Momo may continue, but TUES is waaay overvalued fundamentally
The potential improvements/fixes articulated by Rouleau don't support the current share price. TUES's relative value was waaaay over-extended when I looked at it this morning. It only got worse by closing time.
What am I missing? TUES is no TJ Maxx. TJX trades at a 9.6X EBITDA multiple. TUES would need to wring out another $66M of EBITDA -- just to match TJ Maxx's multiple. You cannot squeeze out another $66M, even if you are Rouleau (who does seem to have a bonafide track record) because TUES only has annual revenue of $832M. The numbers don't compute and this is eventually going to deflate. I don't know when, but it is coming down.
I totally agree. Tuesday Morning stores have all the charm of a medical center parking garage. Even if TUES management is able to procure exciting merchandise with compelling values on a consistent basis, it will appeal primarily to the extreme value shoppers who used to line up Tuesday mornings to get first crack at all the deals. Most people I know don't want to root through lots of shelves on the oft chance that they might find an incredible deal. They also don't want to waste time in stores that look like an abandoned thrift stores with one-fifth of the store's lights burnt out. People's time today is very limited and they don't want to spend it in dim, dingy stores scrounging for possible bargains.
Yes, I know that some people savor the treasure hunt aspect of so-called flea markets but this is for basic goods like VHS tapes and expired cereal. No one except, possibly trailer park dwellers, goes to a flea market to find their good china and fine linen. There's a reason jewelry stores have nice interiors - one does not expect to find exceptional merchandise at a dumpy looking place. There are bargain fanatics but most folks are looking at the total shopping experience. TJX is pretty hard to beat in this regard. Their merchandise is much broader, their stores more visually vibrant, coupled with lots of great values. Even as a red-blooded American male, I like shopping at TJX and I usually don't leave empty handed. TUES seeks to appeal to middle aged, professional women with college degrees? Talk about a narrow market niche!
Michael Rouleau will likely boost TUES sales but I doubt he will be able to boost TUES back to its glory days. I look for TUES to languish. TUES basic business model is out of sync with today's consumers.
You and I share the same view. I did some more thinking after dinner and the picture looks worse than I thought. The fundamentals really, really don't support the stock on a relative value basis.
Just for kicks, suppose half of the $66M EBITDA improvement TUES would need to match the TJX multiple came from cost improvements. That's being generous to TUES's cost cutting ability, but it doesn't matter -- because it doesn't affect the conclusion I came to an hour ago. The other $33M of TUES's EBITDA improvement, then, must come from growth. Let's say TUES has EBITDA margins of 14% on that new growth. 14% is the EBITDA margin at TJX. Rouleau would have to increase sales by $235M, at 14%, to generate the extra $33M EBITDA to establish the same relative valuation as TJX. $235M growth is 28% over last year's $832M of sales -- which is smoking dope, crack and heroin combined. Conclusion: TUES cannot generate the EBITDA needed to even "match" the valuation multiple that TJX carries. But I think it's actually worse in reality because the market is not going to assign TUES a sustained multiple that matches TJX; TUES will probably be lower because its franchise pales compared to TJX and everything is on the come. The over-valuation looks even worse than what I thought this afternoon.
As I said, however, MOMO may carry this further. But it is highly likely TUES comes down later due to valuation. I don't know when, but things just don't add up to a $14 stock.