our dependence upon key executive management or our inability to hire or retain the talent required for our business;•our ability to effectively adapt to our rapid expansion in recent years and our planned expansion;•failure of our information technology systems to support our current and growing business, before and after our planned upgrades;•disruptions in our supply chain and distribution center;•our indebtedness and lease obligations, including restrictions on our operations contained therein;•our reliance upon independent third-party transportation providers for certain of our product shipments;•our ability to increase comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile;3Table of Contents•disruptions to our information systems in the ordinary course or as a result of systems upgrades;•our inability to protect our trademarks or other intellectual property rights;•acts of war, terrorism or civil unrest;•the impact of governmental laws and regulations and the outcomes of legal proceedings;•our ability to secure the personal financial information of our customers and comply with the security standards for the credit card industry;•our failure to maintain adequate internal controls over our financial and management systems; and•continuing costs incurred as a result of being a public company.We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believethat 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 anticipate allfactors 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. Allforward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this annualreport and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context ofthese risks and uncertainties.We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-lookingstatements included in this annual report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-lookingstatement as a result of new information, future events or otherwise, except as otherwise required by law.4Table of ContentsPART I Item 1. BusinessTillys is a leading destination specialty retailer of West Coast inspired casual apparel, footwear and accessories for young men, young women, boys and girls.We believe we bring together an unparalleled selection of the most sought-after brands rooted in action sports, music, art and fashion inherent in the WestCoast lifestyle. Our stores and website are designed to be a seamless extension of our teen and young adult consumers' lifestyles in a stimulatingenvironment. Tillys is headquartered in Irvine, California and we operated 224 stores in 32 states as of January 30, 2016. Our stores are located in malls,lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the sameassortment of products as is carried in our brick-and-mortar stores, supplemented by additional online-only styles. We believe our success across a variety ofreal estate venues and geographies in the United States demonstrates Tillys' portability. Our goal is to serve as a destination for the latest, most relevantmerchandise and brands important to our customers.The Tillys concept began in 1982 when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984 thebusiness has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011,Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial publicoffering.On May 2, 2012, the shareholders of WOJT contributed all of their equity interests in WOJT to Tilly’s, Inc. in exchange for shares of Tilly’s, Inc. Class Bcommon stock on a one-for-one basis. In addition, WOJT terminated its “S” Corporation status and became a “C” Corporation. These events are collectivelyreferred to as the “Reorganization Transaction”. As a result of the Reorganization Transaction, WOJT became a wholly owned subsidiary of Tilly’s, Inc.Except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World of Jeans and Tops", "WOJT", "we", "our", "us"and "Tillys" refer to WOJT before the Reorganization Transaction (as defined above), and to Tilly's, Inc. and its subsidiary after the ReorganizationTransaction.Our fiscal year ends on the Saturday closest to January 31. For example, "fiscal 2015" refers to the fiscal year ended January 30, 2016 "fiscal 2016" refers tothe fiscal year ending January 28, 2017 and "fiscal 2014" refers to the fiscal year ended January 31, 2015.Our StrengthsWe believe that the following competitive strengths contribute to our success and distinguish us from our competitors:•Destination retailer with a broad and differentiated assortment. We believe the combined depth and breadth of apparel, footwear and accessoriesoffered at our stores exceeds the selection offered at many other specialty retailers. We offer an extensive selection of third-party, West Coast inspiredlifestyle brands, which are complemented by our proprietary brands. Our merchandise includes a wide assortment of brands, styles, colors, sizes and pricepoints to ensure we have what our customers want every time they visit our stores. We offer a balanced mix of merchandise across the apparel, footwearand accessories categories serving young men, young women, boys and girls. We believe that by combining proven and emerging fashion trends andcore style products with a vibrant blend of carefully selected music and visuals, we provide an in-store experience that is authentic, fun, and engaging forour core customers. We believe that our differentiated in-store environment, evolving selection of relevant brands, and broader and deeper assortmentpositions us as a retail destination that appeals to a larger demographic than many other specialty retailers and encourages customers to visit our storesmore 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 address trendsmore quickly, offer a greater range of price points and manage our inventories more dynamically. By closely monitoring trends and shipping product toour stores multiple times per week, we are able to adjust our merchandise mix based on store size and location. We also keep our merchandise mixrelevant by introducing emerging brands not available at many other retailers. Our merchandising capabilities enable us to adjust our merchandise mixwith a frequency that promotes a current look to our stores and website and encourages frequent visits.•Flexible real estate strategy across real estate venues and geographies. Our stores have proven to be successful in different real estate venues andgeographies. We operate stores in malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations across 85 markets in32 states. We believe our success operating in these different retail venues and geographies demonstrates the portability of the Tillys brand.•Multi-pronged marketing approach. We utilize a multi-pronged marketing strategy to connect with our customers to drive traffic for our stores andonline platform. We distribute catalogs to potential and existing customers from our proprietary5Table of Contentsdatabase to familiarize them with the Tillys brand and our products and to drive sales to our stores and website. We offer an integrated digital platform,including our mobile and tablet applications, for our customers to shop how and when they like and to drive further connection with them. In the fourthquarter of fiscal 2015, we upgraded our mobile application to enhance our customer experience and engagement. 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 the connectionbetween Tillys and the West Coast inspired lifestyle. We use social media to communicate directly with our customers while also encouraging customersto interact with one another and provide feedback on our events and products. In fiscal 2014, we implemented a customer loyalty program to furtherengage with our customers, build customer loyalty and gain customer insights. All of these programs are complemented by digital and email marketingas well as traditional radio and print advertising to build customer awareness and loyalty, highlight key merchandise offerings, drive traffic to our storesand online platform and promote the Tillys brand. Also, through our “We Care Program”, we support and participate in various academic, art, andathletic programs at local schools and other organizations in communities surrounding our stores.•Systems and distribution/fulfillment infrastructure to support growth. We have previously made investments in distribution, fulfillment and allocationinfrastructure that we believe are adequate to support continued growth for several years. Our distribution center allows us to quickly sort and processmerchandise and deliver it to our stores in a floor-ready format for immediate display. During the second quarter of fiscal 2014, we opened a new e-commerce fulfillment center that continues to provide us with a more efficient and expeditious fulfillment process to support our future growth. Oursystems enable us to respond to changing fashion trends, manage inventory in real time and provide a customized selection of merchandise at eachlocation. We believe our distribution and fulfillment infrastructure can support significant growth in our stores and e-commerce platform with minimalincremental capital investment.•Experienced management team. Our senior management team, led by Hezy Shaked and Edmond Thomas, has extensive experience across a wide range ofdisciplines 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 in developing our long-term growth initiatives and cultivating our unique culture. Mr. Thomas, our President and Chief Executive Officer, rejoined Tillys in October 2015 withover 30 years of retail experience. He previously served as our President and Co-Chief Executive Officer from September 2005 to October 2007.Growth StrategyWe are pursuing several strategies to drive long-term sales and profitability, including:•Drive Comparable Store Sales. We seek to maximize our comparable store sales by consistently offering new, on-trend and relevant merchandise,including exclusive and proprietary branded merchandise, across a broad assortment of categories, increasing our brand awareness through our multi-pronged marketing approach, providing an authentic store and online experience for our core customers, and maintaining a high level of customerservice. We believe the combination of these factors, together with the operating strategies described below, will improve our comparable store salesresults over time.•Increase Our Operating Margins. We believe we have the opportunity to drive operating margin expansion through scale efficiencies and continuedprocess improvements. We believe comparable store sales increases will permit us to take advantage of largely fixed occupancy costs, favorable buyingcosts from larger volume purchases, leverage of our costs for store management and corporate overhead, as well as the fixed portion of shipping andhandling costs over higher sales volumes. In addition, we expect to improve operating margins and support growth by leveraging previous investmentsin infrastructure, including our dedicated fulfillment center for e-commerce, upgraded e-commerce platform, ongoing investments to upgrade our point-of-sale, merchandise allocation and merchandise planning systems. We also will continue to use established business processes to identify and executeinitiatives focused on lowering our unit costs and improving operational efficiency throughout our organization.•Continue Growing E-Commerce. We believe our e-commerce platform is an extension of our brand and retail stores, providing our customers a seamlessshopping experience. Our e-commerce platform allows us to provide our customers with extensions of the same assortment offered in our brick-and-mortar stores, reach new customers, and build our brand in markets where we currently do not have stores. For example, during fiscal 2015, we generatede-commerce sales in all 50 states although we have physical stores in only 32 states. Our target customer regularly shops online and via mobile devicesin addition to visiting stores, giving us a continued opportunity to grow our e-commerce platform over time. Key factors we expect to drive growthinclude continuing our catalog, online and mobile application marketing efforts, enhancing the efficiency and responsiveness of our digital capabilities,and supplementing the assortment available in our brick-and-mortar stores with additional online-only styles. We also expect to expand marketingefforts and build brand6Table of Contentsawareness in the communities surrounding our existing stores to drive growth in both brick-and-mortar and e-commerce sales.•Improve Inventory Management. We believe we can improve our operating results through improved micro-merchandising based on specific storecharacteristics. During the fourth quarter of fiscal 2015, we compiled individual store profiles for every store to highlight the differences in brandperformance, gender penetrations, and customer interests that exist within our fleet of stores. By adapting allocation strategies to capitalize on theseindividual store differences, we believe we can improve sales results in our existing store base. We expect to achieve improvements in our allocationmethodologies without requiring significant additional capital expenditures for new systems.•Develop Omni-Channel Capabilities. We currently have a direct-to-consumer program that allows online orders to be fulfilled and shipped direct to ourcustomers from our brick-and-mortar stores. We believe we can further improve our sales results by developing additional omni-channel capabilities thatwill allow for online orders to be picked up in stores, both from satisfying the order from existing inventories within our stores as well as shippingproduct from our e-commerce fulfillment center to our stores. We believe these omni-channel initiatives will drive additional traffic to our stores andincrease sales to customers who come to the store to pick up their online orders.•Remodel Existing Stores. We believe that re-investing in our existing stores is strategically important to enhance customer loyalty, elevate the customerexperience and, in turn, drive additional comparable store sales. We began remodeling certain of our older, high-volume stores within our heritagemarkets of California, Arizona and Nevada during fiscal 2014. We expect to continue remodeling a number of our existing, high-volume stores duringfiscal 2016 to continue improving our customers' in-store experience.Merchandising, Purchasing, and Planning and AllocationMerchandisingWe seek to be viewed by our customers as the destination for West Coast inspired apparel, footwear and accessories. We believe we offer an unparalleledselection of relevant brands, styles, colors, sizes and price points to ensure we have what our customers want every time they visit our stores. Our extensiveselection of third-party and proprietary merchandise allows us to identify and address trends more quickly, offer a greater range of price points and manageour inventories more dynamically. We offer a balanced mix of merchandise for young men, young women, boys and girls across the apparel, footwear andaccessories categories. We believe this category mix contributes to our broad demographic appeal. Our apparel merchandise includes branded, fashion andcore styles for tops, outerwear, bottoms, and dresses. Accessories merchandise includes backpacks, hats, sunglasses, headphones, handbags, watches, jewelryand more. We focus on our merchandise presentation and vary the visual displays in our stores and windows throughout the month, presenting new looks andfashion combinations to our customers.Our ability to maintain an image consistent with the West Coast inspired lifestyle is important to our branded vendors and provides us better access to a wideassortment of products and styles. Our third-party branded merchandise includes both established and emerging brands. We strive to keep our merchandisemix current by continuously introducing emerging brands and styles not available at many other specialty retailers in order to identify and respond to theevolving desires of our customers. Our third-party brands represented approximately 72% of our net sales in each of the last three fiscal years with no singlethird-party brand exceeding 5% of total net sales.Selected third-party brands include, in alphabetical order:• AYC• Adidas• Billabong• Converse• G-Shock• GoPro• Hurley• JanSport• KR3W • Last Kings• Levi’s• LRG• Neff• Nike SB• Nixon• O’Neill• RayBan• Roxy • RVCA• Spy• Stance• The North Face• TOMS• 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 proprietary brands represented approximately 28% of ournet sales in each of the last three fiscal years.7Table of ContentsExamples of our proprietary branded merchandise include:Brand Category Denim, apparel and fragrance brand for young men, young women and boys Apparel, footwear and accessories brand for young women and girls Apparel and accessories brand for young men and boys Apparel and fragrance brand for young men, young women and boysWe believe that our extensive selection of merchandise, from established and emerging third-party brands as well as our proprietary brands, caters to a widedemographic of core customers and enhances our store image as a destination that carries the most sought-after apparel, footwear and accessories.Merchandise PurchasingOur merchandising team is organized by category and product type under our Chief Merchandising Officer and includes divisional merchandise managers, atechnical design and fashion trend team, buyers, associate buyers and assistant buyers. We believe a key element of our success is our team’s ability toidentify and source the latest proven fashion trends and core styles that are most relevant to our customers.Our purchasing approach focuses on product relevance, quality, fit, availability, cost and speed of production in order to provide timely frequent delivery ofmerchandise to our stores. Our purchasing group and planning and allocation team are highly coordinated and maintain a disciplined buying strategy.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 of identifyingand growing with emerging brands. We believe the Tillys brand, shopping experience and core customer lifestyle is highly consistent with the image andphilosophy of our key vendors. This, in addition to our customer connectivity, facilitates a partnership culture with our key vendors and provides us access toan extensive variety of products and styles, as well as certain merchandise that is exclusive to our stores and website. Our merchandise purchasing group alsoworks closely with independent third parties who design and procure merchandise for our proprietary brands. Our proprietary brand capabilities enhance ourability to rapidly identify and respond to trends and consistently offer proven fashion items that provide a broader demographic appeal. We work with morethan 100 vendors based in the United States to supply us with our proprietary branded product. These vendors source from both domestic and internationalmarkets and either have their own factories or contract with owners of factories to source finished product. By sourcing merchandise for our proprietarybrands both domestically and internationally, we have the flexibility to benefit from shorter lead times associated with domestic manufacturing and lowercosts associated with international manufacturing.Planning and AllocationWe have developed inventory planning and allocation processes to support our merchandising strategies. Working closely with our merchandise purchasingteam, the planning and allocation team utilizes a disciplined approach to buying, forecasting, inventory control and allocation processes. Our planning andallocation team continually analyzes information from our management information system, including inventory levels and sell-through data, to regularlyadjust the assortment at each store and the inventory levels for our company as a whole. Our broad third-party vendor base allows us to shift merchandise8Table of Contentspurchases to react quickly to changing consumer preferences and market conditions. Furthermore, the vendor base for our proprietary products provides usflexibility to develop our own branded products to quickly address emerging fashion trends and provide a deeper selection of styles, colors, and price pointsfor proven fashion items. We modify our merchandising mix based upon store size, the season, and consumer preferences in different parts of the country. Weare also able to react quickly to changing customer needs due to our shipment of merchandise to our stores multiple times per week. Finally, we coordinateclosely with our visual merchandise managers and marketing group in order to manage inventory levels in connection with our promotions and seasonality.StoresAs of January 30, 2016, we operated 224 stores in 32 states with an average size of approximately 7,600 square feet. Our stores are located in mall, off-malland outlet locations. Our stores generated average net sales of $2.2 million, or $290 per square foot in fiscal 2015.The table below shows our number of stores by type of retail center as of the end of each of the last three fiscal years: 2015 2014 2013Regional Mall114 108 102Off-Mall (1)90 88 86Outlet20 16 7 224 212 195(1)Includes power centers, neighborhood and lifestyle centers and street-front locations.The table below shows the total number of stores by state as of January 30, 2016:State Number ofStores State Number ofStoresArizona 19 Nevada 7California 92 New Jersey 5Colorado 5 New Mexico 1Florida 21 New York 4Georgia 2 North Carolina 4Illinois 7 Ohio 4Indiana 5 Oklahoma 3Iowa 1 Oregon 2Kansas 2 Pennsylvania 3Kentucky 1 South Dakota 1Maryland 2 Tennessee 4Massachusetts 2 Texas 7Michigan 3 Utah 3Minnesota 2 Virginia 4Missouri 2 Washington 2Nebraska 1 Wisconsin 3Distinctive Store ExperienceTillys is a customer-driven lifestyle brand. We are energized and inspired by our customers’ individuality and passion for the West Coast lifestyle, actionsports, music, art, and fashion. Our stores bring these interests together in a vibrant, stimulating and authentic environment that is an extension of ourcustomers’ high velocity, multi-tasking lifestyle. We do this by blending the most relevant brands and styles with music videos, product-related visuals and adedicated team of store associates. Our associates share the same passion as our customers for action sports, music, art and fashion, enabling them to easilyengage with our customers and make shopping at Tillys a fun, social experience. Outside of our stores, we connect with our consumers using the sameauthentic approach, including social media, community outreach and sponsorship of contests, demos, and other events. We believe the Tillys experiencedrives customer awareness, loyalty and repeat visits while generating a buzz and excitement for our brand.9Table of ContentsStore Expansion Opportunities and Site SelectionAs of January 30, 2016, nearly half 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 YearStoresOpened StoresClosed Total Numberof Stores atEnd of Period201116 1 140201229 1 168201328 1 195201419 2 212201515 3 224 107 8 Declining traffic has been a challenge for the teen retail industry in recent years. We believe this decline in traffic has contributed to declining sales in ourstores and hindered the rate of growth for some of our newer stores. Consequently, we expect to slow our pace of new store growth in the near term comparedto recent years. However, we will be opportunistic and selective about additional new store opportunities. Our new store openings are planned in bothexisting and new markets and in both mall and off-mall locations. We focus on potential locations that have above average incomes and an ability to drawfrom a sufficient population with attractive demographics. We have entered new markets by opening stores in high traffic malls as well as off-mall locationsthat effectively cover trade areas where our customers want to shop.Store 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 our storestypically 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 lifestyle and promote the Tillys brand not only inside the store, but also in their schools and communities. The number of storeassociates we employ generally increases during peak selling seasons, particularly the back-to-school and the winter holiday seasons, and will increase to theextent 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 reward themwhen they exceed sales targets. We are committed to improving the skills and careers of our workforce and providing advancement opportunities foremployees. We evaluate our store associates weekly on measures such as sales per hour, units per transaction and dollars per transaction to ensureproductivity, to recognize top performers and to identify potential training opportunities. We endeavor to design incentive programs for store associates thatpromote a competitive, yet fun, culture that is consistent with our image.We provide our managers with the knowledge and tools to succeed through comprehensive training programs, focusing on both operational expertise andsupervisory skills. Our training programs and workshops are offered at the store, district and regional levels, allowing managers from multiple locations tointeract with each other and exchange ideas to better operate stores. Store associates receive training from their managers to improve their product expertiseand selling skills.E-CommerceIn October 2014, we launched a new responsive design e-commerce platform for desktop and mobile designed to enhance the online customer experience.Our e-commerce platform was established in 2004 and has grown significantly since inception. In May 2014, we opened our new e-commerce fulfillmentcenter in Irvine, California to accommodate significant additional growth. We believe our digital platform is an extension of our brand and retail stores,providing our customers a seamless shopping experience. We believe that our target customer regularly shops online through various digital channels inaddition to visiting stores. Our website serves both as a sales channel and a marketing tool to our extended customer base, including those customers inmarkets where we do not currently have stores. In both fiscal 2015 and 2014, we sold merchandise to customers in all 50 states even though we have brick-and-mortar stores in only 32 states. We also believe our fully integrated digital platform reinforces the Tillys brand image and serves as an effectiveadvertising vehicle for our retail stores. Our digital platform provides the same assortment available in our brick-and-mortar stores, supplemented byadditional online-only styles. Similar to the merchandising approach in our stores, we frequently change the look of our website to highlight new brands andproducts and to encourage frequent visits. We utilize multiple tools to drive traffic online, including our catalog, marketing10Table of Contentsmaterials in our retail stores, search engine marketing, internet ad placement, shopping site partnerships, third-party affiliations, email marketing, digitalmarketing and direct mail. In addition, we utilize the website to offer current information 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 our brandwhile staying true to our West Coast inspired heritage. We utilize a multi-pronged marketing strategy to connect with our customers and drive traffic to ourstores and online platform, comprised of the following: •Catalog. We view our catalog in both print and digital format primarily as a sales and marketing tool to drive online and store traffic from both existingand new customers. We also believe our catalog reinforces the Tillys brand and showcases our comprehensive selection of products in settings designedto reflect our brand’s lifestyle image. We send these catalogs, which include coupons that can be redeemed at stores or online, to the customers in ourdatabase several times a year, primarily around key shopping periods such as spring break, back-to-school, and the winter holidays.•Brand Partnerships. We partner and collaborate with our vendors for exclusive events such as autograph signings, in-store performances, contests,demos, giveaways, shopping sprees and VIP trips. In fiscal 2015, we organized a variety of events, many involving musicians, celebrities and athletes inthe entertainment, music and action sports industries. Through brand partnerships such as these, we are able to connect with and engage our customers inan 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 use ourwebsite blog, as well as Facebook, Instagram, Twitter and Snapchat posts, as a viral marketing platform to communicate directly with our customerswhile also allowing customers to interact with one another and provide feedback on our events and products.•Loyalty Program. In January 2014, we launched a customer loyalty program designed to interact with our customers in a more direct and targetedmanner, and to provide more insight into their shopping behaviors and preferences. The loyalty program is free to join and provides points to customersin exchange for purchases at our stores and online, and for interactions with us such as checking into Tillys events. We plan to rebrand and relaunch ourloyalty program during fiscal 2016 to provide more meaningful rewards to our most loyal customers.•Community Outreach. Through our “We Care Program” and in partnership with our vendors, we support and participate in various academic, art, andathletic programs at local schools and other organizations in communities surrounding our stores. We also support Tilly’s Life Center, founded by ourco-founder, Tilly Levine, which provides underprivileged youth a healthy and caring environment to help create a well-defined sense of self, cultivatecommunity 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 traffic to ourstores and online platform and to promote local in-store promotions and events. We periodically send emails to the customers in our proprietary databaseto 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. Our leaseexpires in December 2017 and we have two five-year renewal option periods. We designed this facility to allow us to manage our distribution operations inan efficient, cost-effective manner and to provide support for our growth initiatives. Extensive investments have been made to the distribution-centerinfrastructure, focused around systems automation, material-handling equipment, radio frequency technologies, and automated sortation in order to furtherenhance our processing speed and long term scalability. We believe the automation systems we utilize in our facility allow us to operate at a higher level ofefficiency 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 handle 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.11Table of ContentsWe use our own fleet of trucks to ship merchandise to our Southern California stores and third-party distributors to ship merchandise to stores outside ourlocal area.We believe our distribution and fulfillment infrastructure can support significant growth of our e-commerce platform and increases in our number of storeswith 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, real estate andother business teams. We selected, customized and integrated our information systems to enable and support our dynamic merchandise model. We believeour systems provide us with improved operational efficiencies, scalability, management control and timely reporting that allow us to identify and quicklyrespond to trends in our business. We believe that our information systems are scalable, flexible and have the capacity to accommodate our current growthplans.We have made significant investments in our management information systems over the last several years. We use software licensed from JDA SoftwareGroup, Inc. for allocation, SKU classification, inventory tracking, purchase order management and sales audit functions. We utilize MicroStrategyIncorporated for business intelligence. We utilize Manhattan Associates Inc.’s warehouse management systems to handle merchandise distribution. Weutilize technology from Strategic Distribution, Inc. in our distribution and new fulfillment centers enabling us to automate our merchandise sortation andfulfillment processes, allowing us greater flexibility in scaling our operations for new store expansions and peak season operations. Our financial systems arelicensed from Lawson and our payroll system uses a third-party platform provided by Automatic Data Processing, Inc.We update our sales daily in our merchandising reporting systems by collecting sales information from each store’s point-of-sale, or POS, terminals utilizingsoftware 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, performs systemmaintenance 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, storelocations, store associates and management personnel. We currently compete with other teenage-focused retailers such as, but not limited to, Abercrombie &Fitch Co., Aeropostale, Inc., American Eagle Outfitters, Inc., The Buckle, Inc., Forever 21, Inc., Hot Topic, Inc., Pacific Sunwear of California, Inc., UrbanOutfitters, Inc., and Zumiez, Inc. In addition, we compete with independent specialty shops, department stores and direct marketers that sell similar lines ofmerchandise and target customers through catalogs and e-commerce. Further, we may face new competitors and increased competition from existingcompetitors as we expand into new markets and increase our presence in existing markets. Given the extensive number and types of retailers with whichTillys 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. Webelieve that we compete favorably with many of our competitors based on our differentiated merchandising strategy, store environment, flexible real estatestrategy and company culture. However, many of our competitors are larger, have significantly more stores, and have substantially greater financial,marketing and other resources than we do. Moreover, we recognize that we do not possess exclusive rights to many of the elements that comprise our in-storeexperience and product offerings. Our competitors can emulate facets of our business strategy and in-store experience, which could result in a reduction ofany competitive advantage or special appeal that we might possess. See Item 1A. “Risk Factors—Risks Related to Our Business. We face intense competitionin our industry and we may not be able to compete effectively.”12Table 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”, "Destined" and logos related to some of these names, are among our trademarks registered with the United States Patent and Trademark Office.We regard our trademarks as valuable and intend to maintain such marks and any related registrations. We are not aware of any claims of infringement orother challenges to our right to use our marks in the United States. We vigorously protect our trademarks.EmployeesAs of January 30, 2016, we employed approximately 1,400 full-time and approximately 3,500 part-time employees, of which approximately 500 wereemployed at our corporate office and distribution facility and approximately 4,400 were employed at our store locations. However, the number of totalemployees, especially part-time employees, fluctuates depending upon our seasonal needs and, in fiscal year 2015, varied between approximately 4,600 and7,100 employees. 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 protection regulationsand other laws that regulate retailers and govern the promotion and sale of merchandise and the operation of stores and warehouse facilities. We monitorchanges 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-relatedhealth care benefits, a portion of which is paid by the employees. We evaluate our insurance requirements on an ongoing basis to maintain adequate levels ofcoverage.SeasonalityDue to the seasonal nature of the retail industry, we have historically experienced and expect to continue to experience fluctuations in our revenues and netincome. Net revenues are typically smallest in the first quarter of a given fiscal year followed by sequentially increased net revenues in each succeedingquarter within a fiscal year. Our net sales fluctuate significantly in relation to various holidays and other peak shopping periods, including but not limited tothe Thanksgiving and year-end holiday season, the back-to-school season, spring break periods, and other holidays. If, for any reason, our revenues werebelow seasonal norms or expectations during these quarters, particularly during peak selling periods, our annual results of operations could be adverselyaffected. The level of our working capital reflects the seasonality of our business. We expect inventory levels, along with an increase in accounts payable andaccrued expenses, 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.13Table of ContentsItem 1A. Risk FactorsOur business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business, prospects, financialcondition and results of operations, any of which could subsequently have an adverse effect on the trading price of our Class A common stock, and youshould carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors in itsentirety, in addition to other information contained in or incorporated by reference into this Annual Report on Form 10-K and our other public filings withthe SEC. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financialcondition 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 inspired apparel, footwear and accessories market can change rapidly. We need to anticipate, identify and respond quicklyto changing trends and consumer demands in order to provide the merchandise our customers seek and maintain our brand image. If we cannot identifychanging trends in advance, fail to react to changing trends or misjudge the market for a trend, our sales could be adversely affected and we may be facedwith a substantial amount of unsold inventory or missed opportunities. As a result, we may be forced to mark down our merchandise in order to dispose ofslow moving inventory, which may result in lower profit margins, negatively impacting our financial condition and results of operations.We face intense competition in our industry and we may not be able to compete effectively.The retail industry is highly competitive. We currently compete with other retailers such as, but not limited to, Abercrombie & Fitch Co., Aeropostale, Inc.,American Eagle Outfitters, Inc., The Buckle, Inc., Forever 21, Inc., Hot Topic, Inc., Pacific Sunwear of California, Inc., Urban Outfitters, Inc. and Zumiez, Inc.In addition, we compete with independent specialty shops, department stores and direct marketers that sell similar lines of merchandise and target customersthrough catalogs and e-commerce. Moreover, the internet and other new technologies facilitate competitive entry and comparison shopping in our retailmarket. 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 devote greaterresources to the marketing and sale of their products, generate national brand recognition or adopt more aggressive pricing policies than we can, which wouldput us at a competitive disadvantage. Moreover, we do not possess exclusive rights to many of the elements that comprise our in-store experience andproduct offerings. Our competitors may seek to emulate facets of our business strategy and in-store experience, which could result in a reduction of anycompetitive advantage or special appeal that we might possess. In addition, most of the third-party branded products we sell are sold to us on a non-exclusivebasis. As a 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 webelieve are important in differentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or improve on some or all ofour in-store experience or product offerings, our competitive position and our business could suffer.Our sales could be severely impacted by declines in consumer confidence and decreases in consumer spending.We depend upon consumers feeling confident to spend discretionary income on our product offering to drive our sales. Consumer spending may be adverselyimpacted by economic conditions such as consumer confidence in future economic conditions, interest and tax rates, employment levels, salary and wagelevels, general business conditions, the availability of consumer credit and the level of housing, energy and food costs. These risks may be exacerbated forretailers like us who focus on specialty apparel and accessories. Our financial performance is particularly susceptible to economic and other conditions inregions or states where we have a significant number of stores, such as the southwestern and northeastern United States and Florida. If periods of decreasedconsumer spending persist, our sales could decrease and our financial condition and results of operations could be adversely affected.14Table of ContentsOur continued growth depends upon our ability to successfully open a significant number of new stores and improve the performance of our existing stores.We have grown our store count rapidly in recent years and that has contributed to our growth in revenue. However, we expect to slow the pace of new storeopenings during fiscal 2016 while focusing our efforts on improving the performance of our existing stores. As a result, we may not be able to grow ourrevenue as we have in the past, or at all. The failure to improve the performance of existing stores could have a material adverse effect on our financialcondition and results of operations.Our 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 maintaining andenhancing our brand image, particularly in new markets where we have limited brand recognition, is important to maintaining and expanding our customerbase. As we execute our growth strategy, our ability to successfully integrate new stores into their surrounding communities, to expand into new markets or tomaintain the strength and distinctiveness of our brand image in our existing markets will be adversely impacted if we fail to connect with our target customer.Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising, marketing, store operations,community relations, store graphics, catalog distribution and employee training, which could adversely affect our cash flow and which may not ultimately besuccessful. Failure to successfully market our brand in new and existing markets could harm our business, results of operations and financial condition.Our sales can significantly fluctuate based upon shopping seasons, which may cause our operating results to fluctuate disproportionately on 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 the third andfourth fiscal quarters than they are in the first and second fiscal quarters. Accordingly, the results of a single fiscal quarter, particularly the third and fourthfiscal quarters, should not be relied on as an indication of our annual results or future performance. In addition, any factors that harm our third and fourthfiscal 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. An increase in our net cash outflow fornew stores or remodels of existing stores could adversely affect our operations by reducing the amount of cash available to address other aspects of ourbusiness.In addition, as we expand our business, we will need significant amounts of cash from operations to pay our existing and future lease obligations, build outnew store space, remodel existing stores, purchase inventory, pay personnel, pay for the increased costs associated with operating as a public company, and, ifnecessary, further invest in our infrastructure and facilities. If our business does not generate sufficient cash flow from operations to fund these activities andsufficient funds are not otherwise available from our existing revolving credit facility or future credit facilities, we may need additional equity or debtfinancing. If such financing is not available to us on satisfactory terms, our ability to operate and expand our business or to respond to competitive pressureswould be limited and we could be required to delay, curtail or eliminate planned store openings. Moreover, if we raise additional capital by issuing equitysecurities or securities convertible into equity securities, your ownership may be diluted. Any debt financing we may incur may impose on us covenants thatrestrict our operations, 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 have historically depended on the location of our stores to generate a large amount of traffic for our stores. We try to select well-known and popular malls,power centers, neighborhood and lifestyle centers, outlet centers and street-front locations, usually near prominent retailers, to generate traffic to our stores.Traffic at these retail centers, and consequently our stores, could be adversely affected by economic downturns nationally or regionally, competition fromInternet retailers, changes in consumer demographics, the closing or decrease in popularity of other retailers in the retail centers in which our stores arelocated, our inability to obtain or maintain prominent store locations within retail centers or the selection by prominent retailers and businesses of otherlocations. Over the last few years, we have experienced a continuing decline in traffic to our stores as consumer purchasing behaviors shift toward onlinepurchases. A reduction in traffic would likely lead to a decrease in our sales, and, if similar reductions in traffic occur at a number of our stores, this couldhave a material adverse effect on our financial condition and results of operations.15Table of ContentsOur ability to successfully open and operate new stores is subject to a variety of risks and uncertainties.As we continue to open additional locations, our ability to successfully 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 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.Additionally, some of our new stores may open in locations close enough to our existing stores that a segment of customers will stop shopping at our existinglocations and prefer to shop at the new locations, and therefore sales and profitability at those existing stores may decline.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. If there is asignificant 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 encounter untimelyaberrations in weather conditions, such as warmer winters or cooler summers than would be considered typical, these weather variations could cause some ofour 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 and manufacturersfor our proprietary branded products. We operate on a purchase order basis for our proprietary branded and third-party branded merchandise and do not havelong-term contractual relationships with our suppliers. Accordingly, our suppliers can refuse to sell us merchandise, limit the type or quantity of merchandisethey sell us or raise prices at any time, which can have an adverse impact on our business. Deterioration in our relationships with our suppliers could have amaterial adverse impact on our business, and there can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on termsacceptable to us in the future. Also, some of our vendors are vertically integrated, selling products directly from their own retail stores, and therefore are indirect competition with us. These vendors may decide at some point in the future to discontinue supplying their merchandise to us, supply us less desirablemerchandise or raise prices on the products they do sell us. If we lose key vendors or are unable to find alternative vendors to supply us with substitutemerchandise for lost products, our business may be adversely affected.16Table 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 represents a significant portion of our net sales. Our proprietary branded merchandise generally has a higher grossmargin than the third-party branded merchandise we offer. As a result, we may determine that it is best for us to continue to hold or increase the penetration ofour 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. By maintaining or increasing the amount of ourproprietary branded merchandise, we are also exposed to greater fashion risk, as we may fail to anticipate fashion trends 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. Some foreigncountries can be, and have been, affected by political and economic instability and natural disasters, negatively impacting trade. The countries in which ourmerchandise currently is manufactured or may be manufactured in the future could become subject to new trade restrictions imposed by the United States orother foreign governments. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, against apparel items, as well asUnited States or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and have a materialadverse effect on our business, financial condition and results of operations. In addition, our merchandise supply could be impacted if our suppliers’ importsbecome subject to existing or future duties and quotas, or if our suppliers face increased competition from other companies for production facilities, importquota capacity and shipping capacity. Any increase in the cost of our merchandise or limitation on the amount of merchandise we are able to purchase couldhave 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 or accepted inthe United States, consumers may develop a negative view of us, our brand image could be damaged and we could become the subject of boycotts by ourcustomers and/or interest groups. Further, if the suppliers violate labor or other laws of their own country, these violations could cause disruptions or delaysin their shipments of merchandise. For example, much of our merchandise is manufactured in China and Mexico, which have different labor practices than theUnited States. We do not independently investigate whether our suppliers are operating in compliance with all applicable laws and therefore we rely upon thesuppliers’ representations set forth in our purchase orders and vendor agreements concerning the suppliers’ compliance with such laws. If our goods aremanufactured using illegal or unacceptable labor practices in these countries, or other countries from which our suppliers source the product we purchase, ourability to supply merchandise for our stores without interruption, our brand image and, consequently, our sales may be adversely affected.If we lose key management personnel our operations could be negatively impacted.Our business and growth depends upon the leadership and experience of our key executive management team, including our co-founder, Hezy Shaked, whocurrently serves as our Chief Strategy Officer and Executive Chairman of our Board of Directors, and Edmond Thomas, 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. Except for Mr. Thomas, none of our employees 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.17Table of ContentsIf 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 brand image and,for many positions, have knowledge of our merchandise and the skill necessary to excel in a customer service environment. The turnover rate in the retailindustry is high and finding qualified candidates to fill positions may be difficult. If we cannot attract and retain corporate employees, district managers, storemanagers and store associates with the qualifications we deem necessary, our ability to effectively operate and expand may be adversely affected. In addition,we rely on temporary personnel to staff our distribution and fulfillment centers, as well as seasonal part-time employees to provide incremental staffing to ourstores in busy selling seasons such as the back-to-school and winter holiday seasons. We cannot guarantee that we will be able to find adequate temporary orseasonal personnel to staff our operations when needed, which may strain our existing personnel and negatively impact our operations.Our corporate headquarters, distribution and e-commerce fulfillment centers and management information systems are in Irvine, California, and if theiroperations are disrupted, we may not be able to operate our store support functions, ship merchandise to our stores, or fulfill e-commerce orders, whichwould adversely 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 is greater than it might be if they were located in another region, as southern California is prone to natural disasterssuch as earthquakes and wildfires. Any disruption or shut down at these locations could significantly impact our operations and have a material adverse effecton 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.The majority of our stores are located in California, Arizona, Nevada, Florida and the northeastern United States. Sales in these states could be moresusceptible than the country generally to disruptions, such as from economic and weather conditions, demographic and population changes and changes infashion tastes, and consequently, we may be more susceptible to these factors than more geographically diversified competitors. For example, because of thenegative economic impact caused by the downturn in the housing market that began several years ago, sales in these states may have slowed more than saleswould 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 ofdamage from a major earthquake or wildfires, while stores in Florida are exposed to a relatively high risk from hurricane damage. Any negative impact uponor disruption to the operations of stores in these states could have a material adverse effect on our financial condition and results of operations.We 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 not ownany 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. Weare required to pay additional rent under many of our lease agreements based upon achieving certain sales plateaus for each store location. In addition, wemust make significant payments for common area maintenance and real estate taxes. Many of our lease agreements also contain provisions which increase therent payments 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 escalatewhen multi-year leases are renewed at the expiration of their lease term. These costs are significant, recurring and increasing, which places a consistent strainon our cash flow.We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flowsfrom operating activities, and sufficient funds are not otherwise available to us from borrowings under our available revolving credit facility or from othersources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or to fund our other liquidity andcapital 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, wemay nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance ofthe lease term. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us toclose stores in desirable18Table of Contentslocations. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases forstores 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 well as toship e-commerce sales packages directly to our customers. Relying on these third-party delivery services puts us at risk from disruptions in their operations,such as employee strikes, inclement weather and their ability to meet our shipping demands. If we are forced to use other delivery services, our costs couldincrease and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain delivery terms as favorable as those received from thetransportation providers we currently use, which would further increase our costs. These circumstances may negatively impact our financial condition andresults of operations.We rely on print and online marketing services.We use the U.S. Postal Service to mail printed marketing materials several times each year to inform our customers about our products, acquire new customers,drive customers into our stores, and promote our website and stores. As a result, postal rate increases and paper and printing costs affect the cost of ourmailings. We also use third-party online services to market our website and stores and to distribute promotions to attract new customers and encourageexisting customers to purchase from us. Any significant or unanticipated increase in postage, reduction in postal service, or slow-down in postal delivery,increases in paper and printing costs, increases in the cost of our online marketing services or any service interruption or failure on the part of such serviceproviders could impair our ability to deliver printed marketing materials or our online marketing in a timely or economically efficient manner. This couldalso adversely impact our sales and earnings if we are unable to pass such increases on to our customers or are unable to implement more efficient printing,mailing, delivery and order fulfillment systems or, in the case of our online marketing, to find alternative providers in a timely manner and on terms that arenot significantly more costly to us.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.If our management information systems fail to operate or are unable to support our growth, our operations could be disrupted.We rely upon our management information systems in almost every aspect of our daily business operations. For example, our management informationsystems serve an integral part in enabling us to order merchandise, process merchandise at our distribution center and retail stores, perform and track salestransactions, manage personnel, pay vendors and employees, operate our e-commerce 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.19Table of ContentsOur internal operations, management information systems and databases containing the personal information of our employees and customers could bedisrupted by system security failures or breached by intentional attacks. These disruptions or attacks could negatively impact our sales, increase ourexpenses, and harm our reputation.Database privacy, network security and identify theft are matters of growing public concern. Hackers, computer programmers and internal users may be ableto penetrate our network security and create system disruptions, cause shutdowns and misappropriate our confidential information or that of third parties,including our employees and customers. Therefore, we could incur significant expenses addressing problems created by security breaches to our network.This risk is heightened because we collect and store customer information for marketing purposes, and use credit card information to process transactions. Wemust, and do, take precautions to secure customer information and prevent unauthorized access to our database of confidential information. However, ifunauthorized parties, including external hackers or computer programmers, gain access to our database, they may be able to steal this confidentialinformation. Our failure to secure this information could result in costly litigation, adverse publicity or regulatory action that could have a material adverseeffect on our financial condition and results of operations. In addition, sophisticated hardware and operating system software and applications that weprocure from third parties may contain defects in design or manufacture that could unexpectedly interfere with our operations. The cost to alleviate securityrisks, defects in software and hardware and address any problems that occur could negatively impact our sales, distribution and other critical functions, aswell 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 our unregisteredtrademarks in foreign countries. Use of our trademarks in foreign countries could negatively impact our identity in the United States and cause our sales todecline.We may be subject to liability if we, or our vendors, infringe upon the intellectual property rights of third parties.We may be subject to liability if we infringe upon the intellectual property rights of third parties. If we were to be found liable for any such infringement, wecould be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could harm ourbrand image. In addition, any payments we are required to make and any injunction with which we are required to comply as a result of such infringementactions could adversely affect our financial results.We 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.20Table of ContentsOur 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 of Class Bcommon 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 common stock arebeneficially owned by Hezy Shaked, Tilly Levine and their children through related trusts, which we refer to as the Shaked and Levine family entities. As aresult, the Shaked and Levine family entities control a substantial majority of the total voting power of our outstanding common stock. 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 byMs. Levine. As a result, Mr. Shaked is in a position to dictate the outcome of any corporate actions requiring stockholder approval, including the election ofdirectors and mergers, acquisitions and other significant corporate transactions. Mr. Shaked may delay or prevent a change of control from occurring, even ifthe change of control could appear to benefit the stockholders. Mr. Shaked may also have interests that differ from yours and may vote in a way with whichyou disagree and which may be adverse to your interests. This ownership concentration may adversely impact the trading of our Class A common stockbecause 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 the"Reorganization Transaction", World of Jeans & Tops’ “S” Corporation status terminated and it thereafter became subject to federal income taxes andincreased state income taxes. In the event of an adjustment to World of Jeans & Tops’ reported taxable income for a period or periods prior to termination ofits “S” Corporation status, its shareholders during those periods could be liable for additional income taxes for those prior periods. Therefore, we entered intotax indemnification agreements with the former shareholders of World of Jeans & Tops prior to the reorganization transactions that took place in connectionwith our initial public offering, which we collectively refer to as the "Reorganization Transaction". Pursuant to the tax indemnification agreements, we agreedto indemnify, defend and hold harmless each such shareholder on an after-tax basis against additional income taxes, plus interest and penalties resulting fromadjustments made, as a result of a final determination made by a competent tax authority, to the taxable income World 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 taxliability.War, terrorism, civil unrest or other violence could negatively affect our business.All of our stores are located in public areas where large numbers of people typically gather. Terrorist attacks, threats of terrorist attacks or civil unrestinvolving public areas could cause people not to visit areas where our stores are located. Further, armed conflicts or acts of war throughout the world maycreate uncertainty, causing consumers to spend less on discretionary purchases, including on apparel and accessories, and disrupting our ability to obtainmerchandise for our stores. Such decreases in consumer spending or disruptions in our ability to obtain merchandise would likely decrease our sales andmaterially adversely affect our financial condition and results of operations. Other types of violence, such as shootings in malls or in public areas, could leadto lower traffic in shopping malls or centers in which we operate stores. In addition, local authorities or management from the mall or shopping center couldclose the mall or shopping center in response to security concerns. Such closures, as well as lower traffic due to security concerns, could result in decreasedsales.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, employmentmatters, compliance with the Americans with Disabilities Act of 1990, apparel, footwear and accessory safety standards, security of customer and employeepersonal information, contractual relations with vendors, marketing and infringement of trademarks and other intellectual property rights. Litigation todefend ourselves against claims by third parties, or to enforce any rights that we may have against third parties, may be necessary, 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.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.21Table of ContentsWe 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 and occupancylaws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of stores andwarehouse 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 in lawsrelated to employee health care, hours, wages, job classification and benefits could significantly increase operating costs. On June 30, 2015, the U.S.Department of Labor announced proposed revisions to the Fair Labor Standards Act’s ("FLSA") overtime exemptions. The proposed revisions increase theminimum salary needed to qualify for the FLSA’s standard exemptions to be equal to the 40th percentile of weekly earnings for full-time salaried employees.If this proposal becomes effective, it could significantly increase our cost of labor or require us to make other changes to our business practices, which couldhave a material adverse effect on our business or results of operations. In addition, in March 2010, the Patient Protection and Affordable Care Act, as amendedby the Health Care Education Reconciliation Act of 2010, or, collectively, the Act, was signed into law. The Act includes a number of health care provisionstaking effect over several years, including expanded dependent coverage, incentives for business to provide health care benefits, a prohibition on denial ofcoverage and denial of claims on pre-existing conditions, a prohibition on limiting essential benefits, and other expansion of health care benefits andcoverage. Some of the associated taxes and fees, as well as certain health care changes required by these acts, are expected to result in increased health carecosts for us. The costs of such legislation may adversely impact our results of operations.Furthermore, 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 to otherreporting and corporate governance requirements, including certain requirements of the New York Stock Exchange, or NYSE, and certain provisions of theSarbanes-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 and ouremployees. In addition, pursuant to Section 404 of SOX, and the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are required to provideannually an assessment of the effectiveness of our internal controls over financial reporting and, starting with the year after we are no longer an “emerginggrowth company” as defined in the JOBS Act, our independent registered public accounting firm will be required to provide an attestation on our assessmentof our internal controls over financial reporting.22Table of ContentsThe process required to comply with Section 404 of SOX is time consuming and costly. If during this process we identify one or more material weaknesses inour internal controls, it is possible that our management may not be able to certify that our internal controls are effective by the certification deadline.Moreover, if we identify any material weaknesses or significant deficiencies in our internal controls we will have to implement appropriate changes to thesecontrols, which may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting, legaland other personnel, entail substantial costs to modify our existing accounting systems and take a significant period of time to complete. Such changes maynot, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produceaccurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Effectiveinternal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to satisfy the requirementsof 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 our financialstatements, both of which in turn could cause the market value of our Class A common stock to decline.Prior to our initial public offering, we were treated as an “S” Corporation under Subchapter S of the Internal Revenue Code, and claims 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 the unaudited,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 haveviolated, our “S” Corporation status, we will be obligated to pay back taxes, interest and penalties, and we will not have the right to reclaim tax distributionsit 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 suchclaims could result in additional costs to us and could have a material adverse effect on our results of operations and financial condition.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, joint ventures,restructurings, divestitures and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-termexpenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial 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 us tocertain 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, electronicbreak-ins and similar 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.23Table of ContentsChanges 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, or GAAP.New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes toaccounting rules or regulations, such as changes as a requirement to convert to international financial reporting standards, could negatively affect our resultsof operations and financial condition through increased cost of compliance.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-based compensation. Ourshare-based compensation expenses may be significant in future periods, which could have an adverse impact on our operating and net income. FASB ASC718 requires the use of subjective assumptions, including the options’ expected lives and the price volatility of our Class A common stock. Changes in thesubjective input assumptions can materially affect the amount of our share-based compensation expense. In addition, an increase in the competitiveness ofthe market for qualified employees could result in an increased use of share-based compensation awards, which in turn would result in increased share-basedcompensation 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 NYSE corporategovernance listing standards. As a controlled company, certain exemptions under the NYSE listing standards will exempt us from the obligation to complywith 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 writtencharter addressing 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 thecommittee’s purpose 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 will nottake advantage of these exemptions in the future. Accordingly, so long as we are a controlled company, holders of our Class A common stock may not havethe 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.Financial forecasting by us and financial analysts who may publish estimates of our performance may differ materially from actual results.Given the dynamic nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of ourrevenues, comparable sales, margins, net income and other financial and operating forecasts may differ materially from actual results. Such discrepanciescould cause a decline in the trading price of our Class A common stock.We have a small public float and this may result in price swings in our Class A common stock or make it difficult to acquire or dispose of our Class Acommon stock.This small public float can result in large swings in our stock price with relatively low trading volume. In addition, a purchaser that seeks to acquire asignificant number of shares may be unable to do so without increasing our common stock price, and conversely, a seller that seeks to dispose of a significantnumber of shares may experience a decreasing stock price.24Table of ContentsThe 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 and investorsmay 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, and could inthe 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 of litigationcould result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfyjudgments 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 the marketprice for our Class A common stock to decline. Most of these are freely tradable without restriction under the Securities Act of 1933, as amended, or SecuritiesAct. The shares of Class A common stock and Class B common stock held by the Shaked and Levine family entities, and the shares of Class A common stockheld by our directors, officers and other affiliates, are restricted securities under the Securities Act, and may not be sold in the public market unless the sale isregistered under 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 Delaware law, aswell 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 withoutstockholder approval, which, if issued, would increase the number of outstanding shares of our capital stock and could make itmore difficult for a stockholder to acquire us; • our certificate of incorporation provides that if all shares of our Class B common stock are converted into Class A common stock orotherwise cease to be outstanding, our Board of Directors will be divided into three classes in the manner provided by ourcertificate of incorporation. After the directors in each class serve for the initial terms provided in our certificate of incorporation,each class will serve for a staggered three-year term; • our certificate of incorporation permits removal of a director only for cause by the affirmative vote of the holders of a majority ofthe voting power of the company once the Board of Directors is divided into three classes and provides that director vacancies canonly be filled by an affirmative 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 ofus.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 will bethe sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary dutyowed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DelawareGeneral Corporation Law, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person purchasing or otherwise acquiringany interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated bylaws.This choice-of-forum provision may limit our stockholders’ ability to bring a claim in a judicial25Table of Contentsforum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a courtwere to find this provision of our amended and restated bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions orproceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business andfinancial condition.We do not currently intend to pay cash dividends on our common stock, which may make our Class A common stock less desirable to investors anddecrease its value.We currently intend to retain all of our earnings to finance our operations and growth and do not anticipate paying any cash dividends on our common stockfor the 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 likely be the sole source of gain for our Class A common stockholders for theforeseeable 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 12 Whatney,Irvine, California. Our lease began on January 1, 2003. We have exercised the first of three five-year renewal options on this lease. Upon exercising the firstrenewal option, the lease now terminates on December 31, 2017.We lease approximately 26,000 square feet of office and warehouse space located at 11 Whatney, Irvine, California. The lease began on September 2, 2011and 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 on November 1,2011 and terminates on October 31, 2021.All of our 224 stores, encompassing a total of approximately 1.7 million total square feet as of January 30, 2016, are occupied under operating leases. Thestore leases generally have a base lease term of 10 years and many have renewal option periods, and we are generally responsible for payment of propertytaxes and utilities, common area maintenance and mall marketing fees.We consider all of our properties adequate for our present and anticipated future needs.Item 3. Legal ProceedingsFrom time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. For some matters, we are currentlyunable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that couldresult from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim.Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are aparty or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverseeffect on our financial condition, results of operations or cash flows. See Item 1A “Risk Factors- Risks Related to Our Business- Litigation costs and theoutcome of litigation could have a material adverse effect on our business” included in this report.Kirstin Christiansen, Shellie Smith and Paul Haug, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, Superior Court ofCalifornia, County of Sacramento, Case No. 34-2013-139010. On January 29, 2013, the plaintiffs in this matter filed a putative class action lawsuit againstus alleging violations of California Civil Code Section 1747.08, which prohibits requesting or requiring personal identification information from a customerpaying for goods with a credit card and recording such information, subject to exceptions. The complaint seeks certification of a class, unspecified damages,injunctive relief and attorneys' fees. In June 2013, the Court granted our motion to strike portions of the plaintiffs’ complaint and granted plaintiffs leave toamend. The parties completed class certification discovery and briefing, and a hearing was held on August 13, 2015. On September 17, 2015, the Courtissued an order denying plaintiff's motion for class certification. On or around November 30, 2015, plaintiffs filed a notice of appeal of the Court's orderdenying plaintiffs' motion for class certification. The deadline for plaintiffs to file their opening brief has not yet beet set. We intend to defend this casevigorously. 26Table of ContentsMaria 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 this matterfiled a putative class action lawsuit against us alleging violations of California’s wage and hour, meal break and rest break rules and regulations, and unfaircompetition law, among other things. An amended complaint was filed on February 22, 2013, to add a claim for penalties under the California PrivateAttorneys General Act. In March 2013, we filed a motion to compel arbitration, which was denied in June 2013 and later affirmed on appeal. In October 2014,we filed an answer to the amended complaint. The parties attended a mediation proceeding and reached a resolution that will be presented to the Court forapproval.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 for attorneys' fees and costs. The matter is in pre-class certification motion discovery state. We intent to defend this casevigorously.Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. On September 1, 2015, plaintiff filed a putative class action lawsuit against us, alleging violations of California’s wage and hour rules and regulations andunfair competition law. The complaint seeks certification of a class, unspecified damages, unpaid wages, penalties, restitution, and attorneys’ fees. We intendto defend this case vigorously.Item 4. Mine Safety DisclosuresNot applicable.27Table 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 24, 2016, the closing price of our Class A common stock was $6.46. High LowFiscal 2015: Fourth Quarter$7.48 $5.72Third Quarter$9.71 $6.90Second Quarter$14.67 $8.82First Quarter$16.99 $11.91Fiscal 2014: Fourth Quarter$14.67 $6.65Third Quarter$8.55 $6.82Second Quarter$11.95 $7.32First Quarter$13.10 $10.70As of March 24, 2016, we had approximately 55 stockholders of record, 49 of whom were holders of our Class A common stock and six of whom were holdersof our Class B common stock. The number of stockholders of record is based upon the actual number of stockholders registered at such date and does notinclude 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 the NYSE on May 4, 2012, in connection with our initial public offering. Our current credit facility precludes usfrom paying dividends. Consequently, we have not declared any cash dividends since our initial public offering, and we do not currently anticipate declaringany cash dividends in the foreseeable future.Securities Authorized for Issuance under Equity Compensation PlansThe information required by this Item is incorporated herein by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders, which will befiled with the SEC no later than 120 days after the end of the fiscal year ended January 30, 2016 (the "2016 Proxy Statement").28Table of ContentsStock Performance GraphThe graph set forth below compares the cumulative stockholder return on our Class A common stock between May 4, 2012, the day our Class A commonstock began trading on the NYSE, and January 30, 2016 to the cumulative return of (i) the S&P Midcap 400 Index and (ii) the S&P 400 Apparel Retail Indexover the same period. 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 theS&P 400 Apparel Retail 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 Midcap 400 Index and the S&P 400 Apparel Retail Index on May 4, 2012 were the closing prices on that trading day.Comparison of 45 Month Cumulative Total Return as of January 30, 2016Assumes Initial Investment of $100 on May 4, 2012Recent Sales of Unregistered SecuritiesWe did not sell any unregistered equity securities or purchase any of our securities during the fiscal year ended January 30, 2016.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 forma informationto reflect our conversion during fiscal year 2012 from an “S” Corporation to a “C” Corporation for income tax purposes. The selected consolidated statementof income data for the fiscal year ended January 30, 2016 and selected balance sheet data as of January 30, 2016 are derived from our consolidated financialstatements audited by BDO USA, LLP, our independent registered public accounting firm, included in Item 8 of this report. The selected consolidatedstatement of income data for the fiscal years ended January 31, 2015 and February 1, 2014 and selected consolidated balance sheet data as of January 31,2015 are derived from our consolidated financial statements audited by Deloitte & Touche LLP, our29Table of Contentsformer independent registered public accounting firm, included in Item 8 of this report. The selected consolidated statement of income data for the fiscalyears ended February 2, 2013 and January 28, 2012 and the selected consolidated balance sheet data as of February 1, 2014, February 2, 2013 andJanuary 28, 2012 are derived from our audited consolidated financial statements that have not been included elsewhere in this report. The historical resultspresented below are not necessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial data inconjunction with the consolidated financial statements and accompanying notes and the information under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” appearing elsewhere in this report. Fiscal Year Ended (1) January 30,2016 January 31,2015 February 1,2014 February 2,2013 January 28,2012 (in thousands, except per share data)Consolidated Statements of Income Data: Net sales$550,991 $518,294 $495,837 $467,291 $400,624Cost of goods sold (2)383,745 362,762 345,015 319,723 271,482Gross profit167,246 155,532 150,822 147,568 129,142Selling, general and administrative expenses149,150 132,343 121,085 116,178 94,217Operating income18,096 23,189 29,737 31,390 34,925Interest income (expense), net52 (14) (9) (91) (196)Income before income taxes18,148 23,175 29,728 31,299 34,729Income tax expense10,607 9,100 11,591 7,406 389Net income$7,541 $14,075 $18,137 $23,893 $34,340 Basic earnings per share of Class A andClass B common stock$0.27 $0.50 $0.65 $0.93 $1.72Diluted earnings per share of Class A andClass B common stock$0.27 $0.50 $0.65 $0.92 $1.68Weighted average basic shares outstanding28,332 28,013 27,822 25,656 20,000Weighted average diluted shares outstanding28,402 28,078 28,116 26,076 20,500Pro Forma Income Information (3): Pro forma income tax expense $12,520 $13,892Pro forma net income 18,779 20,837Pro forma basic earnings per share of Class A and ClassB common stock $0.73 $1.04Pro forma diluted earnings per share of Class A andClass B common stock $0.72 $1.02 Fiscal Year Ended January 30, 2016 January 31, 2015 February 1, 2014 February 2, 2013 January 28, 2012Operating Data (unaudited): Stores operating at beginning of period212 195 168 140 125Stores opened during the period15 19 28 29 16Stores closed during the period3 2 1 1 1Stores operating at end of period224 212 195 168 140Comparable store sales change (4)1.2% (2.8)% (1.9)% 2.2% 10.7%Total square feet at end of period1,704,031 1,622,156 1,513,138 1,318,803 1,094,419Average square footage per store at end of period7,607 7,652 7,760 7,850 7,817Average net sales per brick-and-mortar store (inthousands) (5)$2,219 $2,250 $2,396 $2,676 $2,718Average net store sales per square foot (5)$290 $292 $307 $341 $350Capital expenditures (in thousands)$23,100 $23,636 $42,701 $33,298 $20,22330Table of Contents As of January 30, 2016 January 31, 2015 February 1, 2014 February 2, 2013 January 28, 2012 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities$100,952 $84,746 $60,355 $57,182 $25,091Working capital114,862 97,988 80,710 73,891 27,673Total assets270,751 257,551 232,407 205,381 140,819Total capital lease obligation (6)1,693 2,500 3,258 3,970 4,638Stockholders’ equity$173,213 $158,686 $140,923 $117,296 $60,424 (1)The fiscal years ended January 30, 2016, January 31, 2015, February 1, 2014 and January 28, 2012 each included 52 weeks. The fiscal year endedFebruary 2, 2013 included 53 weeks.(2)Includes buying, distribution and occupancy costs.(3)The unaudited pro forma income statement for all years presented gives effect to an adjustment for income tax expense as if we had been a “C”Corporation for all years presented at an assumed combined federal, state and local effective income tax rate, which approximates our statutoryincome tax rate, of 40%.(4)Comparable store sales are net sales from stores that have been open at least 12 full fiscal months as of the end of the current reporting period. Aremodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store was 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 platform but exclude gift card breakage income and e-commerce shipping and handling fee revenue. The comparable store sales changefor the period ended February 2, 2013 excludes the 53rd week in fiscal year 2012.(5)The number of stores and the amount of square footage reflect the number of days during the period that new stores were open. E-commerce sales, e-commerce shipping revenue, and gift card breakage income are excluded from our sales in deriving net sales per store.(6)Comprised solely of a capital lease for our corporate headquarters and distribution center.31Table 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 on theSaturday closest to January 31 of the following year. References to ‘fiscal year 2015” or "fiscal 2015” refer to the fiscal year ended January 30, 2016,references to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015 and references to “fiscal year 2013” or “fiscal 2013” referto the fiscal year ended February 1, 2014. Fiscal years 2015, 2014 and 2013 each consisted of a 52-week period.OverviewTillys is a destination specialty retailer of West Coast inspired apparel, footwear and accessories. We believe we bring together an unparalleled selection ofthe most sought-after brands rooted in action sports, music, art and fashion. Our West Coast heritage dates back to 1982 when Hezy Shaked and Tilly Levineopened our first store in Orange County, California. As of January 30, 2016, we operated 224 stores in 32 states, averaging approximately 7,600 square feet.We also sell our products through our e-commerce website, www.tillys.com.Known or Anticipated TrendsWe, and teen retail in general, have experienced a downward trend in traffic to brick-and-mortar stores for an extended period of time. Conversely, onlineshopping has generally increased and resulted in sustained online sales growth. We believe these traffic trends and shopping behaviors will continue in fiscal2016. As a result, we expect to slow the pace of new store openings during fiscal 2016 to focus our efforts on improving the performance of our existing storesand expanding our online/digital capabilities through omni-channel initiatives designed to provide a seamless shopping experience for our customers,whether in-store or online.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 condition andoperating performance of our business are net sales, comparable store sales, gross profit, selling, general and administrative expenses and operating income.Net SalesNet sales reflect revenue from the sale of our merchandise at store locations as well as sales of merchandise through our e-commerce 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 used to purchase merchandise.However, over time, the redemption of some gift cards becomes remote (referred to as gift card breakage). Revenue from estimated gift card breakage is alsoincluded in net sales.Our business is seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected by anumber of factors including the timing of holidays and weather patterns. The third and fourth quarters of the fiscal year, which include the back-to-school andholiday sales seasons, have historically produced stronger sales and disproportionately stronger operating results than have the first two quarters of the fiscalyear.32Table of ContentsComparable 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 attract traffic to our stores and online platform;•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;•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 reporting period. Aremodeled, relocated or refreshed 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.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 and benefit expense for our internal buying organization. Distribution costs includecosts for receiving, processing and warehousing our store merchandise, and shipping of merchandise to or from our distribution and e-commerce fulfillmentcenters and to our e-commerce customers and between store locations. Occupancy costs include the rent, common area maintenance, utilities, property taxes,security and depreciation costs of all store locations. These costs are significant and can be expected to continue to increase as our company grows. Thecomponents of our reported cost 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 by salesmix shifts within and between brands and between major product departments such as young men's and women's apparel, footwear or accessories. Asubstantial shift in the mix of products could have a material impact on our results of operations. In addition, gross profit and gross profit as a percent of saleshave historically 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.This reflects that various costs, including occupancy costs, generally do not increase in proportion to the seasonal sales increase.33Table of ContentsSelling, General and Administrative ExpensesOur selling, general and administrative, or SG&A, expenses are composed of store selling expenses and corporate-level general and administrative expenses.Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-commercereceiving and processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functionssuch as executive management, legal, accounting, information systems, human resources, impairment charges and other centralized services. Store sellingexpenses generally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directlyproportional to net sales and store growth, but will be expected to increase over time to support the needs of our growing company. SG&A expenses as apercentage of net sales are usually higher in lower volume periods and lower in higher volume periods.Operating IncomeOperating income equals gross profit less SG&A expenses. Operating income excludes interest income, interest expense and income taxes. Operating incomepercentage measures operating income as a percentage of our net sales.Results of OperationsThe following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales: Fiscal Year Ended January 30,2016 January 31,2015 February 1,2014 (in thousands)Statements of Income Data: Net sales$550,991 $518,294 $495,837Cost of goods sold383,745 362,762 345,015Gross profit167,246 155,532 150,822Selling, general and administrative expenses149,150 132,343 121,085Operating income18,096 23,189 29,737Other expense, net52 (14) (9)Income before income taxes18,148 23,175 29,728Income tax expense10,607 9,100 11,591Net income$7,541 $14,075 $18,137Percentage of Net Sales: Net sales100.0% 100.0% 100.0%Cost of goods sold69.6% 70.0% 69.6%Gross profit30.4% 30.0% 30.4%Selling, general and administrative expenses27.1% 25.5% 24.4%Operating income3.3% 4.5% 6.0%Interest expense, net—% —% —%Income before income taxes3.3% 4.5% 6.0%Income tax expense1.9% 1.8% 2.3%Net income1.4% 2.7% 3.7% 34Table of ContentsThe following table presents store operating data for the periods indicated: Fiscal Year Ended January 30,2016 January 31,2015 February 1,2014Store Operating Data: Stores operating at end of period224 212 195Comparable store sales change (1)1.2% (2.8)% (1.9)%Total square feet at end of period1,704,031 1,622,156 1,513,138Average net sales per brick-and-mortar store (in thousands) (2)$2,219 $2,250 $2,396Average net sales per square foot (2)$290 $292 $307 (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 platform but exclude gift card breakage income and e-commerce shipping and handling fee revenue.(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 2015 Compared to Fiscal Year 2014Net SalesNet sales were $551.0 million in fiscal 2015 compared to $518.3 million in fiscal 2014, an increase of $32.7 million, or 6.3%. The components of our netsales increase were as follows:$ millions Attributable to$26.5 Increase in non-comparable store sales due to opening 12 net new stores in the prior twelve months6.2 Increase in comparable store sales of 1.2%$32.7 TotalGross ProfitGross profit was $167.2 million in fiscal 2015 compared to $155.5 million in fiscal 2014, an increase of $11.7 million, or 7.5%, primarily due to the increasein net sales. Gross margin, or gross profit as a percentage of net sales, was 30.4% and 30.0% during fiscal 2015 and fiscal 2014, respectively. The 0.4%increase in gross margin was primarily due to a decrease in buying, distribution and occupancy costs as a percentage of net sales as a result of improved laborand other operational efficiencies in our distribution center and e-commerce fulfillment center.35Table of ContentsSelling, General and Administrative ExpensesSG&A expenses were $149.2 million in fiscal 2015 compared to $132.3 million in fiscal 2014, an increase of $16.9 million, or 12.8%. As a percentage of netsales, SG&A expenses were 27.1% and 25.5% during fiscal 2015 and fiscal 2014, respectively. The components of the SG&A expense increase, both in termsof percentage of net sales and total dollars, were as follows:% $ millions Attributable to0.6% $4.1 Increase in marketing expenses0.4% 3.6 Increase in corporate payroll and benefits, primarily due to $1.1 million in non-recurring severance obligationsand the annualized impact of merit awards and minimal headcount additions0.3% 1.6 Increase in non-cash store impairment charges0.1% 4.5 Increase in store payroll and benefits primarily due to 12 net new store openings0.2% 3.1 Increase in all other SG&A expenses1.6% $16.9 TotalOperating IncomeOperating income was $18.1 million in fiscal 2015 compared to $23.2 million for fiscal 2014, a decrease of $5.1 million, or 22.0%. As a percentage of netsales, operating income was 3.3% and 4.5% for fiscal 2015 and fiscal 2014, respectively. The decrease in operating income was primarily attributable to theincrease in SG&A, partially offset by increased gross profit as discussed above.Income Tax ExpenseIncome taxes were $10.6 million and $9.1 million for fiscal 2015 and fiscal 2014, respectively. Our effective tax rates were 58.4% and 39.3% for fiscal 2015and fiscal 2014, respectively. The increase in our effective tax rate for fiscal 2015 was primarily due to discrete items related to expiration of stock options,exercises of stock options, settlement of restricted stock units and a tax settlement from a prior tax year.Net Income and Earnings Per ShareNet income was $7.5 million for fiscal 2015 compared to $14.1 million for fiscal 2014, a decrease of $6.6 million, or 46.8%. Diluted earnings per share was$0.27 for fiscal 2015 compared to $0.50 for fiscal 2014.Fiscal Year 2014 Compared to Fiscal Year 2013Net SalesNet sales were $518.3 million in fiscal 2014 compared to $495.8 million in fiscal 2013, an increase of $22.5 million, or 4.5%. The components of our netsales increase were as follows:$ millions Attributable to$35.7 Increase in non-comparable store sales due to opening 17 net new stores in the prior twelve months(13.2) Decrease in comparable store sales of 2.8%$22.5 TotalGross ProfitGross profit was $155.5 million in fiscal 2014 compared to $150.8 million in fiscal 2013, an increase of $4.7 million, or 3.1%, primarily due to the increase innet sales. Gross margin, or gross profit as a percentage of net sales, was 30.0% and 30.4%36Table of Contentsduring fiscal 2014 and fiscal 2013, respectively. The components of the 0.4% decrease in gross margin were as follows:% Attributable to(0.6)% Increase in buying, distribution and occupancy costs as a percentage of net sales primarily due to due to new stores opened during theyear and deleverage due to comparable store sales decline0.2% Increase in product margins due to an increase in initial markup rates and a decrease in markdowns(0.4)% TotalSelling, General and Administrative ExpensesSG&A expenses were $132.3 million in fiscal 2014 compared to $121.1 million in fiscal 2013, an increase of $11.2 million, or 9.2%. As a percentage of netsales, SG&A expenses were 25.5% and 24.4% during fiscal 2014 and fiscal 2013, respectively. The components of the SG&A expense increase, both in termsof percentage of net sales and total dollars, were as follows:% $ millions Attributable to0.7% $6.2 Increase in store payroll and benefits0.2% 1.5 Increase in marketing expenses, primarily due to higher spend on catalogs and other marketing initiatives—% 1.0 Increase in corporate payroll and benefits, primarily due to the annualized impact of merit awards and minimalheadcount additions.(0.2)% (0.8) Decrease in non-cash store impairment charges0.4% 3.3 Increase in all other SG&A expenses1.1% $11.2 TotalOperating IncomeOperating income was $23.2 million in fiscal 2014 compared to $29.7 million for fiscal 2013, a decrease of $6.5 million, or 21.9%. As a percentage of netsales, operating income was 4.5% and 6.0% in fiscal 2014 and fiscal 2013, respectively. The decrease in operating income was primarily attributable to theincrease in SG&A, partially offset by increased gross profit as discussed above.Income Tax ExpenseIncome taxes were $9.1 million and $11.6 million in fiscal 2014 and fiscal 2013, respectively. Our effective tax rates were 39.3% and 39.0% in fiscal 2014and fiscal 2013, respectively.Net Income and Earnings Per ShareNet income was $14.1 million in fiscal 2014 compared to $18.1 million in fiscal 2013, a decrease of $4.0 million, or 22.1%. Diluted earnings per share was$0.50 in fiscal 2014 compared to $0.65 in fiscal 2013.Liquidity and Capital ResourcesOur 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 access toadditional liquidity through a $25.0 million revolving credit facility with Wells Fargo Bank, N.A. We have not drawn funds or issued letters of creditfinancing from the revolving credit facility and do not currently expect to draw from the facility. We currently expect to finance company operations, storegrowth and remodels with existing cash on hand, marketable securities and cash flows from operations.In addition 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 assurance37Table of Contentsthat equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to ourstockholders.Working capital at January 30, 2016, was $114.9 million compared to $98.0 million at January 31, 2015, an increase of $16.9 million. The changes in ourworking capital during fiscal 2015 were as follows:$ millions Description$98.0 Working capital at January 31, 201516.2 Increase in cash and marketable securities0.7 Net increase from changes in all other assets and liabilities$114.9 Working capital at January 30, 2016Cash Flow AnalysisA summary of operating, investing and financing activities is shown in the following table: Fiscal Year Ended January 30,2016 January 31,2015 February 1,2014 (in thousands)Net cash provided by operating activities$36,850 $48,288 $43,794Net cash used in investing activities(37,966) (23,479) (37,530)Net cash provided by (used in) financing activities2,347 (432) 1,834Net Cash Provided by Operating ActivitiesOperating activities consist primarily of net income adjusted for non-cash items that include depreciation, asset impairment write-downs, deferred incometaxes 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 decreased in fiscal year 2015 as compared to fiscal year 2014 primarily due to lower operating income, an increasein cash paid for income taxes and a decrease in cash generated from working capital related to the timing of payments to vendors, partially offset by adecrease in inventory as a result of increased markdowns.Net cash provided by operating activities increased in fiscal year 2014 as compared to fiscal year 2013 primarily due to an increase in cash generated fromworking capital mainly due to the timing of payments to vendors and a decrease in receivables and other assets, partially offset by an increase in inventory asa result of the opening of 19 new stores. The cumulative increase in cash generated from working capital was partially offset by lower net income, net of non-cash adjustments, of $1.0 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 and equipment atexisting stores, investments in information technology, distribution center enhancements, expansion into the new e-commerce fulfillment center, assets at ourcorporate headquarters and the addition or replacement of company vehicles. Investing activities also consist of the purchase and sale of marketablesecurities.Net cash used in investing activities was $38.0 million in fiscal year 2015. Capital expenditures totaled $23.1 million, primarily related to new andremodeled stores and other improvements in our information technology systems, distribution centers, and corporate offices. We purchased $74.9 million ofmarketable securities and received proceeds of $60.0 million from the maturities of marketable securities during fiscal year 2015.Net cash used in investing activities was $23.5 million in fiscal year 2014. Capital expenditures totaled $23.6 million, with spending on new stores and theremodeling or other improvements of existing stores comprising $16.3 million of this total. The remaining capital expenditures were for our investment inour new e-commerce fulfillment center, information technology systems and other distribution and corporate facility enhancements. We purchased $59.9million of marketable securities and received proceeds of $60.0 million from the maturities of marketable securities during fiscal year 2014.38Table of ContentsNet cash used in investing activities was $37.5 million in fiscal year 2013. Capital expenditures totaled $42.7 million, with spending on new stores and theremodeling or other improvements of existing stores comprising $24.7 million of this total. The remaining capital expenditures were for our investment inour new e-commerce fulfillment center, information technology systems and other distribution and corporate facility enhancements. We purchased $44.9million of marketable securities and received proceeds of $50.0 million from the maturities of marketable securities during fiscal year 2013.Capital expenditures during fiscal year 2016 are expected to be between $25 million and $30 million. We expect to spend the majority on remodels ofexisting stores, construction of new stores, and improving our information technology and e-commerce capabilities. 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-basedcompensation and employee taxes paid in result of the net settlement of issued restricted stock.Net cash provided by financing activities was $2.3 million in fiscal year 2015. This included $3.2 million of proceeds from the exercise of stock options andexcess tax benefits from share-based compensation, partially offset by $0.8 million in payments towards our capital lease obligation during fiscal year 2015.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 stock options andexcess tax benefits from share-based compensation, partially offset by $0.7 million in payments towards our capital lease obligation during fiscal year 2013.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. Theinterest 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 or LIBOR-based rate at the time of a draw. The credit facility is secured by substantially all of our assets. As a sub-feature under the revolving credit facility the bankmay issue stand-by and commercial letters of credit up to $15.0 million.We are required to maintain certain financial and nonfinancial covenants in accordance with the revolving credit facility. The financial covenants requirecertain levels of leverage and profitability, such as (i) an aggregate maximum net loss after taxes not to exceed $5 million (measured at the end of each fiscalquarter), with no more than one annual net loss after taxes for any fiscal year (in either case, excluding all charges for impairment of goodwill, otherintangibles and store assets impairment on the balance sheet, in an aggregate amount of up to $2.0 million for the relevant period), and (ii) a maximum ratioof 2.00 to 1.00 for “balance sheet leverage”, defined as total liabilities divided by total tangible net worth.On July 9, 2015, we further amended the line of credit to modify the event of default with respect to a change in the composition of a majority of our Board ofDirectors in a period of 12 consecutive months, to no longer exclude from the determination any individual whose nomination for an assumption of office asa member of our Board of Directors occurred as a result of a solicitation of proxies or consents that was not made by or on behalf of our Board of Directors.As of January 30, 2016, we were in compliance with all of our 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 operating leases.We lease approximately 172,000 square feet for our corporate headquarters and distribution center from a company that is owned by the co-founders ofTillys. These buildings are located at 10 and 12 Whatney, Irvine, California. The lease expires on December 31, 2017, with two remaining five-year renewaloption periods. The land component of this lease is accounted for as an operating lease and the building component is accounted for as a capital lease.39Table of ContentsWe lease approximately 26,000 square feet of office and warehouse space with a company that is owned by one of the co-founders of Tillys. This building islocated 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 Tillys. Thisbuilding is located at 17 Pasteur, Irvine, California. The lease is accounted for as an operating lease and expires on October 31, 2021.With the exception of the corporate headquarters and distribution center and warehouse leases discussed above, our leases are generally non-cancellableoperating leases expiring at various dates through fiscal year 2027. Certain leases provide for additional rent based on a percentage of sales and annual rentincreases based upon the Consumer Price Index. In addition, many of our store leases contain certain co-tenancy provisions that permit us to pay rent basedon a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in such lease.As of January 30, 2016, our contractual cash obligations over the next several periods are set forth below: Payments Due by Period Total Less Than1 Year 1-3 Years 3-5 Years More Than5 Years (in thousands)Capital Lease Obligations (a)$1,801 $940 $861 $— $—Operating Lease Obligations (b)429,056 70,168 132,413 102,322 124,153Purchase Obligations (c)1,651 1,028 505 118 —Total$432,508 $72,136 $133,779 $102,440 $124,153 (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 ofour corporate 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.(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 as discussedabove.Critical Accounting Policies and EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the appropriate applicationof certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in ourconsolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differfrom our estimates.We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimatesare reevaluated on an ongoing basis and adjustments are made when facts and circumstances dictate a change.The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our consolidatedfinancial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can 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.40Table of ContentsWe have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policieswith respect to revenue recognition, merchandise inventories, long-lived assets, share-based compensation and accounting for income taxes, which are morefully described below.Revenue RecognitionRevenue is recognized for store sales when the customer receives and pays for the merchandise at the register. Taxes collected from our customers arerecorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at thetime the merchandise is received by the customer. We defer e-commerce revenue and the associated product and shipping costs for shipments that are in-transit to the customer. Customers typically receive goods within four days of shipment. Amounts related to shipping and handling that are billed tocustomers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income.Merchandise InventoriesMerchandise inventories are stated at the lower of cost or market. Market is determined based on the estimated net realizable value, which generally is themerchandise selling price. Cost is calculated using the retail inventory method. Under the retail inventory method, inventory is stated at its current 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 current andanticipated 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.To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross margin, operatingincome and the carrying value of inventories. Our success is largely dependent upon our ability to anticipate the changing fashion tastes of our customersand to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brandpreferences of our customers, we may experience lower sales, excessive inventories and more frequent and extensive markdowns, which would adverselyaffect 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 last physicalinventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mix andchanges in shrinkage trends. We perform physical inventory counts at least once per year for the entire chain of stores and our distribution center and adjustthe 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 30, 2016 and January 31, 2015 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,41Table of Contentswith such estimated fair values determined using the best information available. Quarterly, we assess whether events or changes in circumstances haveoccurred that potentially indicate the carrying value of long-lived assets may not be recoverable.The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales and gross margin performance.Factors used in the valuation of long-lived assets with finite lives include, but are not limited to, discount rates, management’s plans for future operations,recent operating results and projected future cash flows. If our net sales or gross profit performance or other estimated operating results are not achieved at orabove our forecasted level, or inflation exceeds our forecast and we are unable to recover such costs through price increases, the carrying value of certain ofour 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, whichestablishes accounting for equity instruments exchanged for employee services. Under the provisions of this statement, share-based compensation expense ismeasured 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 the employee’srequisite service period (generally the vesting period of the equity grant). As required under this guidance, we estimate forfeitures for options granted whichare not expected to vest. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our share-basedcompensation 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 the fairvalue 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, suchas 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.•Expected Term. We have limited historical information regarding expected option term. Accordingly, we determined the expected stock option termof the awards using the latest historical data available from comparable public companies and our expectation of exercise behavior.•Volatility. As we do not have a significant trading history for our Class A common stock, the expected stock price volatility for each grant ismeasured using the average of historical daily price changes of comparable public companies’ common stock over the most recent period equal tothe expected term of our stock option awards. We intend to consistently apply this process using the same or similar public companies until asufficient amount of historical information regarding the volatility of our own common stock share price becomes available. However, if thecircumstances change so the identified companies are no longer similar to us, we will select companies we believe are more suitable and use theirpublicly available share prices in the calculation.•Risk-Free Rate. The risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected term of thestock options for each stock option group.•Dividend Yield. Tilly's, Inc. has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future.Consequently, we used an expected dividend yield of zero.If any of the assumptions used in the Black-Scholes model change significantly, share-based compensation expense for future awards may differ materiallycompared with the expense for awards granted previously.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.Accounting for Income TaxesWe account for income taxes and the related accounts using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes, or ASC740. Under this method, we accrue income taxes payable or refundable and recognize deferred tax assets and liabilities based on differences between GAAPand tax bases of assets and liabilities. We measure deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences areexpected to reverse, and recognize the effect of a change in enacted rates in the period of enactment.42Table of ContentsWe record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider allavailable positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planningstrategies and recent financial operations.We establish assets and liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognitionthreshold. We include in income tax expense any interest and penalties related to uncertain tax positions.Recently Issued Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update, or ASU, No. 2014-09 Revenue from Contracts withCustomers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 outlines principles that govern revenuerecognition at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09, which will become effective for us in thefirst quarter of fiscal 2018, may be applied retrospectively for each period presented or retrospectively with the cumulative effect recognized in the openingretained earnings balance in fiscal year 2018. We are in the process of evaluating the impact of adopting the new standard on our consolidated financialstatements.In November 2015, the FASB issued ASU No. 2015-17 Balance Sheet Classification of Deferred Tax Assets, or ASU No. 2015-17, which simplifies thepresentation of deferred tax liabilities and assets requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement offinancial position. ASU 2015-17 is effective for us in the first quarter of fiscal 2017, with early adoption permitted. We expect the new standard to impact thepresentation of deferred tax assets as noncurrent in our consolidated balance sheets.In February 2016, the FASB issued ASU, No. 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases aseither finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification willdetermine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is alsorequired to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with aterm of 12 months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for us in the first quarter of fiscal2019, with early adoption permitted. The new standard is expected to impact our consolidated financial statements as we conduct all of our retail sales andcorporate operations in leased facilities. We are in the process of evaluating the impact of adopting the new standard on our consolidated financialstatements.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 of January 30, 2016and January 31, 2015, 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 of inflation dueto the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have beenimmaterial.Foreign Exchange Rate RiskWe currently source all merchandise through domestic vendors. We source certain fixtures and materials from various suppliers in other countries. Allpurchases are denominated in U.S. dollars, and therefore we do not hedge using any derivative instruments. Historically, we have not been impacted bychanges in exchange rates.43Table of ContentsItem 8. Financial Statements and Supplementary DataTilly’s, Inc.Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firms45Consolidated Balance Sheets as of January 30, 2016 and January 31, 201547Consolidated Statements of Income for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 201448Consolidated Statements of Comprehensive Income for the fiscal years ended January 30, 2016, January 31, 2015 and February 1,201449Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 30, 2016, January 31, 2015 and February 1,201450Consolidated Statements of Cash Flows for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 201451Notes to Consolidated Financial Statements5244Table of ContentsReport of BDO USA, LLP, Independent Registered Public Accounting FirmBoard of Directors and StockholdersTilly’s, Inc.Irvine, CaliforniaWe have audited the accompanying consolidated balance sheet of Tilly’s, Inc. (the “Company”) as of January 30, 2016 and the related consolidatedstatements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis forour opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tilly’s, Inc. at January30, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in theUnited States of America./s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 30, 201645Table of ContentsReport of Deloitte & Touche, LLP, 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, and the relatedconsolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended January 31,2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis 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 as ofJanuary 31, 2015, and the results of their operations and their cash flows for each of the two years in the period ended January 31, 2015 in conformity withaccounting principles generally accepted in the United States of America./s/ Deloitte & Touche LLPCosta Mesa, CaliforniaApril 1, 201546Table of ContentsTilly’s, Inc.Consolidated Balance Sheets(In thousands, except per share data) January 30,2016 January 31,2015ASSETS Current assets: Cash and cash equivalents$51,020 $49,789Marketable securities49,932 34,957Receivables5,397 4,682Merchandise inventories51,357 51,507Prepaid expenses and other current assets12,968 12,349Total current assets170,674 153,284Property and equipment, net99,026 101,335Other assets1,051 2,932Total assets$270,751 $257,551LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$16,022 $23,109Accrued expenses18,901 12,325Deferred revenue8,174 7,075Accrued compensation and benefits5,751 5,911Current portion of deferred rent6,106 6,070Current portion of capital lease obligation (Note 9)858 806Total current liabilities55,812 55,296Long-term portion of deferred rent40,891 41,875Long-term portion of capital lease obligation (Note 9)835 1,694Total long-term liabilities41,726 43,569Total liabilities97,538 98,865Commitments and contingencies (Note 10) Stockholders’ equity: Common stock (Class A), $0.001 par value; January 30, 2016—100,000 shares authorized, 12,305 shares issuedand outstanding; January 31, 2015—100,000 shares authorized, 11,546 shares issued and outstanding12 11Common stock (Class B), $0.001 par value; January 30, 2016—35,000 shares authorized, 16,169 shares issuedand outstanding; January 31, 2015—35,000 shares authorized, 16,544 shares issued and outstanding16 17Preferred stock, $0.001 par value; January 30, 2016 and January 31, 2015—10,000 shares authorized, no sharesissued or outstanding— —Additional paid-in capital133,550 126,565Retained earnings39,613 32,072Accumulated other comprehensive income22 21Total stockholders’ equity173,213 158,686Total liabilities and stockholders’ equity$270,751 $257,551The accompanying notes are an integral part of these consolidated financial statements.47Table of ContentsTilly’s, Inc.Consolidated Statements of Income(In thousands, except per share data) Fiscal Year Ended January 30,2016 January 31,2015 February 1, 2014Net sales$550,991 $518,294 $495,837Cost of goods sold (includes buying, distribution, and occupancy costs)383,745 362,762 345,015Gross profit167,246 155,532 150,822Selling, general and administrative expenses149,150 132,343 121,085Operating income18,096 23,189 29,737Other income (expense), net52 (14) (9)Income before income taxes18,148 23,175 29,728Income tax expense10,607 9,100 11,591Net income$7,541 $14,075 $18,137Basic earnings per share of Class A and Class B common stock$0.27 $0.50 $0.65Diluted earnings per share of Class A and Class B common stock$0.27 $0.50 $0.65Weighted average basic shares outstanding28,332 28,013 27,822Weighted average diluted shares outstanding28,402 28,078 28,116The accompanying notes are an integral part of these consolidated financial statements.48Table of ContentsTilly’s, Inc.Consolidated Statements of Comprehensive Income(In thousands) For the Fiscal Years Ended January 30,2016 January 31,2015 February 1, 2014Net income$7,541 $14,075 $18,137Other comprehensive income, net of tax: Net change in unrealized gains (losses) on available-for-sale securities1 9 (5)Other comprehensive income (loss), net of tax1 9 (5)Comprehensive income$7,542 $14,084 $18,132The accompanying notes are an integral part of these consolidated financial statements.49Table 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) Balance at February 2, 201310,772 16,920 $28 $117,391 $(140) $17 $117,296Net income— — — — 18,137 — 18,137Shares converted by founders278 (278) — — — — —Stock-based compensation expense— — — 3,106 — — 3,106Restricted stock31 — — — — — —Exercise of stock options280 — — 2,389 — — 2,389Net change in unrealized gain (loss) onavailable-for-sale securities— — — — — (5) (5)Balance at February 1, 201411,361 16,642 28 122,886 17,997 12 140,923Net income— — — — 14,075 — 14,075Shares converted by founders98 (98) — — — — —Stock-based compensation expense— — — 3,499 — — 3,499Excess tax deficiencies from stock-basedcompensation— — — (124) — — (124)Restricted stock49 — — — — — —Exercise of stock options38 — — 304 — — 304Net change in unrealized gain (loss) onavailable-for-sale securities— — — — — 9 9Balance at January 31, 201511,546 16,544 28 126,565 32,072 21 158,686Net income— — — — 7,541 — 7,541Shares converted by founders375 (375) — — — — —Stock-based compensation expense— — — 3,926 — — 3,926Restricted stock48 — — — — — —Exercise of stock options336 — — 3,094 — — 3,094Taxes paid in lieu of shares issued for stockbased compensation— — — (35) — — (35)Net change in unrealized gain (loss) onavailable-for-sale securities— — — — — 1 1Balance at January 30, 201612,305 16,169 $28 $133,550 $39,613 $22 $173,213The accompanying notes are an integral part of these consolidated financial statements.50Table of ContentsTilly’s, Inc.Consolidated Statements of Cash Flows(In thousands) Fiscal Year Ended January 30,2016 January 31,2015 February 1, 2014Cash flows from operating activities Net income$7,541 $14,075 $18,137Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization22,808 21,237 19,367Stock-based compensation expense3,926 3,499 3,106Impairment of assets2,593 1,007 1,840Loss on disposal of assets304 118 140Gain on sales and maturities of marketable securities(100) (116) (176)Deferred income taxes1,554 1,150 (304)Excess tax benefit from stock-based compensation(95) (22) (157)Changes in operating assets and liabilities: Receivables(715) 3,863 (2,611)Merchandise inventories150 (5,241) 329Prepaid expenses and other assets(293) (255) (1,253)Accounts payable(6,993) 3,720 1,554Accrued expenses6,179 3,662 (1,796)Accrued compensation and benefits(160) 936 (1,119)Deferred rent(948) (206) 5,976Deferred revenue1,099 861 761Net cash provided by operating activities36,850 48,288 43,794Cash flows from investing activities Purchase of property and equipment(23,100) (23,636) (42,701)Proceeds from sale of property and equipment7 41 79Purchases of marketable securities(74,873) (59,884) (44,908)Maturities of marketable securities60,000 60,000 50,000Net cash used in investing activities(37,966) (23,479) (37,530)Cash flows from financing activities Proceeds from exercise of stock options3,094 304 2,389Payment of capital lease obligation(807) (758) (712)Taxes paid in lieu of shares issued for stock-based compensation(35)—— —Excess tax benefit from stock-based compensation95 22 157Net cash provided by (used in) financing activities2,347 (432) 1,834Change in cash and cash equivalents1,231 24,377 8,098Cash and cash equivalents, beginning of period49,789 25,412 17,314Cash and cash equivalents, end of period$51,020 $49,789 $25,412Supplemental disclosures of cash flow information Interest paid$133 $182 $253Income taxes paid$7,473 $4,511 $14,969Supplemental disclosure of non-cash activities Unpaid purchases of property and equipment$1,817 $1,513 $2,348The accompanying notes are an integral part of these consolidated financial statements.51Table of ContentsTilly’s, Inc.Notes to Consolidated Financial StatementsNote 1: Description of the Company and Basis of PresentationTillys is a leading destination specialty retailer of West Coast inspired casual apparel, footwear and accessories for young men, young women, boys and girls.Tillys is headquartered in Irvine, California and we operated 224 stores in 32 states as of January 30, 2016. Our stores are located in malls, lifestyle centers,‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment ofproducts as is carried in our brick-and-mortar stores, supplemented by additional online only styles. Our goal is to serve as a destination for the latest, mostrelevant merchandise and brands important to our customers.The Tillys concept began in 1982 when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984 thebusiness has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011,Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial publicoffering.On May 2, 2012, the shareholders of WOJT contributed all of their equity interests in WOJT to Tilly’s, Inc. in exchange for shares of Tilly’s, Inc. Class Bcommon stock on a one-for-one basis. In addition, WOJT terminated its “S” Corporation status and became a “C” Corporation. These events are collectivelyreferred to as the “Reorganization Transaction”. As a result of the Reorganization Transaction, WOJT became a wholly owned subsidiary of Tilly’s, Inc.As used in these Notes to Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "theCompany", "World of Jeans and Tops", "WOJT", "we", "our", "us" and "Tillys" refer to WOJT before the Reorganization Transaction (as defined above), and toTilly's, Inc. and its subsidiary after the Reorganization Transaction.Fiscal YearOur fiscal year ends on the Saturday closest to January 31. Fiscal years 2015, 2014 and 2013 ended on January 30, 2016, January 31, 2015 and February 1,2014, respectively. Fiscal years 2015, 2014 and 2013 each included 52 weeks.Segment ReportingAccounting principles generally accepted in the United States (“GAAP”) has established guidance for reporting information about a company’s operatingsegments, including disclosures related to our products and services, geographic areas and major customers. We identify our operating segments based onhow our business is managed and evaluated. Our operating segments have been aggregated into one reportable segment based on the similar nature ofproducts sold, production, merchandising and distribution processes involved, target customers and economic characteristics. All of our identifiable assetsare in the United States.Note 2: Summary of Significant Accounting PoliciesCash and Cash EquivalentsWe consider 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. We classify all marketable securities within current assets on our consolidated balance sheet, including thosewith maturity dates beyond twelve months, as they are available to support our current operational liquidity needs.52Table of ContentsMerchandise InventoriesMerchandise inventories are comprised of finished goods offered for sale at our retail stores and online. Inventories are stated at the lower of cost or marketusing the retail inventory method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. We believe that the retailinventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $6.7 million, $6.7 million and $6.6 million infiscal years 2015, 2014 and 2013, respectively, are included in cost of goods sold in the Consolidated Statements of Income.We review our inventory levels to identify slow-moving merchandise and generally use markdowns to clear this merchandise. At any given time,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. Our management bases the decision to mark down merchandise primarily upon its current sell-throughrate and the age of the item, among other factors. These markdowns may have an adverse impact on earnings, depending on the extent and amount ofinventory affected. Markdowns are recorded as an increase to cost of goods sold in the consolidated statements of income. Total markdowns, includingpermanent and promotional markdowns, on a cost basis were $41.5 million, $37.0 million and $35.7 million in fiscal years 2015, 2014 and 2013,respectively. In addition, we accrued $0.6 million and $0.9 million for planned but unexecuted markdowns, including markdowns related to slow movingmerchandise, as of January 30, 2016 and January 31, 2015, respectively.Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated usefullives of the assets. Equipment is depreciated over five to seven years. Furniture and fixtures are depreciated over five years. Computer software is depreciatedover three years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the lease or the estimateduseful life of the improvement. The cost of assets sold or retired and the related accumulated depreciation is removed from the accounts with any resultinggain or loss included in net income.Repairs and maintenance costs are charged directly to expense as incurred. Major renewals, replacements and improvements that substantially extend theuseful life of an asset are capitalized and depreciated.Impairment of Long-Lived AssetsImpairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts maynot 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 business strategies. At leastquarterly, 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 theweighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware andsoftware, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniquesthat could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevantand reliable means by which to determine fair value in this circumstance. Refer to "Note 11: Fair Value Measurements", for further information.Operating LeasesWe lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/orcontingent rent provisions. We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the differencebetween the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a percentage of sales in excess ofspecified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.Deferred Rent and Tenant AllowancesDeferred rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the dateof possession and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes tenantallowances received from landlords in accordance with negotiated53Table of Contentslease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date ofpossession.Revenue RecognitionRevenue is recognized for store sales when the customer receives and pays for the merchandise at the register. Taxes collected from our customers arerecorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at thetime the merchandise is received by the customer. We defer e-commerce revenue and the associated product and shipping costs for shipments that are in-transit to the customer. Customers typically receive goods within four days of shipment. Amounts related to shipping and handling that are billed tocustomers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income. For fiscal years 2015,2014 and 2013, shipping and handling fee revenue included in net sales was $2.7 million, $2.6 million, $3.3 million, respectively.We accrue for estimated sales returns by customers based on historical sales return results. Sales return accrual activity for fiscal years 2015, 2014 and 2013 isas follows (in thousands): Fiscal Year Ended January 30,2016 January 31,2015 February 1,2014Beginning balance$648 $573 $703Provisions20,835 16,875 15,938Usage(20,477) (16,800) (16,068)Ending balance$1,006 $648 $573We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift cardbalances. The customer liability balance was $8.2 million and $7.1 million as of January 30, 2016 and January 31, 2015, respectively, and is included indeferred revenue on the balance sheets. Our gift cards do not have expiration dates; however, over time, the redemption of some gift cards becomes remoteand in most cases there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card “breakage”). An assessment of the ultimatenon-redemption rate of gift cards is performed when enough time has passed since the activation of the cards to enable a determination of the ultimatebreakage rate based upon historical redemption experience. This date of assessment has historically been two full fiscal years after the fiscal year 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, $0.8million and $0.6 million in fiscal years 2015, 2014 and 2013, 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 •Costs 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.•Buying, distribution and occupancy costs, 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, occupancycosts, and depreciation;54Table of Contents•freight expenses associated with moving merchandise inventories from our distribution center to our stores and e-commerce customers; and•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 Pre-opening CostsStore pre-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 Consolidated Statements of Income.AdvertisingWe expense advertising costs as incurred, except for direct-mail advertising expenses which are recognized at the time of mailing. Advertising costs includesuch things as production and distribution of print and digital catalogs; print, online and mobile advertising costs; radio advertisements; and grand openingsand other events. Advertising expense, which is classified in selling, general and administrative expenses in the accompanying Consolidated Statements ofIncome, was $19.7 million, $15.7 million and $14.1 million in fiscal years 2015, 2014 and 2013, respectively.Share-Based CompensationWe apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-StockCompensation (“ASC 718”), for accounting for equity instruments exchanged for employee services. Under the provisions of this statement, share-basedcompensation expense 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 basisover the employee’s requisite service period (generally the vesting period of the equity grant). As required under this guidance, we estimate forfeitures foroptions granted which are not expected to vest. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value ofshare-based compensation expense. Refer to “Note 12: Share-Based Compensation” for further information.Income TaxesWe account for income taxes and the related accounts using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes (“ASC740”). Under this method, we accrue income taxes payable or refundable and recognize deferred tax assets and liabilities based on differences between GAAPand tax bases of assets and liabilities. We measure deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences areexpected to reverse, and recognize the effect of a change in enacted rates in the period of enactment.We establish assets and liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognitionthreshold. We include in income tax expense any interest and penalties related to uncertain tax positions. Refer to “Note 14: Income Taxes”, for furtherinformation.Earnings per ShareBasic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weightedaverage number of shares outstanding adjusted for the incremental shares attributed to55Table of Contentsoutstanding options to purchase common stock. Incremental shares of 70 thousand, 65 thousand and 294 thousand in fiscal years 2015, 2014 and 2013,respectively, were used in the calculation of diluted earnings per share. 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 30, 2016 andJanuary 31, 2015, and at various times throughout these years, we had cash in financial institutions in excess of the $250,000 amount insured by the FederalDeposit Insurance Corporation. We typically invest our cash in highly rated, short-term commercial paper or in interest-bearing money market funds.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptionsaffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews itsestimates based on currently available information. Changes in facts and circumstances may result in revised estimates.Correction of an Immaterial Error to Previously Issued Financial StatementsSubsequent to the issuance of our January 31, 2015 consolidated financial statements, management determined that the change in deferred income taxesshould have been presented as a cash inflow of $1.2 million in the fiscal year ended January 31, 2015 and a cash outflow of $0.3 million in the fiscal yearended February 1, 2014 with a corresponding change to prepaid expenses and other assets, with no net impact to total cash flows provided by operatingactivities. As a result, we corrected our accompanying fiscal 2014 and 2013 consolidated statements of cash flows. Management has concluded the errors areimmaterial to the consolidated financial statements as of and for the years ended January 31, 2015 and February 1, 2014. New Accounting StandardsIn May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue from Contracts withCustomers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 outlines principles that govern revenuerecognition at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09, which will become effective for us in thefirst quarter of fiscal 2018, may be applied retrospectively for each period presented or retrospectively with the cumulative effect recognized in the openingretained earnings balance in fiscal year 2018. We are in the process of evaluating the impact of adopting the new standard on our consolidated financialstatements.In November 2015, the FASB issued ASU No. 2015-17 Balance Sheet Classification of Deferred Tax Assets, which simplifies the presentation of deferred taxliabilities and assets requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 iseffective for us in the first quarter of fiscal 2017, with early adoption permitted. The new standard is expected to impact the presentation of deferred tax assetsas noncurrent in our consolidated balance sheets.In February 2016, the FASB issued ASU, No. 2016-02, Leases (ASC 842). The new standard requires lessees to apply a dual approach, classifying leases aseither finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification willdetermine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is alsorequired to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with aterm of 12 months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for us in the first quarter of fiscal2019, with early adoption permitted. The new standard is expected to impact our consolidated financial statements as we conduct all of our retail sales andcorporate operations in leased facilities. We are in the process of evaluating the impact of adopting the new standard on our consolidated financialstatements.56Table of ContentsNote 3: Marketable SecuritiesMarketable securities are classified as available-for-sale and consisted entirely of commercial paper, all of which was less than one year from maturity. Thefollowing table summarizes investments in marketable securities at January 30, 2016 and January 31, 2015 (in thousands): Cost GrossUnrealizedHoldingGains FairValueCommercial paper at January 30, 2016$49,894 $38 $49,932 Commercial paper at January 31, 2015$34,922 $35 $34,957For fiscal years 2015, 2014 and 2013, we recognized gains on investments of $0.1 million, $0.1 million and $0.2 million, respectively, for commercial paperwhich matured during the period. Upon recognition of the gains, we reclassified these amounts out of accumulated other comprehensive income and intoother income (expense), net, on the Consolidated Statements of Income.Note 4: ReceivablesAt January 30, 2016 and January 31, 2015, receivables consisted of the following (in thousands): January 30, 2016 January 31,2015Credit and debit card receivables$2,698 $2,685Tenant allowances due from landlords1,749 1,789Other950 208Total receivables$5,397 $4,682We establish a receivable for amounts we expect to collect. The majority of year-end receivables are collected within the following fiscal quarter. We havenot historically had significant write-offs for these receivables.Note 5: Prepaid Expenses and Other Current AssetsAt January 30, 2016 and January 31, 2015, prepaid expenses and other current assets consisted of the following (in thousands): January 30,2016 January 31,2015Prepaid rent$7,022 $6,596Deferred taxes3,897 3,594Prepaid insurance776 704Prepaid maintenance646 753Prepaid marketing305 411Other322 291Total prepaid expenses and other current assets$12,968 $12,34957Table of ContentsNote 6: Property and EquipmentAt January 30, 2016 and January 31, 2015, property and equipment consisted of the following (in thousands): January 30,2016 January 31,2015Leasehold improvements$131,414 $124,029Furniture and fixtures40,723 37,657Machinery and equipment30,163 28,771Building under capital lease7,840 7,840Computer hardware and software27,415 24,583Construction in progress2,940 2,454Vehicles1,709 1,470 242,204 226,804Accumulated depreciation(143,178) (125,469)Property and equipment, net$99,026 $101,335Depreciation expense related to property and equipment was $22.8 million, $21.2 million and $19.4 million in fiscal years 2015, 2014 and 2013,respectively.We incurred costs of $23.4 million, $22.8 million and $42.2 million for capital expenditures in fiscal years 2015, 2014 and 2013, respectively.Impairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts maynot be recoverable.We recorded non-cash impairment charges of $2.6 million, $1.0 million and $1.8 million in selling, general and administrative expensesin fiscal years 2015, 2014 and 2013, respectively, to write down the carrying value of long-lived assets to their estimated fair values. Refer to "Note 11: FairValue Measurements", for further information.If we are not able to achieve our projected key financial metrics, we may incur additional impairment in the future for long-lived assets.Note 7: Accrued ExpensesAt January 30, 2016 and January 31, 2015, accrued expenses consisted of the following (in thousands): January 30, 2016 January 31, 2015Sales and use taxes payable$6,305 $1,611Income taxes payable2,218 600Accrued construction1,600 1,202Merchandise returns1,006 648Minimum rent and common area maintenance581 927Other7,191 7,337Total accrued expenses$18,901 $12,325Note 8: Line of CreditOur amended and restated credit agreement with Wells Fargo Bank, N.A. ("Bank") provides for a $25.0 million revolving line of credit with a maturity dateof May 31, 2017. The interest rate charged on borrowings is selected at our discretion at the time of draw between the London Interbank Offered Rate,plus 1.00%, or at the Bank’s prime rate. The line of credit is secured by substantially all of our assets. As a sub-feature under the revolving line of credit, theBank may also issue stand-by and/or commercial letters of credit up to $15.0 million.We are required to maintain certain financial and non-financial covenants in accordance with the line of credit. The financial covenants require certain levelsof leverage and profitability, such as (i) an aggregate maximum net loss after taxes not to exceed $5 million (measured at the end of each fiscal quarter), withno more than one annual net loss after taxes for any fiscal58Table of Contentsyear (in either case, excluding all charges for impairment of goodwill, other intangibles and store assets impairment on the balance sheet, in an aggregateamount 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 dividedby total tangible net worth.On July 9, 2015, we further amended the agreement to modify the event of default with respect to a change in the composition of a majority of our Board ofDirectors in a period of 12 consecutive months, to no longer exclude from the determination any individual whose nomination for an assumption of office asa member of our Board of Directors occurred as a result of a solicitation of proxies or consents that was not made by or on behalf of our Board of Directors.As of January 30, 2016, we were in compliance with all of our covenants and had no outstanding borrowings under the revolving credit facility.Note 9: LeasesWe conduct all of our retail sales and corporate operations in leased facilities. Lease terms generally range up to ten years and provide for escalations in baserents. We are generally not obligated to renew leases. Certain leases provide for additional rent based on a percentage of sales and annual rent increasesgenerally based upon the Consumer Price Index. In addition, many of the store leases contain certain co-tenancy provisions that permit us to pay rent basedon a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease.Operating leasesWe lease office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We incurred rentexpense of $0.4 million, $0.3 million and $0.3 million in fiscal years 2015, 2014 and 2013, respectively, related to this lease. Pursuant to the leaseagreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but aminimum of 3%, in any one annual increase. The lease expires on June 30, 2022.We lease a building (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commercedistribution center. We incurred rent expense of $0.9 million, $0.9 million and $0.9 million in fiscal years 2015, 2014 and 2013, respectively, related to thislease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, notto exceed 7%, but a minimum of 3%, in any one annual increase. The lease expires on October 31, 2021.We previously leased warehouse space (15 Chrysler, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We incurred rentexpense of $0.1 million and $0.2 million in fiscal years 2014 and 2013, respectively, related to this lease. The lease expired on October 31, 2014. Wesubleased part of the building to an unrelated third party. Sublease income was $0.1 million in fiscal years 2014 and 2013.59Table of ContentsFuture minimum rental commitments, by year and in the aggregate, under non-cancellable operating leases, including fixed common area maintenancecharges, if any, for the above buildings at 11 Whatney and 17 Pasteur and all of our store locations as of January 30, 2016 are as follows (in thousands): Fiscal YearRelatedParty Other Total2016$2,267 $67,901 $70,16820172,226 64,723 66,94920181,503 63,961 65,46420191,430 53,340 54,77020201,347 46,205 47,552Thereafter1,409 122,744 124,153Total$10,182 $418,874 $429,056Rent expense under non-cancellable operating leases for fiscal years 2015, 2014 and 2013 was as follows (in thousands): January 30, 2016 January 31,2015 February 1, 2014Minimum rentals$43,176 $40,290 $38,009Contingent rentals403 832 675Total rent expense$43,579 $41,122 $38,684Capital leaseWe lease our corporate headquarters and distribution center (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders ofTillys. The lease expires on December 31, 2017, with two remaining five-year renewal option periods. The land component of this lease is accounted for as anoperating lease (included in the operating lease commitments schedule above) and the building component is accounted for as a capital lease. We incurredrent expense of $0.9 million in each of the fiscal years 2015, 2014 and 2013 related to the operating (land component) of this lease.The obligation under the capital lease was $1.7 million and $2.5 million as of January 30, 2016 and January 31, 2015, respectively. The gross amount of thebuilding under the capital lease was $7.8 million as of January 30, 2016 and January 31, 2015. The accumulated amortization of the building under thecapital lease was $6.8 million and $6.3 million as of January 30, 2016 and January 31, 2015, respectively.Future commitments under the related party capital lease obligation as of January 30, 2016 are as follows (in thousands):Fiscal Year 2016$9402017861Total minimum lease payments1,801Less: Amount representing interest108Present value of net minimum lease payments1,693Less: Current portion858Long-term portion$835Prior to signing each of the related party leases above, we received an independent market analysis regarding the property and therefore believe that the termsof each lease are reasonable and not materially different from terms we would have obtained from an unaffiliated third party.60Table of ContentsNote 10: Commitments and ContingenciesIndemnifications, Commitments, and GuaranteesDuring the normal course of business, we have made certain indemnifications, commitments, and guarantees under which we may be required to makepayments for certain transactions. These indemnifications include those given to various lessors in connection with facility leases for certain claims arisingfrom such facility or lease, and indemnifications to our directors and officers to the maximum extent permitted under the laws of the state of Delaware. Themajority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could beobligated to make, and their duration may be indefinite. We have not recorded any liability for these indemnifications, commitments, and guarantees in theaccompanying balance sheets.Purchase ObligationsAt January 30, 2016, our future minimum payments under agreements to purchase services primarily for software maintenance aggregated to $1.7 million,payable as follows: $1.0 million in fiscal 2016, $0.5 million in fiscal 2017 and $0.2 million in fiscal 2018.Legal ProceedingsFrom time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We have established loss provisions ofapproximately $0.5 million for matters in which losses are probable and can be reasonably estimated. For some matters, we are currently unable to predict theultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from anunfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of theunpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that theultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on ourfinancial condition, results of operations or cash flows.Kirstin Christiansen, Shellie Smith and Paul Haug, on behalf of themselves and all others similarly situated vs. World of Jeans & Tops, Superior Court ofCalifornia, County of Sacramento, Case No. 34-2013-139010. On January 29, 2013, the plaintiffs in this matter filed a putative class action lawsuit againstus alleging violations of California Civil Code Section 1747.08, which prohibits requesting or requiring personal identification information from a customerpaying for goods with a credit card and recording such information, subject to exceptions. The complaint seeks certification of a class, unspecified damages,injunctive relief and attorneys' fees. In June 2013, the Court granted our motion to strike portions of the plaintiffs’ complaint and granted plaintiffs leave toamend. The parties completed class certification discovery and briefing, and a hearing was held on August 13, 2015. On September 17, 2015, the Courtissued an order denying plaintiff's motion for class certification. On or around November 30, 2015, plaintiffs filed a notice of appeal of the Court's orderdenying plaintiffs' motion for class certification. The deadline for plaintiffs to file their opening brief has not yet beet set. We intend to defend this casevigorously. 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 this matterfiled a putative class action lawsuit against us alleging violations of California’s wage and hour, meal break and rest break rules and regulations, and unfaircompetition law, among other things. An amended complaint was filed on February 22, 2013, to add a claim for penalties under the California PrivateAttorneys General Act. In March 2013, we filed a motion to compel arbitration, which was denied in June 2013 and later affirmed on appeal. In October 2014,we filed an answer to the amended complaint. The parties attended a mediation proceeding and reached a resolution that will be presented to the Court forapproval.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. The matter is in pre-class certification motion discovery state. We intent todefend this case vigorously.Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. On September 1, 2015, plaintiff filed a putative class action lawsuit against us, alleging61Table of Contentsviolations of California’s wage and hour rules and regulations and unfair competition law. The complaint seeks certification of a class, unspecified damages,unpaid wages, penalties, restitution, and attorneys’ fees. We intend to defend this case vigorously.On June 10, 2015, we and one of our vendors entered into a settlement arrangement with a plaintiff who filed a copyright infringement lawsuit against us andthe vendor related to certain vendor products we sell. The settlement requires that the vendor pay $2.0 million to the plaintiff over three years and we haveagreed to guarantee such payments. In the event of the vendor's default, the current estimated range of a reasonably possible loss is zero to $1.7 million. Ifrequired to perform under this settlement, we would utilize all available rights of offset to reduce our potential loss, including application of amounts owedby us to the vendor from our ongoing purchases of the vendor's merchandise and/or the enforcement of a security interest we have in the vendor's intellectualproperty.Note 11: Fair Value MeasurementsWe determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of anasset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used todetermine fair value is as follows:•Level 1 – Quoted prices in active markets for identical assets and liabilities.•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of theassets or liabilities.•Level 3 – Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significantto the fair value of the assets or liabilities.We measure certain financial assets at fair value on a recurring basis, including our 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 prices in active markets.The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilizeobservable inputs such as interest rates and yield curves) based on information provided by independent third party entities.We did not make any transfers between Level 1 and Level 2 financial assets during fiscal years 2015, 2014 and 2013. Furthermore, as of January 30, 2016 andJanuary 31, 2015, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine ifsignificant inputs have changed that would impact the fair value hierarchy disclosure.Financial AssetsIn accordance with the provisions of ASC 820, we categorized our financial assets based on the priority of the inputs to the valuation technique for theinstruments as follows (in thousands): January 30, 2016 January 31, 2015 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3Cash equivalents: Money market securities$42,626 $— $— $34,433 $— $—Marketable securities: Commercial paper$— $49,932 $— $— $34,957 $—Impairment of Long-Lived AssetsAn impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts forsuch asset may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in our businessstrategies. An evaluation is62Table of Contentsperformed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores.If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and theestimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. Withregard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, we consider the assets at eachindividual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue costand effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determinefair value in this circumstance.On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets maynot be recoverable. Based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operationsand the projected outlook for each of our stores, we determined that nine, two and four stores, respectively, in fiscal years 2015, 2014 and 2013, would not beable to generate sufficient cash flows over the remaining term of the related leases to recover our investment in the respective stores. As a result, we recordednon-cash impairment charges of approximately $2.6 million, $1.0 million and $1.8 million in fiscal years 2015, 2014 and 2013, respectively, to write-downthe carrying value of certain long-lived store assets to their estimated fair values. Fiscal Year Ended January 30, 2016 January 31, 2015 February 1, 2014 ($ in thousands)Carrying value of assets with impairment$3,589 $1,007 $1,840Fair value of assets impaired$996 $— $—Number of stores tested for impairment20 15 11Number of stores with impairment9 2 463Table of ContentsNote 12: Share-Based CompensationThe Tillys 2012 Amended and Restated Equity and Incentive Award Plan, as amended in June 2014 (the "2012 Plan"), authorizes up to 4,413,900 shares forissuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store salesgrowth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As ofJanuary 30, 2016, there were 2,355,613 shares still available for future issuance under the 2012 Plan.OptionsWe grant stock options to certain employees that gives them the right to acquire our Class A common stock under the 2012 Plan. The exercise price ofoptions granted is equal to the closing price per share of our stock at the date of grant. The nonqualified options vest at a rate of 25% on each of the first fouranniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten yearsfrom the date of grant.The following table summarizes our stock option activity for fiscal year 2015: StockOptions Grant DateWeightedAverageExercise Price WeightedAverageRemainingContractualLife (in Years) AggregateIntrinsicValue(1) (in years) ($ in thousands)Outstanding at January 31, 20152,880,040 $13.03 Granted585,000 $6.91 Exercised(336,140) $9.21 Forfeited(381,000) $12.97 Expired(936,575) $14.69 Outstanding at January 30, 20161,811,325 $10.93 7.5 $218Vested and expected to vest at January 30, 20161,723,520 $11.06 7.4 $194Exercisable at January 30, 2016693,450 $12.87 5.5 $2 (1)Intrinsic value for stock options is defined as the difference between the market price of the our Class A common stock on the last business day of thefiscal year and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market value pershare was $6.49 at January 30, 2016.The total intrinsic value of options exercised in fiscal years 2015, 2014 and 2013 was $1.7 million, $0.1 million and $1.6 million, respectively.The total fair value of options vested in fiscal years 2015, 2014 and 2013 was $4.6 million, $3.5 million and $3.0 million, respectively.The total proceeds received from the exercise of stock options in fiscal years 2015, 2014 and 2013 was $3.1 million, $0.3 million and $2.4 million,respectively. The tax benefit realized from stock options exercised in fiscal years 2015, 2014 and 2013 was $0.7 million, $0.1 million and $0.7 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 our stock over the option’sexpected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We estimate forfeitures based on ananalysis of the award recipients’ positions and the vesting period of the awards. We will issue shares of Class A common stock when the options are exercised.64Table of ContentsThe fair values of stock options granted in fiscal years 2015, 2014 and 2013 were estimated on the grant dates using the following assumptions: Fiscal Year Ended January 30,2016 January 31,2015 February 1, 2014Average fair value per option granted$3.06 $5.19 $6.31Expected option term(1)5.0 years 5.0 years 5.0 yearsExpected volatility factor(2)49.68% 46.84% 56.19%Risk-free interest rate(3)1.64% 1.76% 0.842%Expected annual dividend yield—% —% —% (1)We have limited historical information regarding expected option term. Accordingly, we determine the expected option term of the awards using thelatest historical data available from comparable public companies and management’s expectation of exercise behavior.(2)Stock volatility for each grant is measured using the weighted average of historical daily price changes of our competitors’ common stock over themost recent period equal to the expected option term of the 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 StockRestricted stock awards ("RSAs") represent restricted shares issued upon the date of grant in which the recipient's rights in the stock are restricted until theshares are vested, whereas restricted stock units represent shares issuable in the future upon vesting. Under the 2012 Plan, we grant RSAs to independentmembers of our Board of Directors and restricted stock units to certain employees. RSAs granted to Board members vest at a rate of 50% on each of the firsttwo anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vestingdates. The restricted stock units granted to certain employees vest at a rate of 25% on each of the first four anniversaries of the grant date provided that therespective recipient continues to be employed by us through each of those vesting dates. We determine the fair value of restricted stock underlying the RSAsand restricted stock units based upon the closing price of our Class A common stock on the date of grant.A summary of the status of non-vested restricted stock as of January 30, 2016 and changes during fiscal year 2015 are presented below: Shares Weighted-AverageGrant-DateFair ValueNonvested at January 31, 201548,584 $9.88Granted335,740 $15.15Vested(41,736) $12.48Forfeited(118,000) $16.07Nonvested at January 30, 2016224,588 $14.02The weighted-average grant-date fair value of restricted stock granted during the years ended January 31, 2015 and February 1, 2014 was $8.27 and $16.18,respectively.The total fair value of restricted stock vested was $0.4 million, $0.2 million and $0.2 million in fiscal years 2015, 2014 and 2013, respectively.We recorded a total of $3.9 million, $3.5 million and $3.1 million of share-based compensation expense in fiscal years 2015, 2014 and 2013, respectively.At January 30, 2016, there was $5.7 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stockawards. This cost has a weighted average remaining recognition period of 2.7 years.The following table summarizes share-based compensation recorded in the Consolidated Statements of Income:65Table of Contents Fiscal Year Ended January 30, 2016 January 31, 2015 February 1, 2014Cost of goods sold$991 $750 $694Selling, general and administrative expenses2,935 2,749 2,412Stock-based compensation$3,926 $3,499 $3,106Note 13: Retirement Savings PlanThe Tillys 401(k) Plan (the “401(k) Plan”) is a qualified plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan covers all employees thathave attained age 21 and completed at least three months of employment tenure. Matching contributions to the 401(k) Plan by the Company are made at thediscretion of our Board of Directors. Total employer contributions to the 401(k) Plan totaled $0.7 million, $0.7 million and $0.6 million in fiscal years 2015,2014 and 2013, respectively.Note 14: Income TaxesThe components of income tax expense for fiscal years 2015, 2014 and 2013 were as follows (in thousands): Fiscal Year Ended January 30, 2016 January 31, 2015 February 1, 2014Current: Federal$7,614 $6,433 $9,591State1,439 1,517 2,304 9,053 7,950 11,895Deferred: Federal1,105 1,387 (293)State449 (237) (11) 1,554 1,150 (304)Total income tax expense$10,607 $9,100 $11,591A reconciliation of income tax expense to the amount computed at the federal statutory rate for fiscal years 2015, 2014 and 2013 is as follows (in thousands): Fiscal Year Ended January 30, 2016 January 31, 2015 February 1, 2014Federal taxes at statutory rate$6,352 $8,111 $10,405State and local income taxes, net of federal benefit1,098 885 1,517Return to provision adjustments130 (15) (369)Stock compensation discrete items (1)2,592 — —Other435 119 38Total income tax expense$10,607 $9,100 $11,591(1)This amount includes the impact of discrete items related to the expiration of stock options, exercises of stock options and the settlement of restrictedstock units that are recorded to income tax expense which represents stock-based compensation cost previously recognized by us that was greater thanthe deduction allowed for income tax purposes based on the price of our common stock on the date of expiration, exercise or vesting.Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes and (b) operating loss and tax credit66Table of Contentscarry-forwards. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, weconsider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,tax planning strategies and recent financial operations. Significant components of deferred tax assets and liabilities as of January 30, 2016 and January 31,2015 were as follows (in thousands): January 30, 2016 January 31, 2015Deferred tax assets: Deferred rent$5,165 $5,134Stock-based compensation3,061 5,127Accrued expenses1,366 1,262Inventories2,307 2,206Compensation and benefits676 630Capital lease274 388Deferred revenue247 227Tax credits161 119Total deferred tax assets13,257 15,093Deferred tax liabilities: Property and equipment(8,030) (8,279)Prepaid expenses(684) (717)Marketable securities(15) (14)Total deferred tax liabilities(8,729) (9,010)Net deferred tax asset$4,528 $6,083Included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets are $3.9 million at January 30, 2016 and $3.6 million atJanuary 31, 2015 of current deferred tax assets and included in “Other assets” in the Consolidated Balance Sheets are noncurrent deferred tax assets of $0.6million at January 30, 2016 and $2.5 million at January 31, 2015.As of January 30, 2016 and January 31, 2015, we had approximately $0.2 million of California Enterprise Zone credit carryovers. These credits will begin toexpire during fiscal year 2022 if not utilized.Uncertain Tax PositionsAs of January 30, 2016 and January 31, 2015, there were no material unrecognized tax benefits. We do not anticipate that there will be a material change inthe balance of the unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income taxexpense. We did not recognize any interest or penalties related to unrecognized tax benefits during fiscal years 2015, 2014 and 2013.In the third quarter of fiscal year 2014, the Internal Revenue Service initiated an examination of our federal income tax returns for the C-Corporation shortperiod year ended February 2, 2013. The examination was settled in the second quarter of fiscal 2015 without a material impact to the Company. We were notified during the first quarter of fiscal 2015 that the S-Corporation tax period ending May 1, 2012 was also selected for examination by theInternal Revenue Service. The examination was settled in the second quarter of fiscal 2015 without a material impact to the Company. In the fourth quarter of fiscal year 2015, the Internal Revenue Service initiated an examination of our federal income tax return for the year ended January 31,2015.We file income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal course of business, we are subjectto examination by taxing authorities. Fiscal years 2012 through 2014 remain subject to examination for federal tax purposes and fiscal years 2011 through2014 remain subject to examination in significant state tax jurisdictions.67Table of ContentsNote 15: Earnings Per ShareOur common stock consists of two classes: Class A and Class B. The Class A and Class B common stock have identical rights, except with respect to votingand conversion.Net income per share is computed under the provisions of ASC Topic 260, Earnings Per Share. Basic net income per share is computed based on theweighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average numberof shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method, wherebyproceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us topurchase the common shares at the average market price during the period. Potentially dilutive shares of common stock represent outstanding stock optionsand restricted stock awards. The components of basic and diluted net income per share are as follows (in thousands, except per share amounts):The components of basic and diluted earnings per share of Class A and Class B common stock, in aggregate, for fiscal years 2015, 2014 and 2013 are asfollows (in thousands, except per share amounts): Fiscal Year Ended January 30,2016 January 31,2015 February 1, 2014Net income$7,541 $14,075 $18,137Weighted average basic shares outstanding28,332 28,013 27,822Dilutive effect of stock options and restricted stock70 65 294Weighted average shares for diluted earnings per share28,402 28,078 28,116Basic earnings per share of Class A and Class B common stock$0.27 $0.50 $0.65Diluted earnings per share of Class A and Class B common stock$0.27 $0.50 $0.65The 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 common stockbecause the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Shares of Class A and ClassB 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 one voteper share and holders of Class B common stock are entitled to 10 votes per share.Total stock options and restricted stock of 1,273,000, 2,364,000 and 1,766,000 as of January 30, 2016, January 31, 2015 and February 1, 2014, respectively,have been excluded from the calculation of diluted earnings per share as the effect of including these stock options and restricted stock would have beenanti-dilutive.Note 16: Related Party TransactionsCertain LeasesAs discussed in “Note 9: Leases”, we lease certain facilities from companies that are owned by the co-founders of Tillys.Tax Indemnification AgreementsWe entered into certain tax indemnification agreements with each of the Hezy Shaked Living Trust and the Tilly Levine Separate Property Trust. Pursuant tosuch tax indemnification agreements, we agreed to indemnify, defend and hold harmless each such stockholder on an after-tax basis against additionalincome taxes, plus interest and penalties resulting from adjustments made, as a result of a final determination made by a competent tax authority, to thetaxable income our subsidiary, World of Jeans & Tops, Inc., reported as an “S” Corporation. Such agreement provides that we defend and hold harmless suchstockholders against any losses, costs or expenses, including reasonable attorneys’ fees, arising out of a claim for such tax liability.Tilly's Life CenterTilly’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 fiscal years 2015 and 2014, our Board of Directors approved support for TLC of up to $50,000 and$20,000, respectively.68Table of ContentsNote 17: Quarterly Financial Information (Unaudited)The tables below set forth unaudited selected quarterly financial data for each of the last two fiscal years (in thousands, except per share data). Each of thequarters presented was thirteen weeks in duration. The operating results in any quarter are not necessarily indicative of the results that may be expected forany future period. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared onsubstantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary fora fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our financialstatements and notes thereto included elsewhere in this report. Fiscal Year Ended January 30, 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (unaudited) (unaudited) (unaudited) (unaudited)Net sales$120,190 $130,023 $141,692 $159,086Gross profit36,052 36,596 44,641 49,957Operating income2,129 1,104 5,387 9,476Net income1,282 560 2,814 2,885Basic earnings per share$0.05 $0.02 $0.10 $0.10Diluted earnings per share$0.05 $0.02 $0.10 $0.10 Fiscal Year Ended January 31, 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (unaudited) (unaudited) (unaudited) (unaudited)Net sales$111,134 $123,060 $131,283 $152,817Gross profit31,327 34,655 40,548 49,002Operating income1,077 2,329 8,577 11,206Net income591 1,266 5,113 7,105Basic earnings per share$0.02 $0.05 $0.18 $0.25Diluted earnings per share$0.02 $0.05 $0.18 $0.25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresNot Applicable.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresAs required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer andChief Financial Officer, the effectiveness of our disclosure controls and procedures as of the 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 we file orsubmit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us inour reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls andprocedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls andprocedures.We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation and subjectto the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, thedisclosure controls and procedures69Table of Contentswere effective to provide reasonable assurance that information required to be disclosed in the reports we file 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 Financial Officerand effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies andprocedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management andmembers 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 inherent limitations.Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of suchlimitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce,though not eliminate, this risk.Management conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of January 30, 2016 using theframework set forth in the report entitled, “Internal Control — Integrated Framework (2013)", issued by the Committee of Sponsoring Organizations of theTreadway Commission, or the COSO Report. Based on management’s evaluation and the criteria set forth in the COSO Report, management concluded thatour internal control over financial reporting was effective as of January 30, 2016. Our internal control over financial reporting was not subject to attestationby our independent registered public accounting firm pursuant to the rules of the SEC that permit us, as an emerging growth company, to provide onlymanagement’s report in this annual report.Changes in Internal Control over Financial ReportingManagement has determined that, as of January 30, 2016, there were no changes in our internal control over financial reporting that occurred during our mostrecent fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.PART 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 2016 Annual Meeting of Stockholders,which will be filed with the SEC no later than 120 days after the close of the fiscal year ended January 30, 2016 (the “2016 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 our ChiefExecutive Officer, Chief Financial Officer and Principal Accounting Officer. The current version of the Code of Business Ethics is available on our websiteunder the Investor Relations section at www.tillys.com. In accordance with rules adopted by the SEC and the New York Stock Exchange, we intend topromptly disclose any amendments70Table of Contentsto certain provisions of the Code of Business Ethics, or waivers of such provisions granted to executive officers and directors, on our website under theInvestor Relations section at www.tillys.com.Item 11. Executive CompensationThe information required by this Item is incorporated herein by reference to the Company’s 2016 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 2016 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 2016 Proxy Statement.Item 14. Principal Accounting Fees and ServicesThe information required by this Item is incorporated herein by reference to the Company’s 2016 Proxy Statement.PART IV Item 15. Exhibits, Financial Statement SchedulesFinancial Statements and Financial Statement SchedulesSee “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omittedbecause they are not required or are not applicable or because the information required in those schedules either is not material or is included in 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 Annual Report on Form 10-K.71Table 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 March 30, 2016. Tilly’s, Inc. /s/ Edmond ThomasEdmond ThomasPresident, Chief Executive Officer and Director (Principal ExecutiveOfficer) /s/ Michael HenryMichael HenryChief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)72Table of ContentsPOWER OF ATTORNEYEach person whose signature appears below constitutes and appoints Edmond Thomas and Michael Henry, and each of them singly, his or her true and lawfulattorneys-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 and allcapacities, 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 Annual Report on Form 10-K has been signed by the following persons in thecapacities and as of the dates indicated on March 30, 2016. Signature Title /s/ Edmond Thomas President, Chief Executive Officer and Director(Principal Executive Officer)Edmond Thomas /s/ Michael Henry Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Michael Henry /s/ Hezy Shaked Executive Chairman of the Board and Chief Strategy OfficerHezy Shaked /s/ Doug Collier DirectorDoug Collier /s/ Seth Johnson DirectorSeth Johnson /s/ Janet Kerr DirectorJanet Kerr /s/ Jason Nazar DirectorJason Nazar /s/ Bernard Zeichner DirectorBernard Zeichner 73Table of ContentsEXHIBIT INDEX ExhibitNo. Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation of Tilly’s, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s AmendmentNo. 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-Kfiled on November 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 theRegistration Statement on Form S-1 (Registration No. 333-175299), filed on April 23, 2012) 10.1 Form of Indemnification Agreement between Tillys and each of its directors and officers (incorporated by reference to Exhibit 10.1 to theRegistrant’s Quarterly Report on Form 10-Q for the period ended August 1, 2015) 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 FormS-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(15 Chrysler, Irvine, California) (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1(Registration No. 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 periodended July 28, 2012) 10.6# Amended and Restated Tillys 2007 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Amendment No. 2 tothe 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 theRegistrant’s Amendment 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’sProxy Statement 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 AmendmentNo. 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’sAmendment No. 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 to2012 Plan Grant Notice (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 25, 2015) 74Table of Contents10.13# Offer Letter, dated as of January 15, 2011, by and between Daniel Griesemer and World of Jeans & Tops, d/b/a Tillys (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) 10.14 Cancellation of Loan Guaranty for World of Jeans & Tops dated March 9, 2011 from Union Bank (incorporated by reference to Exhibit10.21 to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on August 11,2011) 10.15 Office 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) 10.16 Office 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) 10.17 Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo Bank, NA dated as of May 3, 2012(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012) 10.17.1 Amendment No. 1 to Amended and Restated Credit Agreement and between World of Jeans & Tops and Wells Fargo, NA dated as of March17, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 19, 2015) 10.17.2 Amendment No. 2 to Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo, NA, dated as of July 9,2015 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 10, 2015) 10.18 Form of General Pledge Agreement between Tilly’s, Inc. and Wells Fargo Bank, NA dated as of May 3, 2012 (incorporated by reference toExhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012) 10.19 Form of Amended and Restated Security Agreement-Equipment, between World of Jeans & Tops and Wells Fargo Bank, NA dated as ofMay 3, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28,2012) 10.20 Form of Amended and Restated Security Agreement-Rights to Payment and Inventory, between World of Jeans & Tops and Wells FargoBank, NA dated as of May 3, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for theperiod ended April 28, 2012) 10.21 Form of Continuing Guaranty of Tilly’s, Inc. with Wells Fargo Bank, NA dated as of May 3, 2012 (incorporated by reference to Exhibit10.5 to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012) 10.22 Form of Revolving Credit Agreement Note from World of Jeans & Tops dated as of May 3, 2012 (incorporated by reference to Exhibit 10.6to the Registrant’s Quarterly Report on Form 10-Q for the period ended April 28, 2012) 10.23 Form of S Corporation Termination, Tax Allocation and Indemnification Agreement among Tilly’s, Inc., World of Jeans & Tops and theshareholders of World of Jeans & Tops (including Form of Promissory Note as Exhibit A thereto) (incorporated by reference to Exhibit10.19 to the Registrant’s Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-175299), filed on September7, 2011) 10.24 Form of Share Exchange Agreement among Tilly’s, Inc., World of Jeans & Tops and the shareholders of World of Jeans & Tops(incorporated by reference to Exhibit 10.20 to the Registrant’s Amendment No. 2 to the Registration Statement on Form S-1 (RegistrationNo. 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) 10.26# Offer Letter dated May 12, 2015 from Tilly's, Inc. to Michael Henry (incorporated by reference to Exhibit 10.2 to the Registrant's QuarterlyReport on Form 10-Q for the period ended August 1, 2015) 10.27# Offer Letter, dated October 7, 2015, for Edmond Thomas (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report onForm 8-K filed on October 8, 2015) 10.28# Separation and General Release Agreement between Daniel J. Griesemer and Tilly's dated as of October 7, 2015 (incorporated by referenceto Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on October 8, 2015) 75Table of Contents21.1* Subsidiaries of Tilly’s, Inc. 23.1* Consent of BDO USA, LLP, Independent Registered Public Accounting Firm 23.2* Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm 24.1+ Power of Attorney (included on signature page) 31.1* Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer 31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1* Section 1350 Certifications 101 The following materials from Tilly’s, Inc.’s Annual Report on Form 10-K for the year ended January 30, 2016 formatted in eXtensibleBusiness Reporting Language (XBRL): (i) Consolidated Balance Sheets as of January 30, 2016 and January 31, 2015; (ii) ConsolidatedStatements of Income for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 2014; (iii) Consolidated Statements ofComprehensive Income for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 2014; (iv) Consolidated Statementsof Stockholders’ Equity for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 2014; (v) Consolidated Statementsof Cash Flows for the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 2014; and (vi) the Notes to the ConsolidatedFinancial Statements.* Filed herewith# Management contract or compensatory plan.76Exhibit 21.1Tilly’s, Inc.Subsidiaries Subsidiary State of Incorporation/FormationWorld of Jeans & Tops CaliforniaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTilly's Inc.Irvine, CAWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-181148 and 333-198676) ofTilly's Inc. of our report dated on Form S-8 of our report dated March 30, 2016, relating to the consolidated financial statements whichappears in the Form 10-K of Tilly’s, Inc. for the year ended January 30, 2016./s/ BDO USA, LLP Costa Mesa, California March 30, 2016Exhibit 23.2CONSENT 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 reportdated April 1, 2015, relating to the consolidated financial statements of Tilly’s, Inc., appearing in the Annual Report on Form 10-K ofTilly’s, Inc. for the year ended January 30, 2016./s/ Deloitte & Touche LLP Costa Mesa, California March 30, 2016Exhibit 31.1CERTIFICATIONSI, Edmond Thomas, certify that:1.I have reviewed this annual report on Form 10-K of Tilly’s, Inc. for the fiscal year ended January 30, 2016;2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,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 our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance 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 the effectivenessof 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 recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.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 reasonably likelyto 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 control overfinancial reporting.Date: March 30, 2016 /s/ Edmond ThomasEdmond ThomasPresident, Chief Executive Officer and Director (Principal ExecutiveOfficer)Exhibit 31.2CERTIFICATIONSI, Michael Henry, certify that:1.I have reviewed this annual report on Form 10-K of Tilly’s, Inc. for the fiscal year ended January 30, 2016;2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,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 our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance 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 the effectivenessof 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 recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.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 reasonably likelyto 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 control overfinancial reporting.Date: March 30, 2016 /s/ Michael HenryMichael HenryChief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)Exhibit 32.1Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002I, Edmond Thomas, the Chief Executive Officer of Tilly’s, Inc, certify that (i) the annual report on Form 10-K for the fiscal year ended January 30, 2016(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: March 30, 2016 /s/ Edmond ThomasEdmond ThomasPresident, Chief Executive Officer and Director (Principal Executive Officer)I, Michael Henry, the Chief Financial Officer of Tilly’s, Inc, certify that (i) the annual report on Form 10-K for the fiscal year ended January 30, 2016 (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: March 30, 2016 /s/ Michael HenryMichael HenryChief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)

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