Tilly’s
Annual Report 2017

Plain-text annual report

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 February 3, 2018OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934Commission File Number: 001-35535TILLY’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: NoneIndicate 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 File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant 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, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 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. See thedefinitions of “large accelerated filer,” “accelerated filer” and “small reporting company,” and "emerging growth company" in Rule 12b-2 of the ExchangeAct: Large accelerated filer: ¨ Accelerated filer:xNonaccelerated filer: ¨ (Do not check if a smaller reporting company) Smaller reporting company:¨ Emerging growth company:¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of July 29, 2017, the aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s mostrecently completed second fiscal quarter, at July 29, 2017, was $131,459,893 based on the closing sale price of $10.12 per share at July 28, 2017.As of March 28, 2018, the registrant had 15,106,824 shares of Class A common stock, par value $0.001 per share, outstanding, and 14,028,497 shares of ClassB 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 12, 2018 are incorporated by reference into Part III of thisAnnual Report on Form 10-K. TABLE OF CONTENTS PART I Item 1. Business 5Item 1A. Risk Factors 14Item 1B. Unresolved Staff Comments 25Item 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 42Item 8. Financial Statements and Supplementary Data 43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 66Item 9A. Controls and Procedures 66Item 9B. Other Information 69 PART III Item 10. Directors, Executive Officers and Corporate Governance 69Item 11. Executive Compensation 69Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 69Item 13. Certain Relationships and Related Transactions, and Director Independence 69Item 14. Principal Accounting Fees and Services 69 PART IV Item 15. Exhibits, Financial Statement Schedules 69Item 16, Form 10-K Summary 69 Signatures 702Forward-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;•disruptions to our information systems in the ordinary course or as a result of systems upgrades;3•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.4PART I Item 1. BusinessTillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls. We believe webring together an unparalleled selection of iconic global, emerging and proprietary brands rooted in an active and outdoor lifestyle. Our stores and websiteare designed to be a seamless extension of our teen and young adult consumers' lifestyles in a stimulating environment. Tillys is headquartered in Irvine,California and we operated 219 stores in 32 states as of February 3, 2018. 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 of products as is carried in our brick-and-mortar stores, supplemented by additional online-only styles. We believe our success across a variety of real estate venues and geographies in the UnitedStates demonstrates Tillys' portability. Our goal is to serve as a destination for the most relevant 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. Tilly's, Inc., aDelaware corporation, conducted an initial public offering on May 2, 2012, becoming the publicly-traded entity that operates the Tillys business through itswholly-owned subsidiary, World of Jeans & Tops, a California corporation.Our fiscal year ends on the Saturday closest to January 31. For example, "fiscal 2017" refers to the fiscal year ended February 3, 2018, "fiscal 2016" refers tothe fiscal year ended January 28, 2017; and "fiscal 2015" refers to the fiscal year ended January 30, 2016.As used in this annual report on Form 10-K, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World ofJeans and Tops", "WOJT", "we", "our", "us", and "Tillys" refer to World of Jeans & Tops before our initial public offering, and to Tilly's, Inc. and its subsidiaryafter our initial public offering.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 over 400 third-party lifestylebrands over the course of a given year, which are complemented by our proprietary brands. Our merchandise includes a wide assortment of brands, styles,colors, sizes and price points to ensure we have what our customers want every time they visit our stores. We offer a balanced mix of merchandise acrossthe apparel, footwear and accessories categories serving young men, young women, boys and girls. We believe that by combining proven and emergingfashion trends and core style products with a vibrant blend of carefully selected music and visuals, we provide an in-store experience that is authentic,fun, and engaging for our core customers. We believe that our differentiated in-store environment, evolving selection of relevant brands, and broader anddeeper assortment positions us as a retail destination that appeals to a larger demographic than many other specialty retailers and encourages customersto visit our stores more frequently and spend more on each trip.•Dynamic merchandise model. We believe our extensive selection of third-party and proprietary merchandise allows us to identify and offer several trendssimultaneously, offer a greater range of price points, and manage our inventories more dynamically. By closely monitoring trends and shipping productto our 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 and drive traffic to our stores andonline platforms. We distribute catalogs, newspapers and postcards to potential and existing customers from our proprietary database to familiarize themwith the Tillys brand, our products, and to drive traffic to our stores and website. We offer an integrated digital platform between our online and mobileapplications for our customers to shop how and when they like and to drive further connection with them. We partner and collaborate with our vendorson exclusive, compelling in-store events and contests to build credibility with our target customers, actively involve them in our brands, and enhancethe connection between Tillys and our customers' active lifestyle. We use social media to communicate directly with our customers while alsoencouraging customers to interact with one another and provide5feedback on our events and products. We have a customer loyalty program to further engage with our customers, build customer loyalty, reward our mostloyal customers, and gain customer insights. All of these programs are complemented by digital and email marketing, as well as print advertising, tobuild customer awareness and loyalty, highlight key merchandise offerings, drive traffic to our stores and online platforms, and promote the Tillys brand.Also, through our “We Care Program”, we support and participate in various academic, art, and athletic programs at local schools and other organizationsin 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. We also have a dedicated e-commerce fulfillment center to supportour future online growth potential. Our systems enable us to respond to changing fashion trends, manage inventory in real time, and provide acustomized selection of merchandise at each location. We believe our distribution and fulfillment infrastructure can support significant growth in ourstores and e-commerce platform with minimal incremental 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, we generate e-commerce sales inall 50 states although we have physical stores in only 32 states. Our target customer regularly shops online and via mobile devices in addition to visitingstores, giving us a continued opportunity to grow our e-commerce platform over time. In fiscal 2017, we commenced implementation of a new platformfor our e-commerce website. In fiscal 2018, we plan to upgrade our mobile application to provide an enhanced customer experience. Key factors weexpect to drive growth include continuing our catalog, online and mobile application marketing efforts, enhancing the efficiency and responsiveness ofour digital capabilities, and supplementing the assortment available in our brick-and-mortar stores with additional online-only styles. We also expect toexpand marketing efforts and build brand awareness 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. We regularly update individual store profiles for every store to highlight the differences in brand performance, gender penetrations, andcustomer interests that exist within our fleet of stores. By adapting allocation strategies to capitalize on these individual store differences, we believe wecan improve sales results in our existing store base.6•Develop Omni-Channel Capabilities. We have a direct-to-consumer program that allows online orders to be fulfilled and shipped directly to ourcustomers from our brick-and-mortar stores when inventory is otherwise unavailable in our e-commerce fulfillment center. In addition, during fiscal2017, we invested in additional omni-channel capabilities allowing for online orders to be picked up in stores at our customers' discretion, allowing us tosatisfy an order from existing inventories within our stores as well as shipping product from our e-commerce fulfillment center to our stores. We believethese omni-channel capabilities will drive additional traffic to our stores and increase sales opportunities with customers who come to the store to pickup their online orders.•Reinvest in Existing Stores. We believe that re-investing in our existing stores is strategically important to enhance customer loyalty, elevate thecustomer experience and, in turn, drive additional comparable store sales. We have remodeled or refreshed many of our stores in recent years, and intendto continue to do so in the future to keep the physical representation of the Tillys brand updated and compelling for our customers.•Real Estate Opportunities. With 219 total stores at the end of fiscal 2017, we believe there are numerous attractive opportunities for Tillys to continue toopen new stores in the future. During fiscal 2018, we plan to open up to 15 new stores. Additionally, we expect to open three RSQ-branded pop-up storesto improve the brand awareness of both Tillys and our proprietary RSQ brand. With regard to existing stores, we have an aggregate of approximately 120lease decisions to make over the course of fiscal 2018 and 2019 covering a range of stores across all markets. These lease decisions include leaseextension options, lease kick-out options, and lease expirations that require negotiated renewals. In each case, our real estate decisions will be driven bythe overarching goal of improving our profitability. As a result, we may likely close stores from time to time if acceptable levels of profitability cannotbe obtained through occupancy negotiations with landlords.Merchandising, Purchasing, and Planning and AllocationMerchandisingWe seek to be viewed by our customers as the destination for the apparel, footwear and accessories that best represent their active, connected lifestyle. Webelieve we offer an unparalleled selection of relevant brands, styles, colors, sizes and price points to ensure we have what our customers want every time theyvisit our stores. Our extensive selection of third-party and proprietary merchandise allows us to identify and address trends more quickly, offer a greater rangeof price points and manage our inventories more dynamically. We offer a balanced mix of merchandise for young men, young women, boys and girls acrossthe apparel, footwear and accessories categories. We believe this category mix contributes to our broad demographic appeal. Our apparel merchandiseincludes branded, fashion and core styles for tops, outerwear, bottoms, and dresses. Accessories merchandise includes backpacks, hats, sunglasses,headphones, handbags, watches, jewelry and more. We focus on our merchandise presentation and vary the visual displays in our stores and windowsthroughout the month, presenting new looks and fashion combinations to our customers.Our ability to maintain an image consistent with our customers' 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 a selection of over 400 globally recognized, lifestyle, and emerging brandsover the course of a year. In each of the last three fiscal years, over 100 of these brands each generated net sales in excess of $0.5 million for us. We strive tokeep our merchandise mix current by continuously introducing emerging brands and styles not available at many other specialty retailers in order to identifyand respond to the evolving desires of our customers. Our third-party brands represented approximately 74%, 72% and 72% of our total net sales in fiscal2017, 2016 and 2015, respectively. No single third-party brand exceeded 7% of our total net sales in the last three years.Selected third-party brands include, in alphabetical order:• AYC• Adidas• Billabong• Brixton• Converse• Diamond Supply• Dickies• Ethika• G-Shock• Hurley• HUF • Jansport• Levi’s• LRG• Neff• Nike SB• Nixon• O’Neill• Primitive• RayBan• Riot Society• Rip Curl • Roxy• RVCA• Salty Crew• Santa Cruz• Spy• Stance• The North Face• Vans• Volcom ...and many more7We supplement our third-party merchandise assortment with our own proprietary brands across many of our product categories. We utilize our own brandedmerchandise to expand our price point range, identify and respond to changing fashion trends quickly, fill merchandise gaps and provide a deeper selectionof styles and colors for proven fashion items. Our proprietary brands represented approximately 26%, 28% and 28% of our total net sales in fiscal 2017, 2016and 2015, respectively.Examples of our proprietary branded merchandise include:BrandCategoryDenim, apparel and fragrance brand for young men, young women and kids Apparel and accessories brand for young women and girls Apparel and accessories brand for young men and boys Fragrance brand for young men Apparel and fragrance brand for young women Apparel for young women Apparel for girlsWe 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 proven and emerging 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;•perform in-store visits and 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;8•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 merchandisepurchases 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 February 3, 2018, we operated 219 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 $2.3 million per store, or $296 per square foot, in fiscal 2017.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: 2017 2016 2015Regional Mall119 114 114Off-Mall (1)85 90 90Outlet15 19 20 219 223 224(1)Includes power centers, neighborhood and lifestyle centers and street-front locations.9The table below shows the total number of stores by state as of February 3, 2018:State Number ofStores State Number ofStoresArizona 19 New Jersey 5California 91 New Mexico 1Colorado 5 New York 4Florida 20 North Carolina 2Georgia 2 Ohio 4Illinois 6 Oklahoma 3Indiana 5 Oregon 2Iowa 1 Pennsylvania 3Kansas 2 Rhode Island 1Maryland 1 South Dakota 1Massachusetts 2 Tennessee 4Michigan 3 Texas 9Minnesota 2 Utah 3Missouri 2 Virginia 4Nebraska 1 Washington 2Nevada 6 Wisconsin 3Distinctive Store ExperienceTillys is a customer-driven lifestyle brand. We are energized and inspired by our customers’ individuality and passion for an active, connected lifestyle. Ourstores bring these interests together in a vibrant, stimulating and authentic environment that is an extension of our customers’ multi-tasking lifestyle. We dothis by blending the most relevant brands and styles with music videos, product-related visuals and a dedicated team of store associates. Our associates sharethe same passion as our customers for action sports, music, art and fashion, enabling them to easily engage with our customers and make shopping at Tillys afun, social experience. Outside of our stores, we connect with our consumers using the same authentic approach, including social media, community outreachand sponsorship of contests, demos, and other events. We believe the Tillys experience drives customer awareness, loyalty and repeat visits while generatinga buzz and excitement for our brand.Store Expansion Opportunities and Site SelectionThe following table shows the number of stores opened and closed in each of our last five fiscal years: Fiscal YearStoresOpened StoresClosed Total Numberof Stores atEnd of Period201328 1 195201419 2 212201515 3 22420163 4 22320172 6 219 67 16 During fiscal 2018, we plan to open up to 15 new stores and three new RSQ-branded pop-up stores. We focus on opening new stores in locations that haveabove-average incomes and an ability to draw from a sufficient population with attractive demographics. Given the recent industry trends of decliningcustomer traffic in physical stores, we will remain opportunistic and selective about additional new store opportunities.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 an active lifestyle and promote the Tillys brand not only inside the store, but also in their schools and communities. The number of store associateswe employ generally increases during peak selling seasons, particularly the back-to-school and the winter holiday seasons, and will increase to the extentthat we open new stores.10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-CommerceOur e-commerce platform was established in 2004 and has grown significantly since inception, generating total sales of $76 million during fiscal 2017, or13.1% of our total net sales. In fiscal 2017, we commenced implementation of a new platform for our e-commerce website. Our online business is served by adedicated e-commerce fulfillment center in Irvine, California that can accommodate significant additional growth. In fiscal 2018, we plan on upgrading ourmobile application to provide an enhanced customer experience. We believe our digital platform is an extension of our brand and retail stores, providing ourcustomers a seamless shopping experience. We believe that our target customer regularly shops online through various digital channels in addition tovisiting stores. Our website serves both as a sales channel and a marketing tool to our extended customer base, including those customers in markets where wedo not currently have stores. In both fiscal 2017 and 2016, we sold merchandise to customers in all 50 states even though we have brick-and-mortar stores inonly 32 states. We also believe our fully integrated digital platform reinforces the Tillys brand image and serves as an effective advertising vehicle for ourretail stores. Our digital platform provides the same assortment available in our brick-and-mortar stores, supplemented by additional online-only styles.Similar to the merchandising approach in our stores, we frequently change the look of our website to highlight new brands and products and to encouragefrequent visits. We utilize multiple tools to drive traffic online, including our catalog, newspaper, postcards, marketing materials in our retail stores, searchengine marketing, internet ad placement, shopping site partnerships, third-party affiliations, email marketing, digital marketing and direct mail. In addition,we utilize the website to offer 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 excitement for our brand and theconnected, active lifestyle we represent. We utilize a multi-pronged marketing strategy to connect with our customers and drive traffic to our stores andonline platform, comprised of the following:•Catalog, Newspaper Ads, Postcards. We view our catalog, newspaper ads and postcards in print format and our digital-format catalog primarily as salesand marketing tools to drive online and store traffic from both existing and new customers. We also believe our marketing materials reinforce the Tillysbrand and showcases our comprehensive selection of products in settings designed to reflect our brand’s lifestyle image. We send these marketingmaterials, which include coupons that can be redeemed at stores or online, to the customers in our database several times a year, primarily around keyshopping 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. We organize a variety of events, many involving musicians, celebrities and athletes in theentertainment, music and action sports industries. Through brand partnerships such as these, we are able to connect with and engage our customers in anexciting, 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. During fiscal 2016, we launched an improved and rebranded customer loyalty program designed to interact with our customers in amore direct and targeted manner, and to provide more insight into their shopping behaviors and preferences. This program offers more frequent andcompelling rewards to our most loyal customers than our previous program.•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.11•Email Marketing. We utilize email marketing to build awareness, drive traffic to our stores and online platform and to promote local in-store promotionsand events. We periodically send emails to the customers in our proprietary database to introduce new brands and products, offer promotions on selectmerchandise, 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 2027. Extensive investments have been made to the distribution-center infrastructure, focused around systems automation, material-handling equipment, radio frequency technologies, and automated sorters in order to enhance our processing speed and long term scalability in support ofour planned growth.We also operate a dedicated e-commerce fulfillment center in Irvine, California to handle all e-commerce orders in a highly automated environment thatleverages material handling equipment, automated systems and other technologies consistent with our current distribution facility. This investment supportsour future e-commerce growth initiatives.We ship merchandise to our stores multiple times per week, providing them with a steady flow of both new and replenishment products. Merchandise isshipped in a floor-ready format (carrying price tickets, sensor tags and with hangers where appropriate) which allows store employees to spend less timeprocessing the merchandise and more time with our customers. We use our own fleet of trucks to ship merchandise to our Southern California stores and third-party distributors to ship merchandise to stores outside of our local area.We believe our distribution and fulfillment infrastructure can support significant growth of our e-commerce platform and additional stores with minimalincremental 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 changes in our business. We believe that our information systems are scalable, flexible and have the capacity to accommodate our current growthplans.During the fall of fiscal 2017, we began implementation of our new point-of-sale, order management, and customer relationship management systems throughan end-to-end, cloud-based suite of technology additions that will improve the customer experience wherever, whenever and however our customers engagewith us. We believe that these improvements will enhance our real-time inventory visibility and order management, facilitate seamless omni-channelexecution integrated across mobile devices and stores, and true customer relations management capabilities. We believe this newly implemented technologywill improve customer engagement and increase sales opportunities. Also during the fall of fiscal 2017, we re-platformed our website to a cloud-based, morecost effective solution and have plans to further upgrade our mobile application in advance of the fiscal 2018 holiday season. We believe the re-platformingof our website will improve functionality and reporting capabilities, reduce internal operating costs and effort for updates, and improve redundancy to betterguard against system downtime. Both the new website platform and enhanced mobile application will be designed to function seamlessly with our new point-of-sale solution to provide an enhanced customer engagement.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, off-price retailers, online marketplaces such asAmazon, stores and websites operated by our third-party brands and direct marketers that sell similar lines of merchandise and target customers throughcatalogs and e-commerce. Further, we may face new competitors and increased competition from existing competitors as we expand into new markets andincrease our presence in existing markets. Given the extensive number and types of retailers with which Tillys competes for customers, we believe that ourtarget market is highly fragmented and we do not believe we have a significant share of this market.12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.”Trademarks“Ambitious”, “Blue Crown”, “Division 7”, “Eldon”, “Full Tilt”, “Full Tilt Sport”, “If it’s not here...it’s not happening”, “Infamous”, “RSQ”,“#RSQME”,“Tilly's”, “Vindicated”, "Destined" ,“Tilly’s Clothing & Shoes”, ”Full Tilt Swim”, “Girl in Motion”, “The Tilly’s Hookup”, "Vaporize”, “Ivy +Main”, "Sky and Sparrow", and "White Fawn" and logos related to some of these names, are among our trademarks registered with the United States Patentand Trademark Office. We regard our trademarks as valuable and intend to maintain such marks and any related registrations. We are not aware of any claimsof infringement or other challenges to our right to use our marks in the United States. We vigorously protect our trademarks.EmployeesAs of February 3, 2018, we employed approximately 1,400 full-time and approximately 3,300 part-time employees, of which approximately 400 wereemployed at our corporate office and distribution facility and approximately 4,300 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 2017, varied between approximately 4,700 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 theinformation contained on the website is not part of this document.13Item 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 apparel, footwear and accessories market can change rapidly. We need to anticipate, identify and respond quickly to changing trendsand consumer demands in order to provide the merchandise our customers seek and maintain our brand image. If we cannot identify changing trends inadvance, fail to react to changing trends or misjudge the market for a trend, our sales could be adversely affected and we may be faced with a substantialamount of unsold inventory or missed opportunities. As a result, we may be forced to mark down our merchandise in order to dispose of slow movinginventory, 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, off-price retailers, online marketplaces such as Amazon, stores and websitesoperated by our third-party brands and direct marketers that sell similar lines of merchandise and target customers through catalogs and e-commerce.Moreover, the internet and other new technologies facilitate competitive entry and comparison shopping in our retail market. While we offer a multichannelshopping experience and use social media as a way to interact with our customers and enhance their shopping experiences, multichannel retailing is rapidlyevolving and we must keep pace with changing customer expectations and new developments by our competitors. Competition with some or all of theseretailers noted above could require us to lower our prices or risk losing customers. In addition, significant or unusual promotional activities by ourcompetitors may cause us to respond in-kind and adversely impact our operating cash flow. Because of these factors, current and future competition couldhave 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.14Our continued growth depends upon our ability to successfully open a significant number of new stores and improve the performance of our existing storesand our e-commerce platform.We have grown our store count rapidly in recent years and that has contributed to our growth in revenue. However, in fiscal 2017 and 2016 we slowed thepace of new store openings to focus our efforts on improving the performance of our existing stores. During fiscal 2018, we plan on opening up to 15 newstores and three new RSQ pop-up stores. Despite this plan, we may not be able to grow our revenue as we have in years past, or at all. In addition, our e-commerce platform which was established in 2004, has grown significantly since inception, generating total sales of $76 million during fiscal 2017, or 13.1%of our total net sales, which has also contributed to revenue growth. However, the e-commerce retail market continues to rapidly evolve, and there can be noassurances that we can continue to grow our e-commerce revenue. The failure to improve the performance of existing stores and our e-commerce platformcould have a material adverse effect on our financial condition and results of operations.We may continue to experience comparable store sales or sales per square foot declines, which may cause our results of operations to decline.The investing public may use comparable store sales or net store sales per square foot projections or results, over a certain period of time, such as on aquarterly or yearly basis, as an indicator of our profitability growth. Our comparable store sales have declined in recent periods and can vary significantlyfrom period to period for a variety of reasons, such as the age of stores, changing economic factors, unseasonable weather, changing fashion trends, pricing,the timing of the release of new merchandise and promotional events and increased competition. These factors could cause comparable store sales or net storesales per square foot to decline period to period or fail to grow at expected rates, which could adversely affect our results of operations during such periods.We may not be able to implement our new business strategies, including the implementation of our new suite of technology solutions, on the timelines weanticipate, in a cost-effective manner, or at all.In fiscal 2017, we implemented new point-of-sale, order management, and customer relations management systems and re-platformed our website. In fiscal2018, we plan on updating our mobile application so that they function seamlessly and provide enhanced customer engagement. However, these upgradesmay not be completed in the expected timeframe or may result in unanticipated costs, delays or declines in revenue. We may decide not to complete theseprojects if it becomes apparent that they are no longer feasible. Even if implemented, we cannot assure these upgrades will meet our current and futurebusiness needs or that they will operate as designed. Implementing new systems involves risks inherent in the conversion to a new technology platformincluding loss of information, and there is no assurance that the implementation of these upgrades will not result in disruptions to our business. If theimplementation of our new systems are not executed efficiently and effectively, our business and our operating results could be adversely affected.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, e-commerce, social-media, community relations, store graphics, catalog distribution and employee training, which could adversely affect our cash flow andwhich may not ultimately be successful. Failure to successfully market our brand in new and existing markets could harm our business, results of operationsand 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.15We depend on cash generated from our operations to support our growth, which could strain our cash flow.We primarily rely on cash flows 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, create new marketing and advertising initiatives, fund the expansion of our e-commercebusiness, pay personnel, pay for the increased costs associated with operating as a public company, and, if necessary, further invest in our infrastructure andfacilities. If our business does not generate sufficient cash flows from operations to fund these activities and sufficient funds are not otherwise available fromour existing revolving credit facility or future credit facilities, we may need additional equity or debt financing. If such financing is not available to us onsatisfactory terms, our ability to operate and expand our business or to respond to competitive pressures would be limited and we could be required to delay,curtail or eliminate planned store openings or investment in existing stores. Moreover, if we raise additional capital by issuing equity securities or securitiesconvertible into equity securities, your ownership may be diluted. Any debt financing we may incur may impose on us covenants that restrict our operations,and will require interest payments that would create additional cash demands and financial risk for us.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 periodic declines in traffic to our stores as consumer purchasing behaviors shifted toward onlinepurchases and we may experience similar further declines in the future. A reduction in traffic would likely lead to a decrease in our sales, and, if similarreductions in traffic occur at a number of our stores, this could have a material adverse effect on our financial condition and results of operations.Our 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.16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, Nevada, Florida and the 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.A rise in the cost of raw materials, labor and transportation could increase our cost of sales and cause our results of operations and margins 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 be17damaged and we could become the subject of boycotts by our customers and/or interest groups. Further, if the suppliers violate labor or other laws of theirown country, these violations could cause disruptions or delays in their shipments of merchandise. For example, much of our merchandise is manufactured inChina and Mexico, which have different labor practices than the United States. We do not independently investigate whether our suppliers are operating incompliance with all applicable laws and therefore we rely upon the suppliers’ representations set forth in our purchase orders and vendor agreementsconcerning the suppliers’ compliance with such laws. If our goods are manufactured using illegal or unacceptable labor practices in these countries, or othercountries from which our suppliers source the product we purchase, our ability to supply merchandise for our stores without interruption, our brand imageand, 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.If we cannot retain or find qualified employees to meet our staffing needs in our stores, our distribution and e-commerce fulfillment centers, or ourcorporate offices, our business could be adversely affected.Our success depends upon the quality of the employees we hire. We seek employees who are motivated, represent our corporate culture and 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 occurred several years ago, sales in these states have slowed more than sales inother regions. Compared to the country as a whole, stores in California are exposed to a relatively high risk of damage from a major earthquake or wildfires,while stores in Florida are exposed to a relatively high risk from hurricane damage. Any negative impact upon or disruption to the operations of stores inthese 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.18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 earlycancellation 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 flows.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 desirable locations. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from ourobligations under leases for stores that we close, our business, profitability and results of operations may be harmed.We rely on third parties to deliver merchandise to our stores located outside of southern California and therefore our business could be negativelyimpacted by disruptions in the operations of these third-party providers.We rely on third parties to ship our merchandise from our distribution center in Irvine, California to our stores located across the United States, as 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.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.19Our internal operations, management information systems and databases containing the personal information of our employees and customers could bedisrupted by system security or operational failures or breached by intentional attacks. These disruptions or attacks could negatively impact our sales,increase our expenses, and harm our reputation.Database privacy, network security and identity 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, including potentiallyunintentionally sharing personal information retained by us. The cost to alleviate security risks, defects in software and hardware and address any problemsthat occur could negatively impact our sales, distribution and other critical functions, as well as our financial results.If we are unable to protect our intellectual property rights, our financial results may be negatively impacted.Our success depends in large part on our brand image. Our company’s name, logo, domain name and our proprietary brands and our registered andunregistered trademarks and copyrights are valuable assets that serve to differentiate us from our competitors. We currently rely on a combination ofcopyright, trademark, trade dress and unfair competition laws to establish and protect our intellectual property rights. We cannot assure you that the stepstaken by us to protect our proprietary rights will be adequate to prevent infringement of our trademarks and proprietary rights by others, including imitationand misappropriation of our brand. We cannot assure you that obstacles will not arise as we expand our product lines and geographic scope. Theunauthorized use or misappropriation of our intellectual property could damage our brand identity and the goodwill we created for our company, whichcould cause our sales to decline. Moreover, litigation may be necessary to protect or enforce these intellectual property rights, which could result insubstantial costs and diversion of our resources, causing a material adverse effect on our business, financial condition, results of operations or cash flows. Ifwe cannot protect our intellectual property rights, our brand identity and the goodwill we created for our company may diminish, causing our sales todecline.Most of our intellectual property has not been registered outside of the United States and we cannot prohibit other companies from using 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.20Our founders control a majority of the voting power of our common stock, which may prevent other stockholders from influencing corporate decisions andmay result in conflicts of interest.Our common stock consists of two classes: Class A and Class B. Holders of Class A common stock are entitled to one vote per share, and holders 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. In connection with the completion of ourinitial public offering, World of Jeans & Tops’ “S” Corporation status terminated and it thereafter became subject to federal income taxes and increased stateincome taxes. In the event of an adjustment to World of Jeans & Tops’ reported taxable income for a period or periods prior to termination of its “S”Corporation status, its shareholders during those periods could be liable for additional income taxes for those prior periods. Therefore, we entered into taxindemnification agreements with the former shareholders of World of Jeans & Tops in connection with our initial public offering. Pursuant to the taxindemnification agreements, we agreed to indemnify, defend and hold harmless each such shareholder on an after-tax basis against additional income taxes,plus interest and penalties resulting from adjustments made, as a result of a final determination made by a competent tax authority, to the taxable incomeWorld of Jeans & Tops reported as an “S” Corporation. Such indemnification also includes any losses, costs or expenses, including reasonable attorneys’ fees,arising out of a claim for such tax liability.War, terrorism, civil unrest or other violence could negatively affect our business.All of our stores are located in public areas where large numbers of people typically gather. Terrorist attacks, threats of terrorist attacks or civil unrestinvolving public areas could cause people not to visit areas where our stores are located. Further, armed conflicts or acts of war throughout the world maycreate uncertainty, causing consumers to spend less on discretionary purchases, including on apparel and accessories, and disrupting our ability to obtainmerchandise for our stores. Such decreases in consumer spending or disruptions in our ability to obtain merchandise would likely decrease our sales andmaterially adversely affect our financial condition and results of operations. Other types of violence, such as shootings in malls or in public areas, could leadto lower 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.We may be subject to unionization, work stoppages, slowdowns or increased labor costs.Currently, none of our employees are represented by a union. However, our employees have the right under the National Labor Relations Act to form oraffiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantlydifferent from our current compensation arrangements, it could increase our costs and adversely impact our profitability. Moreover, participation in laborunions could put us at increased risk of labor strikes and disruption of our operations.21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 wedo business. For example, changes in laws related to employee health care, hours, wages, job classification and benefits could significantly increase operatingcosts and adversely impact our results of operations. Furthermore, changes in product safety or other consumer protection laws could lead to increased costsfor certain merchandise, or additional labor costs associated with readying merchandise for sale. It may be difficult for us to foresee regulatory changesimpacting our business and our actions needed to respond 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, Financial Industry RegulatoryAuthority, or FINRA, and certain provisions of the Sarbanes-Oxley Act of 2002, or SOX, and the regulations promulgated thereunder, which imposesignificant compliance obligations on us. SOX, as well as rules subsequently implemented by the SEC, NYSE and FINRA, have imposed increased regulationand disclosure and have required enhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations andstandards result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities. In addition, ifwe fail to implement or maintain the requirements with respect to our internal accounting and audit functions, our ability to continue to report our operatingresults on a timely and accurate basis could be impaired and we could be subject to sanctions or investigation by regulatory authorities, such as the SEC,NYSE or FINRA. Any such action could harm our reputation and the confidence of investors and customers in our company and could materially adverselyaffect 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, we are required to provide annually an assessment of the effectiveness of our internal controls overfinancial reporting and our independent registered public accounting firm will be required to provide an attestation on our assessment of our internal controlsover financial reporting. The process required to comply with Section 404 of SOX is time consuming and costly. If during this process we identify one ormore material weaknesses in our internal controls, it is possible that our management may not be able to certify that our internal controls are effective by thecertification deadline. Moreover, if we identify any material weaknesses or significant deficiencies in our internal controls we will have to implementappropriate changes to these controls, which may require specific compliance training for our directors, officers and employees, require the hiring ofadditional finance, accounting, legal and other personnel, entail substantial costs to modify our existing accounting systems and take a significant period oftime to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain thatadequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impairour ability to operate our business. Effective internal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As aresult, our failure to satisfy the requirements of Section 404 on a timely basis could result in us being subject to regulatory action and a loss of investorconfidence in the reliability of our financial statements, both of which in turn could cause the market value of our Class A common stock to decline.Prior to our initial public offering, we were treated as an “S” Corporation under Subchapter S of the Internal Revenue Code, and claims of taxingauthorities related to its prior status as an “S” Corporation could harm us.Concurrent with and as a result of our becoming a publicly-traded company, our pre-existing “S” Corporation status terminated. Since that time, we havebeen treated as a “C” Corporation for federal and applicable state income tax purposes and are subject to increased federal and state income taxes. Inaddition, 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 tohave qualified for, or to have violated, our “S” Corporation status, we will be obligated to pay back taxes, interest and penalties, and we will not have theright to reclaim tax distributions it made to its shareholders during those periods. These amounts could include taxes on all of our taxable income while wewere an “S” Corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our results of operations andfinancial condition.22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 impacting the Internet; and•risks related to the computer systems that operate our website and related support systems, including computer viruses, electronic break-ins, systemerrors or failures, 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.Changes to accounting rules or regulations could significantly affect our financial results.Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification, or ASC, 718, Compensation-StockCompensation, for share-based compensation. Our share-based compensation expenses may be significant in future periods, which could have an adverseimpact on our operating and net income. FASB ASC 718 requires the use of subjective assumptions, including the options’ expected lives and the pricevolatility of our Class A common stock. Changes in the subjective input assumptions can materially affect the amount of our share-based compensationexpense. In addition, an increase in the competitiveness of the market for qualified employees could result in an increased use of share-based compensationawards, which in turn would result in increased share-based compensation expense in future periods.We may experience fluctuations in our tax obligations and effective tax rate.We are subject to income taxes in federal and applicable state and local tax jurisdictions in the U.S. We record tax expense based on our estimates of currentand future payments. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxingauthorities may impact the ultimate settlement of these tax positions. As a result, there could be ongoing variability in our tax rates as taxable events occurand exposures are re-evaluated. Further, our effective tax rate in any financial statement period may be materially affected by changes in the mix and level ofearnings.On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the ”Tax Act“) into law. The Tax Act has significantly changed the U.S. federalincome taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensingof certain capital expenditures, revising the rules governing net operating losses and the rules governing foreign tax credits, and introducing new anti-baseerosion provisions. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The Tax Actis unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and23implementing regulations by the Treasury and Internal Revenue Service, any of which could lessen or increase certain adverse impacts of the Tax Act. Inaddition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a startingpoint for computing state and local tax liabilities.While we have analyzed and interpreted the anticipated impacts of the Tax Act on us on a preliminary basis, including recognizing a reduction in deferredtax asset value during fiscal year 2017, which resulted in a corresponding charge to income tax expense for the year, the financial statement impacts of theTax Act on us may be subject to further adjustment in subsequent periods throughout 2018 in accordance with recent interpretive guidance issued by theSEC. Further, there may be other material adverse effects resulting from the Tax Act that we have not yet identified.While some of the changes made by the Tax Act may adversely affect the Company in one or more reporting periods and prospectively, other changes may bebeneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact that the Tax Act as a whole will have on us. Weurge our investors to consult with their legal and tax advisors with respect to the Tax Act.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 written charter addressingthe committee’s purpose and responsibilities; and•that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’spurpose and responsibilities.Although we intend to 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.The price of our Class A common stock has been, and may continue to be volatile and may decline in value.The market for retail apparel stocks can be highly volatile. As a result, the market price of our Class A common stock is likely to be volatile 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 could24also require us to make substantial payments to satisfy judgments or to settle litigation. The threat or filing of class action litigation lawsuits could cause theprice 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 without stockholderapproval, which, if issued, would increase the number of outstanding shares of our capital stock and could make it more difficult for a stockholder toacquire us;•our certificate of incorporation provides that if all shares of our Class B common stock are converted into Class A common stock or otherwise ceaseto be outstanding, our Board of Directors will be divided into three classes in the manner provided by our certificate of incorporation. After thedirectors 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 of the voting power ofthe company once the Board of Directors is divided into three classes and provides that director vacancies can only be filled by an affirmative voteof a majority of directors then in office;•our amended and restated bylaws require advance notice of stockholder proposals and director nominations; and•Section 203 of the Delaware General Corporation Law may prevent large stockholders from completing a merger or acquisition of us.These provisions may prevent a merger or acquisition of us which could limit the price investors would pay for our common stock in the future.Our amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions andproceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with usor our directors, officers or other employees.Our amended and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware 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 judicial forum that it finds favorable for disputes with us or ourdirectors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our amended and restatedbylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associatedwith resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.While we have paid dividends in February of 2018 and 2017 there can be no assurance that we will pay dividends in the future, which may make our ClassA common stock less desirable to investors and decrease its value.In February of 2018 and 2017, we paid special cash dividends of $1.00 per share and $0.70 per share, respectively, to all holders of record of issued andoutstanding shares of our common stock. However, there can be no assurance that we will pay additional cash dividends on our common stock in the future.We currently intend to retain all of our earnings to finance our operations and growth, and do not anticipate paying any additional cash dividends on ourcommon stock at this time. Therefore, capital appreciation, if any, of our Class A common stock could be the sole source of gain for our Class A commonstockholders for the foreseeable future.Item 1B. Unresolved Staff Comments25None.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 and terminates on December 31, 2027.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 219 stores, encompassing a total of approximately 1.7 million total square feet as of February 3, 2018, 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. We have established loss provisions ofapproximately $7.5 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. See Item 1A “Risk Factors- Risks Related to Our Business- Litigation costs and the outcome oflitigation could have a material adverse effect on our business” included in this report.Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No.30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage andhour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. InDecember 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. Subsequently, we requested the plaintiff todismiss the class action claims based on an existing waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffingcompany that employed plaintiff to work at the Company. We intend to defend this case vigorously.Lauren Minniti, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., United States District Court, Southern District of Florida, Case No.0:17-cv-60237-FAM. On January 30, 2017, the plaintiff filed a putative class action lawsuit against us, alleging violations of the Telephone ConsumerProtection Act of 1991 (the “TCPA”). Specifically, the complaint asserts a violation of the TCPA for allegedly sending unsolicited automated messages tothe cellular telephones of the plaintiff and others. The complaint seeks class certification and damages of $500 per violation plus treble damages under theTCPA. In March 2017, we filed our initial response to this matter with the court. In June 2017, the parties attended a mediation. In July 2017, the partiesreached an agreement in principle to settle this matter, subject to court approval and the execution of a final settlement agreement. In March 2018, the partiesexecuted a settlement agreement, subject to court approval.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. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hourlaws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court grantedour demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against Tilly's and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative classmembers did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written ordersustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed anappeal of the order to the California Court of Appeal. In October 2017, the plaintiff filed her opening appellate brief, and our responding appellate brief wasfiled in December 2017. Plaintiff's reply appellate brief is currently due to be filed in April 2018. We have defended this case vigorously and will continue todo so.26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. In June 2014, the plaintiff filed a putative class action and representative Private Attorney General Act of 2004 lawsuit against us allegingviolations of California’s wage and hour, meal break and rest break rules and regulations, and unfair competition law, among other things. The complaintsought class certification, penalties, restitution,injunctive relief and attorneys’ fees and costs. The plaintiff filed a first amended complaint in December 2014. We answered the complaint in January 2015,denying all allegations. We engaged in mediation in May 2016, and the parties reached a resolution that was presented to the court for preliminary approvalin September 2016. The court preliminarily approved the settlement in October 2016, and notice of the settlement was issued to class members. Uponcompletion of the claims process, the court approved the final settlement in February 2017. We concluded this matter with the payment of the finalsettlement in April 2017. The final settlement amount was not materially different from the amount previously accrued when a loss provision was established.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 thevendor and us related to certain vendor products we sell. The settlement requires that the vendor pay $2.0 million to the plaintiff over three years and weagreed to guarantee such payments in exchange for a security interest in the vendor's intellectual property. As of February 3, 2018, due to updated facts andcircumstances, we have accrued for the remaining maximum exposure loss of $1.4 million relating to this matter. We will utilize all available rights of offsetto reduce our loss, including the enforcement of the security interest we have in the vendor's intellectual property.Item 4. Mine Safety DisclosuresNot applicable.27PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe following table sets forth the high and low sales prices of our Class A common stock, as reported by the NYSE under the symbol “TLYS” for the quartersindicated. On March 28, 2018, the closing price of our Class A common stock was $11.33. High LowFiscal 2017: Fourth Quarter$16.57 $11.41Third Quarter$12.87 $8.42Second Quarter$11.43 $8.43First Quarter$13.70 $8.02Fiscal 2016: Fourth Quarter$15.29 $8.74Third Quarter$10.86 $5.53Second Quarter$6.69 $5.49First Quarter$8.72 $6.18As of March 28, 2018, we had approximately 12 stockholders of record, six 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.DividendsOn January 24, 2018, we declared a special cash dividend of $1.00 per share to all holders of record of issued and outstanding shares of both Class A andClass B common stock as of the close of business on February 9, 2018, with payment of $29.1 million made on February 20, 2018.On January 31, 2017, we declared a special cash dividend of $0.70 per share to all holders of record of issued and outstanding shares of both Class A andClass B common stock as of the close of business on February 15, 2017, with payment of $20.1 million made on February 24, 2017.We do not currently anticipate declaring any additional dividends, but may do so again in the 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 2018 Annual Meeting of Stockholders, which will befiled with the SEC no later than 120 days after the end of the fiscal year ended February 3, 2018 (the "2018 Proxy Statement").Stock Performance GraphThe following graph compares the cumulative stockholder return on our Class A common stock for the five years ended February 3, 2018 to the cumulativereturn of (i) the S&P Midcap 400 Index and (ii) the S&P 400 Apparel Retail Index over the same period. This graph assumes an initial investment of $100 onFebruary 2, 2013 in our Class A common stock, the S&P Midcap 400 Index and the S&P 400 Apparel Retail Index and assumes the reinvestment ofdividends, if any.28Comparison of 5-Year Cumulative Total Return as of February 3, 2018Among Tilly's, Inc., the S&P Midcap 400 Index and the S&P 400 Apparel Retail IndexRecent Sales of Unregistered SecuritiesWe did not sell any unregistered equity securities or purchase any of our securities during the fiscal year ended February 3, 2018.Item 6. Selected Financial DataThe following tables present selected consolidated financial and other data as of and for the periods indicated.The selected consolidated statement of income data for the fiscal year ended February 3, 2018, January 28, 2017 and January 30, 2016 and selected balancesheet data as of February 3, 2018 and January 28, 2017 are derived from our audited consolidated financial statements included in Part II, Item 8, "FinancialStatements and Supplementary Data" of this Annual Report on Form 10-K. The selected consolidated statement of income data for the fiscal years endedJanuary 31, 2015 and February 1, 2014 and the selected consolidated balance sheet data as of January 30, 2016, January 31, 2015 and February 1, 2014 arederived from our audited consolidated financial statements that have not been included elsewhere in this report. The historical results presented below are notnecessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial data in conjunction with theconsolidated financial statements and accompanying notes and the information under “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing elsewhere in this report.29 Fiscal Year Ended (1) February 3,2018 January 28,2017 January 30,2016 January 31,2015 February 1,2014 (in thousands, except per share data)Consolidated Statements of Income Data: Net sales$576,899 $568,952 $550,991 $518,294 $495,837Cost of goods sold (2)401,529 400,493 383,745 362,762 345,015Gross profit175,370 168,459 167,246 155,532 150,822Selling, general and administrative expenses151,384 149,129 149,150 132,343 121,085Operating income23,986 19,330 18,096 23,189 29,737Interest income (expense), net1,223 418 52 (14) (9)Income before income taxes25,209 19,748 18,148 23,175 29,728Income tax expense10,509 8,338 10,607 9,100 11,591Net income$14,700 $11,410 $7,541 $14,075 $18,137 Basic earnings per share of Class A and Class Bcommon stock$0.51 $0.40 $0.27 $0.50 $0.65Diluted earnings per share of Class A and Class Bcommon stock$0.51 $0.40 $0.27 $0.50 $0.65Weighted average basic shares outstanding28,804 28,496 28,332 28,013 27,822Weighted average diluted shares outstanding29,074 28,529 28,402 28,078 28,116 Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016 January 31, 2015 February 1, 2014Operating Data (unaudited): Stores operating at beginning of period223 224 212 195 168Stores opened during the period2 3 15 19 28Stores closed during the period6 4 3 2 1Stores operating at end of period219 223 224 212 195Comparable store sales change (3)1.0% 0.5% 1.2% (2.8)% (1.9)%Total square feet at end of period1,668,008 1,703,144 1,704,031 1,622,156 1,513,138Average square footage per store at end of period7,616 7,637 7,607 7,652 7,760Average net sales per brick-and-mortar store (inthousands) (4)$2,258 $2,188 $2,219 $2,250 $2,396Average net store sales per square foot (4)$296 $287 $290 $292 $307Capital expenditures (in thousands)$13,753 $17,047 $23,100 $23,636 $42,701 As of February 3, 2018 January 28, 2017 January 30, 2016 January 31, 2015 February 1, 2014 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities$135,952 $133,917 $100,952 $84,746 $60,355Working capital107,423 129,819 110,965 94,394 77,331Total assets290,111 290,506 270,751 257,551 232,407Total capital lease obligation (5)— 835 1,693 2,500 3,258Stockholders’ equity$160,425 $189,220 $173,213 $158,686 $140,923 30(1)The fiscal year ended February 3, 2018 included 53 weeks. The fiscal years ended January 28, 2017, January 30, 2016, January 31, 2015 andFebruary 1, 2014 each included 52 weeks.(2)Includes buying, distribution and occupancy costs.(3)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, deferred revenue from the loyalty program and e-commerce shipping and handling feerevenue. The comparable store sales change for the period ended February 3, 2018 includes the 53rd week in fiscal year 2017.(4)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.(5)Comprised solely of a capital lease for our corporate headquarters and distribution center.31Item 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 2017" or "fiscal 2017" refer to the fiscal year ended February 3, 2018,references to "fiscal year 2016" or "fiscal 2016" refer to the fiscal year ended January 28, 2017 and references to ‘fiscal year 2015” or "fiscal 2015” referto the fiscal year ended January 30, 2016. Fiscal year 2017 consisted of a 53-week period. Fiscal years 2016 and 2015 each consisted of a 52-week period.OverviewTillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls. We believe webring together an unparalleled selection of iconic global, emerging and proprietary brands rooted in an active and outdoor lifestyle. The Tillys conceptbegan in 1982 when our co-founders, Hezy Shaked and Tilly Levine, opened our first store in Orange County, California. As of February 3, 2018, we operated219 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 TrendsThe retail industry has experienced a general downward trend in customer traffic to physical stores for an extended period of time. Conversely, onlineshopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue, despite the improvement instore traffic that we experienced during fiscal 2017. There can be no guarantee that our recent improvement in store traffic will continue given the broaderindustry trends. We will continue to focus our efforts on improving our existing stores, and expanding our online/digital capabilities through omni-channelinitiatives designed to provide a seamless shopping experience for our customers, whether in-store or online.During fiscal 2018, we plan to open up to 15 new stores and three RSQ-branded "pop-up" stores. We will leverage existing markets where we believe ourbrand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.As a result of the Tax Act, which was signed into law in December 2017, we expect our effective income tax rate to be reduced to approximately 27% forfiscal 2018.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.Comparable Store SalesComparable store sales is a measure that indicates the change in year-over-year comparable store sales, which allows us to evaluate how our store base isperforming. Numerous factors affect our comparable store sales, including: 32•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 sellingseasons. This reflects that various costs, including occupancy costs, generally do not increase in proportion to the seasonal sales increase.Selling, General and Administrative ExpensesOur selling, general and administrative, or SG&A, expenses are composed of store selling expenses and corporate-level general and 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.33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 February 3,2018 January 28,2017 January 30,2016 (in thousands)Statements of Income Data: Net sales$576,899 $568,952 $550,991Cost of goods sold401,529 400,493 383,745Gross profit175,370 168,459 167,246Selling, general and administrative expenses151,384 149,129 149,150Operating income23,986 19,330 18,096Other income, net1,223 418 52Income before income taxes25,209 19,748 18,148Income tax expense10,509 8,338 10,607Net income$14,700 $11,410 $7,541Percentage of Net Sales: Net sales100.0% 100.0% 100.0%Cost of goods sold69.6% 70.4% 69.6%Gross profit30.4% 29.6% 30.4%Selling, general and administrative expenses26.2% 26.2% 27.1%Operating income4.2% 3.4% 3.3%Interest income, net0.2% 0.1% —%Income before income taxes4.4% 3.5% 3.3%Income tax expense1.9% 1.5% 1.9%Net income2.5% 2.0% 1.4%The following table presents store operating data for the periods indicated: Fiscal Year Ended February 3,2018 January 28,2017 January 30,2016Store Operating Data: Stores operating at end of period219 223 224Comparable store sales change (1)1.0% 0.5% 1.2%Total square feet at end of period (in thousands)1,668 1,703 1,704Average net sales per brick-and-mortar store (in thousands) (2)$2,258 $2,188 $2,219Average net sales per square foot (2)$296 $287 $290E-commerce revenues (in thousands) (3)$75,846 $76,380 $68,978E-commerce revenues as a percentage of net sales13.1% 13.4% 12.5%(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. A remodeled or relocated storeis included in comparable store sales, both during and after construction, if the square footage of the store was not changed by more than 20% and the store was not closed formore than five days in any fiscal month. Comparable store sales include sales through our e-commerce platform but exclude gift card breakage income, deferred revenue fromthe loyalty program and e-commerce shipping and handling fee revenue.(2)E-commerce sales, e-commerce shipping and handling fee revenue and gift card breakage income are excluded from net sales in deriving average net sales per brick-and-mortar store.(3)E-commerce revenues include e-commerce sales and e-commerce shipping fee revenue.34Fiscal Year 2017 Compared to Fiscal Year 2016Net SalesNet sales were $576.9 million in fiscal 2017 compared to $569.0 million in fiscal 2016, an increase of $7.9 million, or 1.4%. The components of our net salesincrease were as follows:$ millions Attributable to$5.8 Increase in comparable store sales of 1.0%2.1 Increase in non-comparable store sales$7.9 TotalOur comparable store sales increased 1.0%, driven by a 1.6% increase in store sales, partially offset a 2.5% decrease in e-commerce sales. Our comparablestore sales growth was characterized by high single-digit percentage growth in our Mens department and low single-digit percentage growth in our Boysdepartment. This growth was partially offset by low single-digit percentage decreases in our Girls, Womens, Accessories and Footwear departments. E-commerce revenues represented 13.1% of our total net sales, or $75.8 million, in fiscal 2017 as compared to 13.4%, or $76.4 million, in fiscal 2016. E-commerce sales declined due to certain transitional issues we experienced during the fourth quarter associated with the implementation of our new omni-channel order management system. We expect these transitional issues will be substantially corrected near the end of the first quarter or early in the secondquarter of fiscal 2018.Gross ProfitGross profit was $175.4 million in fiscal 2017 compared to $168.5 million in fiscal 2016, an increase of $6.9 million, or 4.1%, primarily due to the increase innet sales. Gross margin, or gross profit as a percentage of net sales, was 30.4% during fiscal 2017 compared to 29.6% during fiscal 2016. This 0.8% increase ingross margin was primarily attributable to a decline in buying, distribution and occupancy costs. Product margins were flat.Selling, General and Administrative Expenses ("SG&A")SG&A was $151.4 million in fiscal 2017 compared to $149.1 million in fiscal 2016. As a percentage of net sales, SG&A was flat at 26.2% for both fiscal 2017and fiscal 2016. The components of the changes in SG&A, both in terms of percentage of net sales and total dollars, were as follows:% $ millions Attributable to0.8% $4.4 Net increase in year over year legal provisions0.5% 2.8 Increase in expenses associated with several information technology system implementations0.1% 2.0 Increase in store payroll and benefits primarily due to minimum wage increases(0.6)% (3.4) Decrease in marketing spend(0.2)% (1.5) Decrease in non-cash store asset impairment charges(0.2)% (0.8) Decrease in corporate payroll and benefits(0.4)% (1.2) Decrease in all other SG&A expenses—% $2.3 TotalOperating IncomeOperating income was $24.0 million in fiscal 2017 compared to $19.3 million for fiscal 2016, an increase of $4.7 million, or 24.1%. As a percentage of netsales, operating income was 4.2% for fiscal 2017 compared to 3.4% for fiscal 2016. The increase in operating income was primarily attributable to theincrease in comparable store sales and reductions in buying, distribution and occupancy costs.Income Tax ExpenseIncome taxes were $10.5 million for fiscal 2017 compared to $8.3 million for fiscal 2016. Our effective tax rates were 41.7% for fiscal 2017 and 42.2% forfiscal 2016. Fiscal 2017 income tax expense includes a net charge of $0.2 million due to the impact of the Tax Cuts and Job Act (the "Act") signed into lawduring December 2017.Net Income and Earnings Per ShareNet income was $14.7 million for fiscal 2017 compared to $11.4 million for fiscal 2016, an increase of $3.3 million, or 28.9%. Diluted earnings per share was$0.51 for fiscal 2017 compared to $0.40 for fiscal 2016.35Fiscal Year 2016 Compared to Fiscal Year 2015Net SalesNet sales were $569.0 million in fiscal 2016 compared to $551.0 million in fiscal 2015, an increase of $18.0 million, or 3.3%. The components of our netsales increase were as follows:$ millions Attributable to$15.4 Increase in non-comparable store sales2.6 Increase in comparable store sales of 0.5%$18.0 TotalComparable store sales increased 0.5%, driven by e-commerce growth of 11.1% which offset a 1.0% decrease in sales from our physical stores. E-commercerevenues represented 13.4% of our total net sales, or $76.4 million, in fiscal 2016 as compared to 12.5%, or $69.0 million, in fiscal 2015. We experienced ashift in our customers’ shopping behaviors, which resulted in an increase in online shopping that largely offset declining traffic trends in our physical stores.Our comparable store sales were driven by higher comparable sales increases in mens, boys and footwear, offset by decreases in women, accessories, and girls.Gross ProfitGross profit was $168.5 million in fiscal 2016 compared to $167.2 million in fiscal 2015, an increase of $1.3 million, or 0.8%, primarily due to the increase innet sales. Gross margin, or gross profit as a percentage of net sales, was 29.6% and 30.4% during fiscal 2016 and fiscal 2015, respectively. The 0.8% decreasein gross margin was primarily attributable to a decline in product margins as a result of increased markdowns.Selling, General and Administrative Expenses ("SG&A")SG&A expenses were $149.1 million in fiscal 2016 compared to $149.2 million in fiscal 2015, a slight decrease from fiscal 2015. As a percentage of net sales,SG&A expenses were 26.2% and 27.1% during fiscal 2016 and fiscal 2015, respectively. The components of the SG&A expense decrease, both in terms ofpercentage of net sales and total dollars, were as follows:% $ millions Attributable to(0.9)% $(4.3) Decrease due to more efficient marketing expenses(0.5)% (2.1) Decrease in corporate payroll and benefits primarily due to prior year's severance obligations and lower stockbased compensation as compared to fiscal 20150.1% 2.8 Increase in store payroll and benefits primarily due to minimum wage increases0.4% 2.6 Increase in computer maintenance expenses and bank chargebacks—% 0.9 Increase in all other SG&A expenses(0.9)% $(0.1) TotalOperating IncomeOperating income was $19.3 million in fiscal 2016 compared to $18.1 million for fiscal 2015, an increase of $1.2 million, or 6.6%. As a percentage of netsales, operating income was 3.4% and 3.3% for fiscal 2016 and fiscal 2015, respectively. The increase in operating income was primarily attributable to theincrease in gross profit as discussed above.Income Tax ExpenseIncome taxes were $8.3 million and $10.6 million for fiscal 2016 and fiscal 2015, respectively. Our effective tax rates were 42.2% and 58.4% for fiscal 2016and fiscal 2015, respectively. The decrease in our effective tax rate for fiscal 2016 was primarily due a reduction in the discrete items related to the expirationof stock options.Net Income and Earnings Per ShareNet income was $11.4 million for fiscal 2016 compared to $7.5 million for fiscal 2015, an increase of $3.9 million, or 52.0%. Diluted earnings per share was$0.40 for fiscal 2016 compared to $0.27 for fiscal 2015.Liquidity and Capital ResourcesOur business relies on cash flows from operating activities as well as cash on hand as our primary sources of liquidity. We currently expect to financecompany operations, store growth 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 and our36cash and marketable securities on hand will be sufficient to cover working capital requirements and anticipated capital expenditures for the next 12 monthsfrom the issuance of this Annual Report. If cash flows from operations are not sufficient or available to meet our capital requirements, then we will be requiredto obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or,if available, that the terms will be satisfactory to us and not dilutive to our stockholders.Working capital at February 3, 2018, was $107.4 million compared to $129.8 million at January 28, 2017, a decrease of $22.4 million. The changes in ourworking capital during fiscal 2017 were as follows:$ millions Description$129.8 Working capital at January 28, 2017(29.1) Increase in dividends payable, paid in February 2018(4.3) Increase in legal loss contingencies3.5 Decrease in sales and use taxes payable2.0 Increase in cash, cash equivalents and marketable securities1.4 Increase in merchandise inventories, net of merchandise payables1.1 Decrease in accrued compensation and benefits3.0 Net increase from changes in all other assets and liabilities$107.4 Working capital at February 3, 2018Cash Flow AnalysisA summary of operating, investing and financing activities is shown in the following table: Fiscal Year Ended February 3,2018 January 28,2017 January 30,2016 (in thousands)Net cash provided by operating activities$32,708 $48,509 $36,945Net cash used in investing activities(40,878) (21,658) (37,966)Net cash (used in) provided by financing activities(17,622) 1,123 2,252Net 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 2017 as compared to fiscal 2016 primarily due to a decrease in cash generated from workingcapital mainly due to the timing of inventory purchases, an increase in accrued legal loss contingencies, and timing of payments to vendors, partially offsetby a decrease in deferred tax assets due to the impact of the Tax Act.Net cash provided by operating activities increased in fiscal 2016 as compared to fiscal 2015 primarily due to higher operating income and an increase incash generated from working capital mainly due to the timing of payments to vendors and decreases in inventories and receivables, partially offset by adecrease in deferred rent.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 $40.9 million in fiscal 2017. Capital expenditures totaled $13.8 million, primarily related to new and remodeledstores and other improvements in our existing stores and information technology systems. We purchased $152.4 million of marketable securities and receivedproceeds of $125.3 million from marketable securities during fiscal 2017.Net cash used in investing activities was $21.7 million in fiscal 2016. Capital expenditures totaled $17.0 million, primarily related to new and remodeledstores and other improvements in our existing stores and information technology systems. We37purchased $99.7 million of marketable securities and received proceeds of $95.0 million from marketable securities during fiscal 2016.Net cash used in investing activities was $38.0 million in fiscal 2015. Capital expenditures totaled $23.1 million, primarily related to new and remodeledstores and other improvements in our information technology systems, distribution centers, and corporate offices. We purchased $74.9 million of marketablesecurities and received proceeds of $60.0 million from the maturities of marketable securities during fiscal 2015.Capital expenditures during fiscal 2018 are expected to be approximately $20 million, primarily for construction of up to 15 new stores and three RSQ-branded "pop-up" stores and continuing information technology investments. These expenditures are expected to be funded from cash provided byoperations.Net Cash (Used in)/Provided by Financing ActivitiesFinancing activities consist of payments on our capital lease obligation, proceeds from the exercise of stock options, cash dividends paid and employee taxespaid in result of the net settlement of issued restricted stock.Net cash used in financing activities was $17.6 million in fiscal 2017. This included $20.1 million of cash dividends paid, $0.8 million in payments towardsour capital lease obligation, partially offset by $3.4 million of proceeds from the exercise of stock options from share-based compensation.Net cash provided by financing activities was $1.1 million in fiscal 2016. This included $2.0 million of proceeds from the exercise of stock options fromshare-based compensation and taxes paid in lieu of shares issued for stock-based compensation, partially offset by $0.9 million in payments towards ourcapital lease obligation.Net cash provided by financing activities was $2.3 million in fiscal 2015. This included $3.1 million of proceeds from the exercise of stock options, partiallyoffset by $0.8 million in payments towards our capital lease obligation during fiscal 2015.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 January 26, 2020. The interest rate charged on borrowings is selected at our discretion at the time of draw between the London Interbank Offered Rate,plus 0.75%, or at the Bank’s prime rate. The agreement allows for the declaration and payment of dividends or distributions to stockholders, subject to certainlimitations. On February 20, 2018 and February 24, 2017, we paid a special dividend of $1.00 per share and $0.70 per share, respectively. Refer to "Note 18:Shareholders' Equity", for further information. The line of credit is secured by substantially all of our assets. As a sub-feature under the revolving line ofcredit, the Bank 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) income before income taxes not to be less than $1 million (measured at the end of each fiscal quarter), (ii) a maximumratio of 4.00 to 1.00 as of each quarter end for “Funded Debt to EBITDAR”, defined as the sum of total debt, capital leases and annual rent expense multipliedby 6 divided by the sum of net income, interest expense, taxes, depreciation, amortization and annual rent expense, and (iii) requires minimum eligibleinventory of $50 million as of the end of each quarter. In addition, maximum investment in fixed assets in any fiscal year of $50 million.In September 2016, we established a $750,000 standby letter of credit as security against insurance claims as required by our worker's compensationinsurance policy. As of February 3, 2018, there has been no activity under this letter of credit.As of February 3, 2018, we 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 is accounted for as an operating lease and expires on December 31,2027.We lease approximately 26,000 square feet of office and warehouse space with a company that is owned by one of the co-founders of 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, 2021.38Our leases are generally non-cancellable operating leases expiring at various dates through fiscal year 2027. Certain leases provide for additional rent basedon a percentage of sales and annual rent increases based upon the Consumer Price Index. In addition, many of our store leases contain certain co-tenancyprovisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums establishedin such lease.As of February 3, 2018, our contractual cash obligations over the next several years are as follows: Payments Due by Period Total Less Than1 Year 1-3 Years 3-5 Years More Than5 Years (in thousands)Operating Lease Obligations (1)$366,819 $69,029 $120,498 $93,692 $83,600Purchase Obligations (2)8,264 2,648 4,080 1,536 —Total$375,083 $71,677 $124,578 $95,228 $83,600(1) Operating leases include minimum lease commitments, including fixed common area maintenance charges, if any, for our stores, and our corporate headquarters and distributioncenter and warehouse leases. Our store leases generally have initial lease terms of 10 years and many also include renewal options on substantially the same terms and conditions as theoriginal lease.(2) 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.We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policieswith respect to revenue recognition, loyalty program, merchandise inventories, long-lived assets, share-based compensation and accounting for incometaxes, which are more fully described below.Revenue RecognitionRevenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected fromour customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost ofgoods sold at the time the merchandise is received by the customer. We defer e-commerce revenue that is in-transit to the customer. Customers typicallyreceive goods within four days of shipment. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the relatedcosts are reflected in cost of goods sold in the Consolidated Statements of Income.Loyalty ProgramWe have a customer loyalty program wherein customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level,the member earns awards that may be redeemed for merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue andawards redeemed by the member for merchandise are recorded as an increase to net sales. We expire unredeemed awards after 45 days from date of issuanceand accumulated partial points 365 days after the last purchase activity. When a customer redeems an earned reward, we recognize revenue for the redeemedproduct and reduce the related loyalty program liability.39Merchandise InventoriesMerchandise inventories are stated at the lower of cost or net realizable value, which generally is the merchandise selling price. Cost is calculated using theretail inventory method. Under the retail inventory method, inventory is stated at its current retail selling value and then is converted to a cost basis byapplying a cost-to-retail ratio based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requiresmanagement judgments and estimates, such as the amount and timing of markdowns needed in order to sell through 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 February 3, 2018 and January 28, 2017 was not material.Long-Lived AssetsWe evaluate the carrying value of our long-lived assets, consisting largely of leasehold improvements, furniture and fixtures and equipment at store,distribution center and corporate office locations, for impairment whenever events or changes in circumstances indicate that the carrying value of such assetsmay not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-periodoperating or cash flow loss combined with a history of operating or cash flow losses and a forecast that indicates continuing losses or insufficient incomeassociated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or asignificant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activitiescompared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized,measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted cash flows using our weighted-averagecost of capital, with such estimated fair values determined using the best information available. Quarterly, we assess whether events or changes incircumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable.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). Changes in these inputs and assumptions can materially affect the measurement ofthe estimated fair value of our share-based compensation expense.40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. Our stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over themost recent period equal to the expected option term of the awards.•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. On January 31, 2017 and January 24, 2018, we declared special cash dividends of $0.70 and $1.00 per share, respectively, to allholders of record of issued and outstanding shares Class A common stock and Class B common stock as of the close of business on February 15,2017 and February 9, 2018, respectively. Except as described above, Tilly's, Inc. has never declared or paid any cash dividends and does not plan topay additional 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.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.We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider allavailable positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planningstrategies and recent financial operations.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.We have included the estimated impact of the Tax Act in our financial results for the period ended February 3, 2018. The Securities and ExchangeCommission ("SEC") has issued interpretive guidance under Staff Accounting Bulletin No. 118 ("SAB 118") that allows for a measurement period up to oneyear after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Our accounting for the income tax effects of the new taxlegislation, based on available guidance and interpretation, is included in our provision amount and we do not anticipate material adjustments to suchaccounting in future periods. Refer to Note 14 to the Consolidated Financial Statements for additional information.New Accounting Standards Not Yet AdoptedIn May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), along with amendments issued in 2015 and2016, which amends the existing accounting standards for revenue recognition. ASU 2014-09 outlines principles that govern revenue recognition at anamount an entity expects to be entitled when products are transferred to customers. ASU 2014-09, which will become effective for us in the first quarter offiscal 2018, may be applied retrospectively for each period presented (the "full retrospective method") or retrospectively with the cumulative effectrecognized in the opening retained earnings balance in fiscal year 2018 (the "modified retrospective method"). We are adopting the standard using themodified retrospective method. We have determined that the adoption will change the timing of recognition of gift card breakage income, which is currentlyrecognized when the probability of the redemption is remote and recorded in net sales. The new guidance will require recognition of gift card breakageincome proportionately in net sales as redemptions occur. Additionally, we have determined that revenue for merchandise shipped to the customer from adistribution center or store will be recognized at the shipping point rather than upon receipt by the customer. Lastly, under the new guidance, we willrecognize allowances for estimated sales returns on a gross basis rather than net basis on the consolidated balance sheets. The new guidance also requiresenhanced disclosures, such as disaggregation of revenues and revenue41recognition policies that require significant judgment and identification of performance obligations to customers. We have determined that the new standardwill result in a net cumulative effect adjustment to increase beginning retained earnings by approximately $1.4 million. We currently do not expect theadoption of this update to have a material effect on our consolidated financial statements.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. ASU 2016-02, which will become effective for us in the firstquarter of fiscal 2019, with early adoption permitted, must be adopted using the modified retrospective method. The new standard is expected to impact ourconsolidated financial statements as we conduct all of our retail sales and corporate operations in leased facilities. We are in the process of evaluating theimpact of adopting the new standard on our consolidated financial statements.Accounting Standard Adopted in Fiscal 2017On January 29, 2017, we adopted FASB ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accountingand reporting for share-based compensation, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as theclassification in the statement of cash flows. We elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The adoption ofASU 2016-09 resulted in a cumulative-effect adjustment of $0.2 million decrease to retained earnings and a $0.2 million increase to additional paid-in-capital as of January 29, 2017, related to the recognition of previously estimated expected forfeitures using the modified retrospective method. We adoptedthe cash flow presentation which requires excess tax benefits to be presented as an operating activity rather than a financing activity. The adoption of thisupdate did not have an effect on our consolidated results of operations.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 February 3, 2018and January 28, 2017, 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.42Item 8. Financial Statements and Supplementary DataTilly’s, Inc.Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm44Consolidated Balance Sheets as of February 3, 2018 and January 28, 201745Consolidated Statements of Income for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 201646Consolidated Statements of Comprehensive Income for the fiscal years ended February 3, 2018, January 28, 2017 and January 30,201647Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 3, 2018, January 28, 2017 and January 30,201648Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 201649Notes to Consolidated Financial Statements5043Report of Independent Registered Public Accounting FirmShareholders and Board of DirectorsTilly’s, Inc.Irvine, CaliforniaOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Tilly’s, Inc. (the “Company”) as of February 3, 2018 and January 28, 2017, the relatedconsolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended February 3,2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements presentfairly, in all material respects, the financial position of the Company at February 3, 2018 and January 28, 2017, and the results of their operations and theircash flows for each of the three years in the period ended February 3, 2018, in conformity with accounting principles generally accepted in the United Statesof America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sinternal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 30, 2018 expressed an unqualified opinionthereon.Changes in Accounting Method Related to Share-Based PaymentsAs discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for employee shared-basedcompensation in fiscal 2017 due to the adoption of Accounting Standards Update 2016-09.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company's auditor since 2015.Costa Mesa, CaliforniaMarch 30, 201844Tilly’s, Inc.Consolidated Balance Sheets(In thousands, except per share data) February 3,2018 January 28,2017ASSETS Current assets: Cash and cash equivalents$53,202 $78,994Marketable securities82,750 54,923Receivables4,352 3,989Merchandise inventories53,216 47,768Prepaid expenses and other current assets9,534 9,541Total current assets203,054 195,215Property and equipment, net83,321 89,219Other assets3,736 6,072Total assets$290,111 $290,506LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$21,615 $17,584Accrued expenses22,731 23,872Deferred revenue10,879 10,203Accrued compensation and benefits6,119 7,259Dividends payable29,067 —Current portion of deferred rent5,220 5,643Current portion of capital lease obligation (Note 9)— 835Total current liabilities95,631 65,396Long-term portion of deferred rent31,340 35,890Other2,715 —Total long-term liabilities34,055 35,890Total liabilities129,686 101,286Commitments and contingencies (Note 10) Stockholders’ equity: Common stock (Class A), $0.001 par value; 100,000 shares authorized; 14,927 and 13,434 shares issued and outstanding,respectively15 14Common stock (Class B), $0.001 par value; 35,000 shares authorized; 14,188 and 15,329 shares issued and outstanding,respectively14 15Preferred stock, $0.001 par value; 10,000 shares authorized, no shares issued or outstanding— —Additional paid-in capital143,984 138,102Retained earnings16,398 51,023Accumulated other comprehensive income14 66Total stockholders’ equity160,425 189,220Total liabilities and stockholders’ equity$290,111 $290,506The accompanying notes are an integral part of these consolidated financial statements.45Tilly’s, Inc.Consolidated Statements of Income(In thousands, except per share data) Fiscal Year Ended February 3,2018 January 28,2017 January 30, 2016Net sales$576,899 $568,952 $550,991Cost of goods sold (includes buying, distribution, and occupancy costs)401,529 400,493 383,745Gross profit175,370 168,459 167,246Selling, general and administrative expenses151,384 149,129 149,150Operating income23,986 19,330 18,096Other income, net1,223 418 52Income before income taxes25,209 19,748 18,148Income tax expense10,509 8,338 10,607Net income$14,700 $11,410 $7,541Basic earnings per share of Class A and Class B common stock$0.51 $0.40 $0.27Diluted earnings per share of Class A and Class B common stock$0.51 $0.40 $0.27Weighted average basic shares outstanding28,804 28,496 28,332Weighted average diluted shares outstanding29,074 28,529 28,402The accompanying notes are an integral part of these consolidated financial statements.46Tilly’s, Inc.Consolidated Statements of Comprehensive Income(In thousands) For the Fiscal Years Ended February 3,2018 January 28,2017 January 30, 2016Net income$14,700 $11,410 $7,541Other comprehensive income, net of tax: Net change in unrealized gains on available-for-sale securities(52) 44 1Other comprehensive income, net of tax(52) 44 1Comprehensive income$14,648 $11,454 $7,542The accompanying notes are an integral part of these consolidated financial statements.47Tilly’s, Inc.Consolidated Statements of Stockholders’ Equity(In thousands) Number of Shares CommonStock AdditionalPaid-inCapital RetainedEarnings AccumulatedOtherComprehensiveIncome TotalStockholders’Equity CommonStock(Class A) CommonStock(Class B) Balance 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 — — 3,094Net change in unrealized gain on available-for-sale securities— — — — — 1 1Balance at January 30, 201612,305 16,169 28 133,550 39,613 22 173,213Net income— — — — 11,410 — 11,410Shares converted by founders840 (840) — — — — —Stock-based compensation expense— — — 2,572 — — 2,572Restricted stock74 — — — — — —Exercise of stock options215 — 1 2,079 — — 2,080Taxes paid in lieu of shares issued for stockbased compensation— — — (99) — — (99)Net change in unrealized gain on available-for-sale securities— — — — — 44 44Balance at January 28, 201713,434 15,329 29 138,102 51,023 66 189,220Cumulative-effect adjustment from adoptionof ASU 2016-09— — — 178 (178) — —Net income— — — — 14,700 — 14,700Dividends declared— — — — (29,067) — (29,067)Dividends paid— — — — (20,080) — (20,080)Shares converted by founders1,141 (1,141) — — — — —Stock-based compensation expense— — — 2,411 — — 2,411Restricted stock44 — — — — — —Exercise of stock options308 — — 3,394 — — 3,394Taxes paid in lieu of shares issued for stockbased compensation— — — (101) — — (101)Net change in unrealized gain on available-for-sale securities— — — — — (52) (52)Balance at February 3, 201814,927 14,188 $29 $143,984 $16,398 $14 $160,425The accompanying notes are an integral part of these consolidated financial statements.48Tilly’s, Inc.Consolidated Statements of Cash Flows(In thousands) Fiscal Year Ended February 3,2018 January 28,2017 January 30, 2016Cash flows from operating activities Net income$14,700 $11,410 $7,541Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization23,389 23,266 22,808Stock-based compensation expense2,411 2,572 3,926Impairment of assets848 2,352 2,593Loss on disposal of assets192 16 304Gain on sales and maturities of marketable securities(782) (251) (100)Deferred income taxes2,933 (1,174) 1,554Changes in operating assets and liabilities: Receivables(363) 1,395 (715)Merchandise inventories(5,448) 3,589 150Prepaid expenses and other assets(562) (449) (293)Accounts payable3,559 1,623 (6,993)Accrued expenses(2,732) 6,562 6,199Accrued compensation and benefits(1,140) 1,508 (160)Deferred rent(4,973) (5,464) (948)Deferred revenue676 1,554 1,079Net cash provided by operating activities32,708 48,509 36,945Cash flows from investing activities Purchase of property and equipment(13,753) (17,047) (23,100)Proceeds from sale of property and equipment— 43 7Purchases of marketable securities(152,389) (99,675) (74,873)Maturities of marketable securities125,264 95,021 60,000Net cash used in investing activities(40,878) (21,658) (37,966)Cash flows from financing activities Dividends paid(20,080) — —Proceeds from exercise of stock options3,394 2,080 3,094Payment of capital lease obligation(835) (858) (807)Taxes paid in lieu of shares issued for stock-based compensation(101) (99) (35)Net cash (used in) provided by financing activities(17,622) 1,123 2,252Change in cash and cash equivalents(25,792) 27,974 1,231Cash and cash equivalents, beginning of period78,994 51,020 49,789Cash and cash equivalents, end of period$53,202 $78,994 $51,020Supplemental disclosures of cash flow information Interest paid$26 $82 $133Income taxes paid$11,534 $8,806 $7,473Supplemental disclosure of non-cash activities Unpaid purchases of property and equipment$4,778 $640 $1,817Dividends declared$29,067 $— $—The accompanying notes are an integral part of these consolidated financial statements.49Tilly’s, Inc.Notes to Consolidated Financial StatementsNote 1: Description of the Company and Basis of PresentationTillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensiveselection of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and weoperated 219 stores in 32 states as of February 3, 2018. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers andstreet-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores,supplemented by additional online only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to ourcustomers.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. As part of the initial public offering in May 2012, 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 our initial public offering, and to Tilly's, Inc. and itssubsidiary after our initial public offering.Fiscal YearOur fiscal year ends on the Saturday closest to January 31. Fiscal years 2017, 2016 and 2015 ended on February 3, 2018, January 28, 2017 and January 30,2016, respectively. Fiscal year 2017, included 53 weeks and fiscal years 2016 and 2015 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 held-to-maturity and are carried at fair value and amortized cost plus accrued income,respectively. Unrealized holding gains and losses, net of income taxes, on available-for-sale securities are reflected as a separate component of stockholders’equity until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis. We classifyall marketable securities within current assets on our accompanying Consolidated Balance Sheets, including those with maturity dates beyond twelvemonths, as they are available to support our current operational liquidity needs.Merchandise 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 netrealizable value using the retail inventory method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. We believe thatthe retail inventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $7.9 million, $8.1 million and $6.7million in fiscal years 2017, 2016 and 2015, respectively, are included in cost of goods sold in the accompanying 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.50These markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected. Markdowns are recorded as anincrease to cost of goods sold in the accompanying Consolidated Statements of Income. Total markdowns, including permanent and promotionalmarkdowns, on a cost basis were $50.0 million, $49.2 million and $41.5 million in fiscal years 2017, 2016 and 2015, respectively. In addition, we accrued$1.1 million and $1.3 million for planned but unexecuted markdowns, including markdowns related to slow moving merchandise, as of February 3, 2018 andJanuary 28, 2017, 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 under-performancerelative 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 negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on astraight-line basis over the term of the lease starting at the date of possession.Revenue RecognitionRevenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected fromour customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost ofgoods sold at the time the merchandise is received by the customer. We defer e-commerce revenue that are in-transit to the customer. Customers typicallyreceive goods within four days of shipment. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the relatedcosts are reflected in cost of goods sold in the accompanying Consolidated Statements of Income. For fiscal years 2017, 2016 and 2015, shipping andhandling fee revenue included in net sales was $3.3 million, $3.3 million, and $2.7 million, respectively.We accrue for estimated sales returns by customers based on historical sales return results. As of February 3, 2018 and January 28, 2017, our reserve for salesreturns was $1.1 million.51We 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 $9.2 million as of February 3, 2018 and January 28, 2017, and is included in deferred revenue on theaccompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates; however, over time, the redemption of some gift cards becomesremote and in most cases there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card “breakage”). An assessment of theultimate non-redemption rate of gift cards is performed when enough time has passed since the activation of the cards to enable a determination of theultimate breakage rate based upon historical redemption experience. This date of assessment has historically been two full fiscal years after the fiscal year thecards were activated. At the time of assessment a breakage estimate is calculated and recorded in net sales. Breakage revenue for gift cards was $1.4 million,$0.9 million and $0.8 million in fiscal years 2017, 2016 and 2015, respectively.Loyalty ProgramIn fiscal 2016, we launched a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves acertain point level, the member earns awards that may be redeemed for merchandise. Unredeemed awards and accumulated partial points are accrued asdeferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. We expire unredeemed awards after 45 daysfrom date of issuance and accumulated partial points 365 days after the last purchase activity. The deferred revenue for this program was $1.2 million and$0.6 million as of February 3, 2018 and January 28, 2017.Cost of Goods SoldCost of goods sold includes product costs and buying, distribution and store occupancy costs as follows:•Costs of products sold include:•freight expenses associated with merchandise received from our vendors into our distribution centers;•vendor allowances;•cash discounts on payments to merchandise vendors;•physical inventory losses; and•markdowns of inventory.•Buying, distribution and occupancy costs include:•payroll, benefit costs, and incentive compensation for merchandising 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;•freight expenses associated with shipping 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;•Legal provisions;•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 accompanying 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 $12.1 million, $15.4 million and $19.7 million in fiscal years 2017, 2016 and 2015, respectively.52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). Changes in these inputs and assumptions can materially affectthe measurement of the estimated fair value of share-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.We have included the estimated impact of the Tax Act in our financial results for the period ended February 3, 2018. The Securities and ExchangeCommission ("SEC") has issued interpretive guidance under Staff Accounting Bulletin No. 118 ("SAB 118") that allows for a measurement period up to oneyear after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Our accounting for the income tax effects of the new taxlegislation, based on available guidance and interpretation, is included in our provision amount and we do not anticipate material adjustments to suchaccounting in future periods. Refer to “Note 14: Income Taxes”, for further information.Earnings per ShareBasic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weightedaverage number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Incremental shares of270 thousand, 33 thousand and 70 thousand in fiscal years 2017, 2016 and 2015, 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 February 3, 2018 andJanuary 28, 2017, 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, interest-bearing money market funds, municipalbonds and certificates of deposit.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.New Accounting Standards Not Yet AdoptedIn May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), along withamendments issued in 2015 and 2016, which amends the existing accounting standards for revenue recognition. ASU 2014-09 outlines principles thatgovern revenue recognition at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09, which will becomeeffective for us in the first quarter of fiscal 2018, may be applied retrospectively for each period presented (the "full retrospective method") or retrospectivelywith the cumulative effect recognized in the opening retained earnings balance in fiscal year 2018 (the "modified retrospective method"). We are adoptingthe standard using the modified retrospective method. We have determined that the adoption will change the timing of recognition of gift card breakageincome, which is currently recognized when the probability of the redemption is remote and recorded in net sales. The new guidance will require recognitionof gift card breakage income proportionately in net sales as redemptions occur. Additionally, we have determined that revenue for merchandise shipped tothe customer from a distribution center or store will be recognized at the shipping point rather than upon receipt by the53customer. Lastly, under the new guidance, we will recognize allowances for estimated sales returns on a gross basis rather than net basis on the consolidatedbalance sheets. The new guidance also requires enhanced disclosures, such as disaggregation of revenues and revenue recognition policies that requiresignificant judgment and identification of performance obligations to customers. We have determined that the new standard will result in a net cumulativeeffect adjustment to increase beginning retained earnings by approximately $1.4 million. We currently do not expect the adoption of this update to have amaterial effect on our consolidated financial statements.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. ASU 2016-02, which will become effective for us in the firstquarter of fiscal 2019, with early adoption permitted, must be adopted using the modified retrospective method. The new standard is expected to impact ourconsolidated financial statements as we conduct all of our retail sales and corporate operations in leased facilities. We are in the process of evaluating theimpact of adopting the new standard on our consolidated financial statements.Accounting Standard Adopted in Fiscal 2017On January 29, 2017, we adopted FASB ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accountingand reporting for share-based compensation, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as theclassification in the statement of cash flows. We elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The adoption ofASU 2016-09 resulted in a cumulative-effect adjustment of $0.2 million decrease to retained earnings and a $0.2 million increase to additional paid-in-capital as of January 29, 2017, related to the recognition of previously estimated expected forfeitures using the modified retrospective method. We adoptedthe cash flow presentation which requires excess tax benefits to be presented as an operating activity rather than a financing activity. The adoption of thisupdate did not have an effect on our consolidated results of operations.Note 3: Marketable SecuritiesMarketable securities as of February 3, 2018 consisted of commercial paper classified as available-for-sale and fixed income securities, that we have theintent and ability to hold to maturity and therefore, are classified as held-to-maturity. Our investments in commercial paper and fixed income securities arerecorded at fair value and amortized cost, which approximates fair value, respectively. All of our marketable securities are less than one year from maturity.The following table summarizes investments in marketable securities at February 3, 2018 and January 28, 2017 (in thousands): February 3, 2018 Cost or Amortized Cost GrossUnrealizedHoldingGains Estimated Fair ValueCommercial paper$59,566 $23 $59,589Fixed income securities23,119 42 23,161 $82,685 $65 $82,750 January 28, 2017 Cost or Amortized Cost GrossUnrealizedHoldingGains Estimated Fair ValueCommercial paper$44,785 $107 $44,892Fixed income securities10,017 14 10,031 $54,802 $121 $54,923For fiscal years 2017, 2016 and 2015, we recognized gains on investments of $0.8 million, $0.3 million and $0.1 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 accompanying Consolidated Statements of Income.54Note 4: ReceivablesAt February 3, 2018 and January 28, 2017, receivables consisted of the following (in thousands): February 3, 2018 January 28,2017Credit and debit card receivables$2,480 $2,450Tenant allowances due from landlords1,004 14Vendor receivables874 1,807Less: Allowance for doubtful accounts(6) (282)Total receivables$4,352 $3,989We establish a receivable for amounts we expect to collect. We make estimates for the allowance for doubtful accounts against receivables for any potentialuncollectible amounts. The year-end receivables are primarily collected within the following fiscal quarter.Note 5: Prepaid Expenses and Other Current AssetsAt February 3, 2018 and January 28, 2017, prepaid expenses and other current assets consisted of the following (in thousands): February 3,2018 January 28,2017Prepaid rent$7,095 $7,507Prepaid maintenance999 690Prepaid insurance673 504Other767 840Total prepaid expenses and other current assets$9,534 $9,541Note 6: Property and EquipmentAt February 3, 2018 and January 28, 2017, property and equipment consisted of the following (in thousands): February 3,2018 January 28,2017Leasehold improvements$132,428 $137,287Furniture and fixtures43,983 43,160Computer hardware and software37,722 30,091Machinery and equipment31,509 31,089Vehicles1,891 1,821Construction in progress1,854 2,273Building under capital lease— 7,840 249,387 253,561Accumulated depreciation(166,066) (164,342)Property and equipment, net$83,321 $89,219Depreciation expense related to property and equipment was $23.4 million, $23.3 million and $22.8 million in fiscal years 2017, 2016 and 2015,respectively.Cash paid for capital expenditures during fiscal 2017, 2016 and 2015, were approximately $13.8 million, $17.0 million and $23.1 million, 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 $0.8 million, $2.4 million and $2.6 million in selling, general and administrative expensesin fiscal years 2017, 2016 and 2015, 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.55Note 7: Accrued ExpensesAt February 3, 2018 and January 28, 2017, accrued expenses consisted of the following (in thousands): February 3, 2018 January 28, 2017Loss contingencies (Note 10)$6,466 $2,198Sales and use taxes payable2,192 5,730Accrued construction2,075 484Accrued freight1,997 2,884Merchandise returns1,133 1,078Income taxes payable343 4,374Other8,525 7,124Total accrued expenses$22,731 $23,872Note 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 January 26, 2020. The interest rate charged on borrowings is selected at our discretion at the time of draw between the London Interbank Offered Rate,plus 0.75%, or at the Bank’s prime rate. The agreement allows for the declaration and payment of dividends or distributions to stockholders. On February 20,2018 and February 24, 2017, we paid a special dividend of $1.00 per share and $0.70 per share, respectively. Refer to "Note 18: Shareholders' Equity", forfurther information. The line of credit is secured by substantially all of our assets. As a sub-feature under the revolving line of credit, the Bank may also issuestand-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) income before income taxes not to be less than $1 million (measured at the end of each fiscal quarter), (ii) a maximumratio of 4.00 to 1.00 as of each quarter end for “Funded Debt to EBITDAR”, defined as the sum of total debt, capital leases and annual rent expense multipliedby 6 divided by the sum of net income, interest expense, taxes, depreciation, amortization and annual rent expense, and (iii) requires minimum eligibleinventory of $50 million as of the end of each quarter. In addition, maximum investment in fixed assets in any fiscal year of $50 million.In September 2016, we established a $750,000 standby letter of credit as security against insurance claims as required by our workers compensation insurancepolicy. As of February 3, 2018, there has been no activity under this letter of credit since its inception.As of February 3, 2018, 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 (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. This lease wasamended in December 2017 and was re-classified from a capital lease to an operating lease. The lease expires on December 31, 2027. We incurred rentexpense of $0.2 million in fiscal year 2017 under the operating lease classification, see Capital lease section for incurred rent expense in prior years.We 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 in each of the fiscal years 2017, 2016 and 2015, related to this lease. Pursuant to the lease agreement, the lease payment adjustsannually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase.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 $1.0 million, $0.9 million and $0.9 million in56fiscal years 2017, 2016 and 2015, respectively, related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the LosAngeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed 7%, but a minimum of 3%, in any one annual increase. The lease expires onOctober 31, 2021.Future 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 and all of our store locations as of February 3, 2018 are as follows (in thousands):Fiscal YearRelatedParty Other Total2018$3,233 $65,796 $69,02920193,330 59,383 62,71320203,429 54,356 57,78520213,258 48,192 51,45020222,276 39,966 42,242Thereafter11,274 72,326 83,600Total$26,800 $340,019 $366,819Rent expense under non-cancellable operating leases for fiscal years 2017, 2016 and 2015 was as follows (in thousands): February 3, 2018 January 28,2017 January 30, 2016Minimum rentals$44,520 $42,988 $43,176Contingent rentals1,552 1,212 403Total rent expense$46,072 $44,200 $43,579Capital leasePrior to December 2017, our corporate headquarters and distribution center (10 and 12 Whatney, Irvine, California) was leased from a company owned by theco-founders of Tillys. The land component was accounted for as an operating lease and the building component was accounted for as a capital lease. Weincurred rent expense of $0.9 million, $1.0 million and $0.9 million, in fiscal years 2017, 2016 and 2015, respectively, related to the operating (landcomponent) of this lease.The obligation under the capital lease was $0.8 million as of January 28, 2017. The gross amount of the building under the capital lease was $7.8 million andaccumulated amortization was and $7.4 million as of and January 28, 2017.Prior 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.Note 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 Consolidated Balance Sheets.Purchase ObligationsAt February 3, 2018, our future minimum payments under agreements to purchase services primarily for software maintenance aggregated to $8.3 million,payable as follows: $2.6 million in fiscal 2018, $2.4 million in fiscal 2019, $1.7 million in fiscal 2020, $1.2 million in fiscal 2021, and $0.4 million in fiscal2022.57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 $7.5 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.Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No.30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage andhour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. InDecember 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. Subsequently, we requested the plaintiff todismiss the class action claims based on an existing waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffingcompany that employed plaintiff to work at the Company. We intend to defend this case vigorously.Lauren Minniti, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., United States District Court, Southern District of Florida, Case No.0:17-cv-60237-FAM. On January 30, 2017, the plaintiff filed a putative class action lawsuit against us, alleging violations of the Telephone ConsumerProtection Act of 1991 (the “TCPA”). Specifically, the complaint asserts a violation of the TCPA for allegedly sending unsolicited automated messages tothe cellular telephones of the plaintiff and others. The complaint seeks class certification and damages of $500 per violation plus treble damages under theTCPA. In March 2017, we filed our initial response to this matter with the court. In June 2017, the parties attended a mediation. In July 2017, the partiesreached an agreement in principle to settle this matter, subject to court approval and the execution of a final settlement agreement. In March 2018, the partiesexecuted a settlement agreement, subject to court approval.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. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hourlaws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court grantedour demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against Tilly's and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative classmembers did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written ordersustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed anappeal of the order to the California Court of Appeal. In October 2017, the plaintiff filed her opening appellate brief, and our responding appellate brief wasfiled in December 2017. Plaintiff's reply appellate brief is currently due to be filed in April 2018. We have defended this case vigorously and will continue todo so.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. In June 2014, the plaintiff filed a putative class action and representative Private Attorney General Act of 2004 lawsuit against us allegingviolations of California’s wage and hour, meal break and rest break rules and regulations, and unfair competition law, among other things. The complaintsought class certification, penalties, restitution,injunctive relief and attorneys’ fees and costs. The plaintiff filed a first amended complaint in December 2014. We answered the complaint in January 2015,denying all allegations. We engaged in mediation in May 2016, and the parties reached a resolution that was presented to the court for preliminary approvalin September 2016. The court preliminarily approved the settlement in October 2016, and notice of the settlement was issued to class members. Uponcompletion of the claims process, the court approved the final settlement in February 2017. We concluded this matter with the payment of the finalsettlement in April 2017. The final settlement amount was not materially different from the amount previously accrued when a loss provision was established. 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 thevendor and us related to certain vendor products we sell. The settlement requires that the vendor pay $2.0 million to the plaintiff over three years and weagreed to guarantee such payments in exchange for a security interest in the vendor's intellectual property. As of February 3, 2018, due to updated facts andcircumstances, we have accrued for the remaining maximum exposure loss of $1.4 million relating to this matter. We will utilize all available rights of offsetto reduce our loss, including the enforcement of the security interest we have in the vendor's intellectual property.58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 either available-for-salesecurities or held-to-maturity, and certain cash equivalents, specifically money market securities, commercial paper, municipal bonds and certificates ofdeposits. The money market accounts are valued based on quoted market prices in active markets. The marketable securities are valued based on otherobservable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yieldcurves) 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 2017, 2016 and 2015. Furthermore, as of February 3, 2018 andJanuary 28, 2017, 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): February 3, 2018 January 28, 2017 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3Cash equivalents (1): Money market securities$46,441 $— $— $76,177 $— $—Marketable securities: Commercial paper$— $59,589 $— $— $44,892 $—Fixed income securities— 23,161 — — 10,031 —(1) Excludes cashImpairment 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 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 ourweighted 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.On at least a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-livedassets may not be recoverable. Based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows fromoperations and the projected outlook for each of our stores, we determined that certain stores would not be able to generate sufficient cash flows over theremaining term of the related leases to recover our investment in the respective stores. As a result, we recorded non-cash impairment charges of approximately$0.8 million, $2.4 million and $2.6 million in fiscal years 2017, 2016 and 2015, respectively, to write-down the59carrying value of certain long-lived store assets to their estimated fair values. Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016 ($ in thousands)Carrying value of assets with impairment$848 $2,584 $3,589Fair value of assets impaired$— $232 $996Number of stores tested for impairment10 15 20Number of stores with impairment4 9 9Note 12: Share-Based CompensationThe Tillys 2012 Amended and Restated Equity and Incentive Award Plan, as amended in June 2014 (the "2012 Plan"), authorizes up to 4,413,900 shares forissuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store salesgrowth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of February 3,2018, there were 1,766,014 shares still available for future issuance under the 2012 Plan.OptionsWe grant stock options to certain employees that gives them the right to acquire our Class A common stock under the 2012 Plan. The exercise price ofoptions granted is equal to the closing price per share of our stock at the date of grant. The non-qualified options vest at a rate of 25% on each of the first fouranniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten yearsfrom the date of grant.The following table summarizes our stock option activity for fiscal year 2017: StockOptions Grant DateWeightedAverageExercise Price WeightedAverageRemainingContractualLife (in Years) AggregateIntrinsicValue(1) (in years) ($ in thousands)Outstanding at January 28, 20171,842,375 $9.98 Granted411,000 $8.79 Exercised(308,250) $11.01 Forfeited(59,000) $8.92 Expired(34,875) $14.07 Outstanding at February 3, 20181,851,250 $9.50 7.2 $9,304Vested and expected to vest at February 3, 20181,851,250 $9.50 7.2 $9,304Exercisable at February 3, 2018828,250 $11.55 5.6 $2,738 (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 the fiscal year and theweighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market value per share was $14.27 at February 3, 2018.The total intrinsic value of options exercised in fiscal years 2017, 2016 and 2015 was $1.3 million, $0.9 million and $1.7 million, respectively.The total fair value of options vested in fiscal years 2017, 2016 and 2015 was $1.6 million, $2.0 million and $4.6 million, respectively.The total proceeds received from the exercise of stock options in fiscal years 2017, 2016 and 2015 was $3.4 million, $2.1 million and $3.1 million,respectively. The tax benefit realized from stock options exercised in fiscal years 2017, 2016 and 2015 was $0.5 million, $0.4 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 option60term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annualdividend yield, if any. We will issue shares of Class A common stock when the options are exercised.The fair values of stock options granted in fiscal years 2017, 2016 and 2015 were estimated on the grant dates using the following assumptions: Fiscal Year Ended February 3,2018 January 28,2017 January 30, 2016Average fair value per option granted$3.99 $3.73 $3.06Expected option term (1)5.0 years 5.0 years 5.0 yearsExpected volatility factor (2)50.3% 62.8% 49.68%Risk-free interest rate (3)1.93% 1.34% 1.64%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 the latest historical dataavailable 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 common stock over the most recent period equal to the expectedoption 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 grant date.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 February 3, 2018 and changes during fiscal year 2017 are presented below: Shares Weighted-AverageGrant-DateFair ValueNonvested at January 28, 2017166,960 $12.12Granted23,100 $10.39Vested(74,528) $11.09Forfeited(6,000) $16.07Nonvested at February 3, 2018109,532 $12.24The weighted-average grant-date fair value of restricted stock granted during the years ended January 28, 2017 and January 30, 2016 was $6.17and $15.15,respectively.The total fair value of restricted stock vested was $0.7 million, $0.5 million and $0.4 million in fiscal years 2017, 2016 and 2015, respectively.Stock-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the vesting period. Thefollowing table summarizes share-based compensation recorded in the accompanying Consolidated61Statements of Income (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Cost of goods sold$612 $855 $991Selling, general and administrative expenses1,799 1,717 2,935Stock-based compensation$2,411 $2,572 $3,926At February 3, 2018, there was $3.6 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 2.2 years.Note 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 $0.6 million, $0.8 million and $0.7 million in fiscal years 2017,2016 and 2015, respectively.Note 14: Income TaxesThe components of income tax expense for fiscal years 2017, 2016 and 2015 were as follows (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Current: Federal$6,236 $7,939 $7,614State1,304 1,602 1,439 7,540 9,541 9,053Deferred: Federal2,436 (1,121) 1,105State533 (82) 449 2,969 (1,203) 1,554Total income tax expense$10,509 $8,338 $10,607A reconciliation of income tax expense to the amount computed at the federal statutory rate for fiscal years 2017, 2016 and 2015 is as follows (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Federal taxes at statutory rate$8,529 $6,913 $6,352State and local income taxes, net of federal benefit1,216 988 1,098Tax reform impact491 — —Stock compensation discrete items (1)231 558 2,592Return to provision adjustments124 (40) 130Other(82) (81) 435Total income tax expense$10,509 $8,338 $10,607(1)This amount includes the impact of discrete items related to the expiration of stock options, exercises of stock options and the settlement of restricted stock units that arerecorded to income tax expense which represents stock-based compensation cost previously recognized by us that was greater than the deduction allowed for income taxpurposes based on the price of our common stock on the date of expiration, exercise or vesting.On December 22, 2017, the Tax Act was signed into law, a significant modification of existing U.S. federal tax legislation, was enacted which reduced ourU.S. federal tax rate from 35% to 21%, effective January 1, 2018. The statutory tax rate for the current year reflects this change in tax rate. The decrease in rateresulted in a $0.2 million decrease in our provision for income62taxes, offset by a $0.5 million impact on our deferred tax assets. Our accounting for the income tax effects of the new tax legislation, based on availableguidance and interpretation, is included in our provision amount and we do not anticipate material adjustments to such accounting in future periods.Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes; and (b) operating loss and tax credit carry-forwards. We record net deferred tax assets to the extentwe believe these assets will more likely than not be realized. In making such determination, we consider 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 February 3, 2018 and January 28, 2017 were as follows (in thousands): February 3, 2018 January 28, 2017Deferred tax assets: Deferred rent$3,523 $5,343Stock-based compensation1,705 2,574Inventories1,650 2,712Accrued expenses1,079 1,753Compensation and benefits471 687Deferred revenue187 318Tax credits51 162Capital lease4 147Total deferred tax assets8,670 13,696Deferred tax liabilities: Property and equipment(5,367) (7,344)Prepaid expenses(526) (606)Marketable securities(9) (44)Total deferred tax liabilities(5,902) (7,994)Net deferred tax asset$2,768 $5,702Deferred tax assets are included in “Other assets" in the accompanying Consolidated Balance Sheets.As of February 3, 2018 and January 28, 2017, we had approximately $0.1 million of California Enterprise Zone credit carryovers. These credits will begin toexpire during fiscal year 2022 if not utilized.Uncertain Tax PositionsAs of February 3, 2018 and January 28, 2017, 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 2017, 2016 and 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 2015 and 2016 remain subject to examination for federal tax purposes and fiscal years 2013 through 2016remain subject to examination in significant state tax jurisdictions.Note 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, and unamortized compensation, on share-based awards are assumed to be used by us to purchase the common shares at theaverage63market price during the period. Potentially dilutive shares of common stock represent outstanding stock options and restricted stock awards.The components of basic and diluted earnings per share of Class A and Class B common stock, in aggregate, for fiscal years 2017, 2016 and 2015 are asfollows (in thousands, except per share amounts): Fiscal Year Ended February 3,2018 January 28,2017 January 30, 2016Net income$14,700 $11,410 $7,541Weighted average basic shares outstanding28,804 28,496 28,332Dilutive effect of stock options and restricted stock270 33 70Weighted average shares for diluted earnings per share29,074 28,529 28,402Basic earnings per share of Class A and Class B common stock$0.51 $0.40 $0.27Diluted earnings per share of Class A and Class B common stock$0.51 $0.40 $0.27The 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.The following stock options and restricted stock have been excluded from the calculation of diluted earnings per share as the effect of including these stockoptions and restricted stock would have been anti-dilutive (in thousands): Fiscal Year Ended February 3,2018 January 28,2017 January 30, 2016Stock options1,058 1,818 1,119Restricted stock56 99 154Total1,114 1,917 1,273Note 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 2017, 2016 and 2015, our Board of Directors approved annual financial support for TLC of$70,000, $50,000 and $50,000, respectively, for each fiscal year.64Note 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, except for fourth quarter ended February 3, 2018, which was fourteen weeks in duration. The operatingresults in any quarter are not necessarily indicative of the results that may be expected for any future period. We have derived this data from our unauditedconsolidated interim financial statements that, in our opinion, have been prepared on substantially the same basis as the audited financial statementscontained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periodspresented. These unaudited quarterly results should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.The quarters are calculated independent of each other and therefore may not agree to the year to date amounts. Fiscal Year Ended February 3, 2018 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (1) (unaudited) (unaudited) (unaudited) (unaudited)Net sales$120,947 $138,810 $152,824 $164,317Gross profit32,905 40,929 50,094 51,440Operating (loss) income(329) (1,239) 14,112 11,441Net (loss) income(161) (596) 8,757 6,699Basic (loss) earnings per share$(0.01) $(0.02) $0.30 $0.23Diluted (loss) earnings per share$(0.01) $(0.02) $0.30 $0.23 (1) Includes 14 weeks Fiscal Year Ended January 28, 2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (unaudited) (unaudited) (unaudited) (unaudited)Net sales$120,218 $136,412 $152,106 $160,216Gross profit32,587 38,837 47,969 49,066Operating (loss) income(3,967) 2,232 10,667 10,398Net (loss) income(2,745) 1,433 6,417 6,305Basic (loss) earnings per share$(0.10) $0.05 $0.23 $0.22Diluted (loss) earnings per share$(0.10) $0.05 $0.22 $0.22Note 18: Shareholders' EquityOn January 24, 2018, our Board of Director's declared a special cash dividend of $1.00 per share to all holders of record of issued and outstanding shares ofboth Class A and Class B common stock as of the close of business on February 9, 2018. Payment of the dividend was made on February 20, 2018.On January 31, 2017, our Board of Director's declared a special cash dividend of $0.70 per share to all holders of record of issued and outstanding shares ofboth Class A and Class B common stock as of the close of business on February 15, 2017. Payment of the dividend was made on February 24, 2017.65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 procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submitunder the Exchange Act is recorded, processed, summarized and reported as and when required.Management’s Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act.Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief 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 February 3, 2018 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 February 3, 2018.Our internal control over financial reporting as of February 3, 2018 has been audited by BDO USA, LLP, an independent registered public accounting firm, asstated in their report included herein.66Changes in Internal Control over Financial ReportingManagement has determined that, as of February 3, 2018, 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.67Report of Independent Registered Public Accounting FirmShareholders and Board of DirectorsTilly’s, Inc.Irvine, CaliforniaOpinion on Internal Control over Financial ReportingWe have audited Tilly’s, Inc.’s (the “Company’s”) internal control over financial reporting as of February 3, 2018, based on criteria established in InternalControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In ouropinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018, based on the COSOcriteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedbalance sheets of the Company as of February 3, 2018 and January 28, 2017, the related consolidated statements of income, comprehensive income,stockholders’ equity, and cash flows for each of the three years in the period ended February 3, 2018, and the related notes and our report dated March 30,2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 30, 201868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 2018 Annual Meeting of Stockholders,which will be filed with the SEC no later than 120 days after the close of the fiscal year ended February 3, 2018 (the “2018 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 amendments to certain provisions of the Code of Business Ethics, or waivers of such provisions granted to executive officers anddirectors, on our website under the Investor Relations section at www.tillys.com.Item 11. Executive CompensationThe information required by this Item is incorporated herein by reference to the Company’s 2018 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 2018 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 2018 Proxy Statement.Item 14. Principal Accounting Fees and ServicesThe information required by this Item is incorporated herein by reference to the Company’s 2018 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.Item 16. Form 10-K SummaryNone.69EXHIBIT 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) 10.2.1* First Amendment to Amended and Restated Office and Warehouse Lease between Shaked Holdings, LLC and World of Jeans & Tops, datedDecember 21, 2017 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) 7010.13 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) 10.14 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) 10.15 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) 10.16 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) 10.16.1 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, 2014) 10.16.2 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) 10.16.3 Amendment No. 3 to Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo, NA, dated as of January26, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 31, 2017) 10.16.4* Amendment No. 4 to Amended and Restated Credit Agreement and Limited Waiver between World of Jeans & Tops and Wells Fargo, NA,dated as of April 13, 2017 10.16.5 Amendment No. 5 to Amended and Restated Credit Agreement between World of Jeans & Tops and Wells Fargo, NA, dated as of January24, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 25, 2018) 10.17 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) 10.18 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) 10.19 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) 10.20 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) 10.21 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) 10.22 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) 10.23 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) 10.24# 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) 10.25# 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) 7110.26# Offer Letter between Tilly’s, Inc. and Jon Kubo entered into on July 8, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’sCurrent Report on Form 8-K filed on August 15, 2016) 21.1* Subsidiaries of Tilly’s, Inc. 23.1* Consent of BDO USA, 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 February 3, 2018 formatted in eXtensibleBusiness Reporting Language (XBRL): (i) Consolidated Balance Sheets as of February 3, 2018 and January 28, 2017; (ii) ConsolidatedStatements of Income for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 2016; (iii) Consolidated Statements ofComprehensive Income for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 2016; (iv) Consolidated Statementsof Stockholders’ Equity for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 2016; (v) Consolidated Statementsof Cash Flows for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 2016; and (vi) the Notes to the ConsolidatedFinancial Statements.* Filed herewith# Management contract or compensatory plan.SIGNATURESPursuant 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, 2018.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)72POWER 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, 2018.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/ Bernard Zeichner DirectorBernard Zeichner 73Exhibit 10.2.1FIRST AMENDMENT TO THE AMENDED & RESTATED OFFICE AND WAREHOUSE LEASETHIS FIRST AMENDMENT TO THE AMENDED & RESTATED OFFICE AND WAREHOUSE LEASE (this“Amendment”) is made and entered into as of December 21, 2017, by and between SHAKED HOLDINGS, LLC, a Californialimited liability company (“Landlord”), and WORLD OF JEANS AND TOPS, INC. a California corporation (“Tenant”).RECITALSA.Landlord and Tenant are parties to that certain Amended & Restated Office and Warehouse Lease dated September 21, 2007,(the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 172,324 rentablesquare feet (the “Premises”) in the building located at 10 & 12 Whatney, Irvine, California (the “Building”).B.The Lease by its terms shall expire on December 31, 2017 (“Prior Termination Date”), and the parties desire to extend theTerm of the Lease, all on the following terms and conditions.NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:1.Extension. The Term of the Lease is hereby extended for a period of ten (10) years commencing January 1, 2018, (“ExtendedCommencement Date”) and shall expire on December 31, 2027 (“Extended Termination Date”). That portion of the Termcommencing the day immediately following the Prior Termination Date and ending on the Extended Termination Date shall bereferred to herein as the “Extended Term”.2.Minimum Monthly Rent. Notwithstanding anything in the Lease to the contrary, effective as of January 1, 2018, the of BaseRent payable with respect to the Premises for the Extended Term shall be $155,091.60, and shall increase by 3% annually. Allsuch Base Rent shall be payable by Tenant in accordance with the terms of the Lease, as amended hereby.3.Additional Security Deposit. No additional Security Deposit shall be required in connection with this Amendment.4.Additional Rental. For the period commencing on the Extended Commencement Date and ending on the Extended TerminationDate, Tenant shall pay all additional rent payable under the Lease, including Tenant’s Operating Expenses in accordance withthe terms of the Lease, as amended hereby.5.Condition of Premises. Tenant is in possession of the Premises and accepts the same “as is” without any agreements,representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements,except as may be expressly provided otherwise in this Amendment or the Original Lease.6.Other Pertinent Provisions. Landlord and Tenant agree that, effective as of the Extended Commencement Date, the Lease shallbe amended in the following additional respects:6.1Option to Extend (Lease, Section 1.7 Exhibit B). All references to Options and Exhibit B are hereby deleted in theirentireties.6.2Guarantor(s) (Lease, Section 1.12). None. However, if Tenant is no longer a Publicly Traded company, Tenant shall berequired to provide annual audited financial statements.16.3Utilities (Lease, Section 7). In addition to the terms outlined in Paragraph 7, Tenant shall be responsible for all utilitycosts. Landlord reserves the right to contract for service from a different Electric Service Provider or Alternative ServiceProvider including the right to install solar power. The Cost to the Tenant of such Alternative Service Provider shall notexceed the cost of the present Electric Service Provider.6.4Tenant’s Insurance (Lease, Section 10). Paragraph 10 of the Lease shall be modified as follows: Tenant shall berequired to maintain Commercial Liability Insurance of $2,000,000 per occurrence (Bodily Injury, Personal Injury,Death & Property Damage Liability), with an aggregate of $4,000,000 Workers Comp Insurance of $1,000,000 orgreater, Commercial Automobile Liability & Property Insurance of no less than $1,000,000 per occurrence and in theaggregate, Business Interruption Insurance of $5,000,000 Rental Value Insurance in this value of 12 months MinimumMonthly Rental, Plate Glass Insurance, Earthquake Insurance, and Fire and Sprinkler Damage coverage. Tenant willinsure leasehold improvements, trade fixtures, merchandise, and personal property in an amount not less than fullreplacement value. Insurance Companies General Policy Holders rating of not less than A- and Financial ratings not lessthan Class VII (7) as rated in the most current available best’s key rating guide. Landlord has not liability for an ofTenants covered or non-covered items.6.5Repairs and Maintenance (Lease, Section 11.1(b)). In addition to the terms outlined in Paragraphs 11.1(b), Tenantshall use Landlord’s designated landscapers or shall have the right to approve landscapers recommended by Tenant.6.5.1Repairs and Maintenance (Lease, Section 11.1(c)). Paragraph 11.1(c) is hereby deleted in its entirety.6.6Signs and Other Displays (Lease, Section 12.2). In addition to the terms outlined in Paragraph 12.2, Tenant shall havethe right to install signage in compliance with applicable City ordinances and Landlord’s standard sign criteria. Landlordmay allocate monument sign panels for Tenant’s use, in locations designated by Landlord. Tenant shall be responsiblefor the cost of installation, maintenance, and removal at the end of the lease.7.Miscellaneous.7.1This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. Therehave been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitledto any rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similareconomic incentives that may have been provided Tenant in connection with entering into the Lease, unless specificallyset forth in this Amendment.7.2Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and infull force and effect. In the case of any inconsistency between the provisions of the Lease and this Amendment, theprovisions of this Amendment shall govern and control. The capitalized terms used in this Amendment shall have thesame definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined inthis Amendment.27.3Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation forsuch an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered thesame to Tenant.7.4Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenantagrees to indemnify and hold Landlord its members, principals, beneficiaries, partners, officers, directors, employees,mortgagee(s) and agents, and the respective principals and members of any such agents harmless from all claims of anybrokers claiming to have represented Tenant in connection with this Amendment.7.5Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same onbehalf of the party hereto for which such signatory is acting. Tenant hereby represents and warrants that neither Tenant,nor any persons or entities holding any legal or beneficial interest whatsoever in Tenant, are (i) the target of anysanctions program that is established by Executive Order of the President or published by the Office of Foreign AssetsControl, U.S. Department of the Treasury (“OFAC”); (ii) designated by the President or OFAC pursuant to the Tradingwith the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, thePatriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of the Presidentissued pursuant to such statutes; or (iii) named on the following list that is published by OFAC: “List of SpeciallyDesignated Nationals and Blocked Persons.” If the foregoing representation is untrue at any time during the SecondExtended Term, a Default under the Lease will be deemed to have occurred, without the necessity of notice to Tenant.7.6Redress for any claim against Landlord under the Lease and this Amendment shall be limited to and enforceable onlyagainst and to the extent of Landlord’s interest in the Building. The obligations of Landlord under the Lease are notintended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of itstrustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, orany beneficiaries, stockholders, employees, or agents of Landlord or the investment manager, and in no case shallLandlord be liable to Tenant hereunder for any lost profits, damage to business, or any form of special, indirect orconsequential damage.[SIGNATURE PAGE FOLLOWS]IN WITNESS WHEREOF, Landlord and Tenant have entered into and executed this Amendment as of the date first written above.3LANDLORD:TENANT: SHAKED HOLDINGS, LLCa California limited liability companyWORLD OF JEANS & TOPS, INC.a California corporationBy: _/s/ Hezy Shaked__________________By: _/s/ Michael Henry______________ Name: __Hezy Shaked_________________Name: _Michael Henry______________ Title: ___Manager___________________________Title: ___Tilly’s, Inc._CFO___________ Dated: __December 21, 2017Dated: ___December 21, 2017 4[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]{2300-0003/00226762;} A-1InitialsExhibit 10.16.4AMENDMENT NO. 4 TO AMENDED AND RESTATED CREDIT AGREEMENT AND LIMITED WAIVERTHIS AMENDMENT NO. 4 TO AMENDED AND RESTATED CREDIT AGREEMENT AND LIMITED WAIVER(this “Amendment”), is made on April 13, 2017, by and among WORLD OF JEANS & TOPS, a California corporation(“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).RECITALSA. Bank and Borrower entered into that certain Amended and Restated Credit Agreement dated as of May 3, 2012, asamended by that certain Amendment No. 1 to Amended and Restated Credit Agreement and Note, dated as of February 3, 2014, thatcertain Amendment No. 2 to Amended and Restated Credit Agreement, dated as of July 9, 2015, and that certain Amendment No. 3 toAmended and Restated Credit Agreement, dated as of January 26, 2017 (as otherwise amended, amended and restated, or otherwisemodified from time to time to the date hereof, the “Agreement”), pursuant to which Bank agreed to extend credit to Borrower on theterms and conditions set forth in such Agreement.B. Borrower has requested that Bank make certain modifications to the Agreement as specified herein and Bank has agreedto such requests and has agreed to waive Borrower’s compliance with certain terms of the Agreement related to such modificationrequests, all subject to execution of this Amendment and the satisfaction of the conditions specified herein.C. Borrower and Bank now desire to execute this Amendment to set forth their agreements with respect to the modificationsto the Agreement.Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each ofBank and Borrower hereby agrees as follows:SECTION 1. Definitions. Capitalized terms used in this Amendment and not defined herein are defined in the Agreement.SECTION 2. Amendments to Agreement. The Agreement is hereby amended as follows:A. Cash, Cash Equivalents, Marketable Securities and Minimum Inventory. Subsection 1.1(c) of the Agreement ishereby amended and restated in its entirety as follows:“(c) Cash, Cash Equivalents, Marketable Securities and Minimum Inventory. Bank shall not be required tomake an advance to Borrower under the Line of Credit unless Borrower has demonstrated that the sum of (i)Borrower’s cash and other cash equivalents and certain marketable securities acceptable to Bank in its sole discretion,and (ii) the aggregate value (with the value determined on a cost basis) of Borrower’s eligible inventory (exclusive ofwork in process and inventory which is obsolete, unsalable or damaged) equals at least Fifty Million Dollars($50,000,000).”B. Financial Condition. Section 4.9 of the Agreement is hereby amended by deleting subsection (c) thereof in itsentirety.SECTION 3. Limited Waiver.A. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties ofBorrower contained herein, Bank hereby waives any Default or Event of Default by Borrower that occurred prior to theeffectiveness of this Amendment, and which, had this Amendment been in effect at such time, would not have constituted aDefault or Event of Default.B. Without limiting the generality of the provisions of the Agreement, the waiver set forth herein shall be limitedprecisely as written and relate solely to the changes to the Agreement effectuated by this Amendment, and nothing in thisAmendment shall be deemed to: (i) constitute a waiver of compliance by Borrower of the Agreement in any other instance, orany other term, provision or condition of the Agreement or any other instrument or agreement referred to therein; or (ii)prejudice any right or remedy that Bank may now have (except to the extent such right or remedy was based upon existingdefaults that will not exist after giving effect to this Amendment) or may have in the future under or in connection with theAgreement or any other instrument or agreement referred to therein.C. Except as expressly set forth herein, the terms, provisions and conditions of the Agreement and the other LoanDocuments shall remain in full force and effect and in all other respects are hereby ratified and confirmed.SECTION 4. Representations and Warranties of Borrower. Borrower represents and warrants to Bank that:(a)It has the power and authority to enter into and to perform this Amendment, to execute and deliver alldocuments relating to this Amendment, and to incur the obligations provided for in this Amendment, all ofwhich have been duly authorized and approved in accordance with Borrower’s organizational documents;(b)This Amendment, together with all documents executed pursuant hereto, shall constitute when executed thevalid and legally binding obligations of Borrower in accordance with their respective terms, except as may belimited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting theenforcement of creditors’ rights generally and by general equitable principles;(c)All representations and warranties contained in the Agreement and the other Loan Documents are true andcorrect with the same effect as though such representations and warranties had been made on and as of theEffective Date (except to the extent that such representations and warranties expressly relate- 2 -solely to an earlier date (in which case such representations and warranties are true and accurate on and as ofsuch earlier date));(d)Borrower’s obligations under the Loan Documents remain valid and enforceable obligations, and the executionand delivery of this Amendment and the other documents executed in connection herewith shall not beconstrued as a novation of the Agreement or any of the other Loan Documents;(e)As of the Effective Date, to Borrower’s knowledge, it has no offsets or defenses against the payment of any ofthe obligations under the Loan Documents;(f)No law, regulation, order, judgment or decree of any Governmental Authority exists, and no action, suit,investigation, litigation or proceeding is pending or threatened in any court or before any arbitrator orGovernmental Authority, which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the making ofthe financings hereunder or (B) the consummation of the transactions contemplated pursuant to the terms of thisAmendment, the Agreement, the Note, or the other Loan Documents or (ii) has or would reasonably beexpected to have a material adverse effect on Borrower; and(g)After giving effect to the terms of this Amendment, no Default or Event of Default exists or has occurred and iscontinuing on and as of the Effective Date and after giving effect hereto.SECTION 5. General Release. In consideration of the benefits provided to Borrower under the terms and provisions hereof,each of Borrower and, by execution of the acknowledgement attached hereto, Guarantor, hereby agree as follows (“General Release”):A. Each of Borrower and Guarantor, for itself and on behalf of its respective successors and assigns, do herebyrelease, acquit and forever discharge Bank, all of Bank's predecessors in interest, and all of Bank's past and present officers,directors, attorneys, affiliates, employees and agents, of and from any and all claims, demands, obligations, liabilities,indebtedness, breaches of contract, breaches of duty or of any relationship, acts, omissions, misfeasance, malfeasance, causes ofaction, defenses, offsets, debts, sums of money, accounts, compensation, contracts, controversies, promises, damages, costs,losses and expenses, of every type, kind, nature, description or character, whether known or unknown, suspected orunsuspected, liquidated or unliquidated, each as though fully set forth herein at length (each, a “Released Claim” andcollectively, the “Released Claims”), that Borrower or Guarantor now has or may acquire as of the later of: (i) the date thisAmendment becomes effective through the satisfaction (or waiver by Bank) of all conditions hereto; or (ii) the date thatBorrower and Guarantor have executed and delivered this Amendment to Bank (hereafter, the “Release Date”), includingwithout limitation, those Released Claims in any way arising out of, connected with or related to any and all prior creditaccommodations, if any, provided by Bank, or any of Bank's predecessors in interest,- 3 -to Borrower or Guarantor, and any agreements, notes or documents of any kind related thereto or the transactions contemplatedthereby or hereby, or any other agreement or document referred to herein or therein.B. Each of Borrower and Guarantor hereby acknowledge, represent and warrant to Bank as follows:(a)Borrower and Guarantor understand the meaning and effect of Section 1542 of the California Civil Code whichprovides:“Section 1542. GENERAL RELEASE; EXTENT. A GENERAL RELEASE DOES NOT EXTEND TOCLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HERFAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HERMUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”(b)With regard to Section 1542 of the California Civil Code, Borrower and Guarantor agree to assume the risk ofany and all unknown, unanticipated or misunderstood defenses and Released Claims which are released by theprovisions of this General Release in favor of Bank, and Borrower and Guarantor hereby waive and release allrights and benefits which they might otherwise have under Section 1542 of the California Civil Code withregard to the release of such unknown, unanticipated or misunderstood defenses and Released Claims.C. Each person signing below on behalf of Borrower or Guarantor acknowledges that he or she has read each of theprovisions of this General Release. Each such person fully understands that this General Release has important legalconsequences, and each such person realizes that they are releasing any and all Released Claims that Borrower or Guarantormay have as of the Release Date. Borrower and Guarantor hereunder hereby acknowledge that each of them has had anopportunity to obtain a lawyer's advice concerning the legal consequences of each of the provisions of this General Release.D. Borrower and Guarantor hereby specifically acknowledge and agree that: (i) none of the provisions of this GeneralRelease shall be construed as or constitute an admission of any liability on the part of Bank; (ii) the provisions of this GeneralRelease shall constitute an absolute bar to any Released Claim of any kind, whether any such Released Claim is based oncontract, tort, warranty, mistake or any other theory, whether legal, statutory or equitable; and (iii) any attempt to assert aReleased Claim barred by the provisions of this General Release shall subject Borrower and Guarantor to the provisions ofapplicable law setting forth the remedies for the bringing of groundless, frivolous or baseless claims or causes of action.- 4 -SECTION 6. Miscellaneous.A. Reference to Agreement. Upon the effectiveness of this Amendment, each reference in the Agreement to “thisAgreement” and each reference in the other Loan Documents to the Agreement, shall mean and be a reference to theAgreement as amended hereby.B. No Waiver. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right,power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the LoanDocuments.C. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State ofCalifornia.D. Counterparts; Electronic Signatures. This Amendment may be executed in any number of counterparts and bydifferent parties to this Amendment on separate counterparts, each of which, when so executed, shall be deemed an original,but all such counterparts shall constitute but one and the same agreement. Any signature delivered by a party by facsimile orother electronic transmission shall be deemed to be an original signature to this Amendment.E. Entire Agreement. This Amendment and the Note constitute the entire agreement among the parties with respect tothe subject matter hereof, and supersedes all prior agreements, written or oral, concerning said subject matter.[SIGNATURE PAGES FOLLOW]- 5 -IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 4 to Amended and Restated Credit Agreementand Limited Waiver on the day and year first written above.WORLD OFJEANS & TOPSBy: /s/ Michael L.Henry Name: Michael L.Henry Title: CFO WELLS FARGOBANK, NATIONALASSOCIATIONBy: /s/ MarkMagdaleno Name: MarkMagdaleno Title: Sr. VP,Relationship Manager [Signature page to Amendment No. 4 to Amended and Restated Credit Agreement and Limited Waiver]ACKNOWLEDGMENT OF GUARANTORThe undersigned (“Guarantor”) hereby acknowledge and agree that the Guarantor is party to that certain ContinuingGuaranty dated May 3, 2012 (as amended, amended and restated otherwise modified from time to time, the “Guaranty”) in connectionwith that certain Amended and Restated Credit Agreement between World of Jeans & Tops, a California corporation (“Borrower”)and Wells Fargo Bank, National Association (“Bank”), dated as of May 3, 2012 (as amended, amended and restated otherwisemodified from time to time, the “Credit Agreement”).Guarantor further acknowledges and agrees that the Credit Agreement is being amended by that certain Amendment No. 4to Amended and Restated Credit Agreement and Limited Waiver, dated the date hereof (“Amendment No. 4”). Guarantor has examined the Credit Agreement and Amendment No. 4 and expressly approves the terms and conditions of the CreditAgreement and Amendment No. 4. Guarantor further acknowledges and agrees that its obligations, liabilities and responsibilities underthe Guaranty shall continue in full force and effect, and the obligations, liabilities and responsibilities of the Guarantor under theGuaranty are hereby ratified, approved and affirmed by the undersigned and incorporated herein in their entirety by this reference.IN WITNESS WHEREOF, the undersigned Guarantor has executed this Acknowledgement on April 13, 2017, with theintent to be legally bound hereby.TILLY’S, INC.By: /s/ Michael L. Henry Name: Michael L. Henry Title: CFO Exhibit 21.1Tilly’s, Inc.Subsidiaries Subsidiary State of Incorporation/FormationWorld of Jeans & Tops CaliforniaExhibit 23.1Consent of Independent Registered Public Accounting FirmTilly's Inc.Irvine, CaliforniaWe 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 reports dated March 30, 2018, relating to the consolidated financial statements, and the effectiveness of Tilly's, Inc.'sinternal control over financial reporting, which appear in this Form 10-K./s/ BDO USA, LLP Costa Mesa, California March 30, 2018Exhibit 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 February 3, 2018;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, 2018 /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 February 3, 2018;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, 2018 /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 February 3, 2018(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, 2018 /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 February 3, 2018 (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, 2018 /s/ Michael HenryMichael HenryChief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)

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