TLYS

Tilly's ($TLYS) Funds Buy $3.8M Despite 78% Plunge...Extreme Undervaluation vs Bankruptcy Risk

08/12/2025 22:38

Tilly's ($TLYS) continues to hit new lows, leaving investors in despair, yet some professional investment funds are aggressively accumulating shares, drawing significant market attention. Tilly's is a California-based youth-targeted fashion retailer founded in 1982, specializing in casual apparel, footwear, and accessories sold through approximately 200 stores and online channels. However, over the past 18 months, shares have plummeted over 78% from $6 to $1.27, inflicting massive losses on investors. The three-month period from March to May 2025, when shares crashed 83% from $4.13 to $0.69, was particularly devastating. Yet amid this despair, two investment funds have been consistently buying against the trend. Fund 1 Investments purchased approximately 496,000 shares for about $2.7 million during June-July 2024 when shares traded in the $5-6 range, while Shay Capital has been steadily accumulating over 700,000 shares for approximately $1.1 million since May 2025, buying across the $0.85-2.03 range. Shay Capital's buying pattern is particularly intriguing. They started purchasing near the bottom at $0.85 and continued buying even as shares doubled to $2.03. This suggests conviction-based investing beyond mere bottom-fishing. To understand this contrarian buying, we must accurately assess Tilly's current situation. The company maintains substantial business operations with annual revenue of $561 million, but recent quarterly revenue declined 7.1% with a loss of 74 cents per share. More concerning, the debt-to-equity ratio stands at 240% with negative operating cash flow. However, what funds appear to focus on is the extreme undervaluation. The current $1.27 share price represents 48% of book value at $2.62, while the price-to-sales ratio of 0.07x significantly underperforms industry averages. If the company succeeds in a turnaround, current prices could offer substantial upside potential. Indeed, the company announced on July 28 the appointment of Nate Smith as new CEO. Taking office August 18, Smith is a retail industry veteran, with current CEO Hezy Shaked transitioning to Chairman, signaling a move toward professional management. This represents the company's attempt at fundamental change for recovery. Key indicators for investors to monitor are clear. Positive signals include improved monthly sales growth, operating cash flow turnaround, and debt ratio improvement. Conversely, if quarterly sales continue declining or cash falls below $20 million, liquidity crisis risks must be considered. In an optimistic scenario, the new CEO's leadership could improve profitability through store efficiency and online channel strengthening, while debt restructuring could restore financial stability. In this case, current prices offer significant upside potential. The most likely base scenario involves further short-term decline followed by gradual recovery. However, in a risk scenario, bankruptcy risks from debt burden and cash depletion cannot be ruled out. While professional funds' continued buying represents a noteworthy signal, this remains a high-risk investment for retail investors. With fundamental risks of high debt ratios and negative cash flow unresolved, hasty entry could be dangerous. However, considering the extreme undervaluation and turnaround potential, risk-tolerant investors might consider this from a long-term perspective.