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Edited Transcript of TUES earnings conference call or presentation 24-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Tuesday Morning Corp Earnings Call

DALLAS Oct 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Tuesday Morning Corp earnings conference call or presentation Thursday, August 24, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stacie R. Shirley

Tuesday Morning Corporation - CFO, EVP and Treasurer

* Steven Robert Becker

Tuesday Morning Corporation - CEO, President and Director

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Conference Call Participants

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* Jeffrey Wallin Van Sinderen

B. Riley & Co., LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tuesday Morning Corporation Fourth Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Stacie Shirley, Chief Financial Officer. You may begin.

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [2]

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Thank you, operator, and good morning, everyone. I'd like to welcome you all to the Tuesday Morning Corporation's Fourth Quarter and Full Year Fiscal 2017 Earnings Conference Call. Joining me on the call today is Chief Executive Officer, Steven Becker. If you have not received a copy of today's earnings release, you may obtain one by visiting the Investor Relations section of the Tuesday Morning website at tuesdaymorning.com.

Before we begin today's discussion, I would like to make you all aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements. Information regarding the company's risk factors was included in our press release and is included in our filings with the SEC. Any forward-looking statements made during this call speak only as of the date of this call.

Today's presentation will also include certain non-GAAP financial measures, including adjusted EBITDA. A reconciliation of the non-GAAP financial measures used in this presentation to the most directly comparable GAAP financial measures can be found in the Investor Relations section of the Tuesday Morning website at tuesdaymorning.com.

Steve will provide an overview of the results and strategy, and I will follow with a review of our financial results before we open the call to questions. I'll now turn the call over to Steve.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President and Director [3]

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Thank you, Stacie, and thank you, everyone, for joining us this morning for our fourth quarter and fiscal year end call.

Fiscal 2017 was a challenging year, primarily due to the operational and financial issues associated with the opening of the Phoenix distribution center. I'm pleased to say our supply chain is now operating effectively, and we are now focused on the opportunities that lie ahead for Tuesday Morning. However, I do not want to lose sight of the progress we made in fiscal 2017. When I spoke to you last, I noted 6 priorities we would continue to benchmark against.

First, a reduction in supply chain costs and an improvement in supply chain efficiency. As I mentioned, our new Phoenix distribution center is operating effectively. We continue to improve costs throughout our supply chain. We made significant improvements in our Dallas distribution center, and we are exceeding many of our internal efficiency metrics. For instance, during July, our 2 distribution centers processed over 10% more units with less labor than in the prior year.

We've also been operating on a first-in, first-out basis in our distribution centers, which has had a meaningful impact on our working capital usage and overall supply chain cycle time. We expect these efforts to bring our costs down over time.

Despite these operational improvements and the reduced cost per piece we are currently seeing, our income statement was burdened in Q4, and will be burdened in Q1 due to the recognition of capitalized costs related to our peak last year.

In Q4 of this year, we had approximately $7 million of previously incurred costs flow through the income statement. Approximately half of these costs were due to the elevated expenses we incurred in Q2 and Q3. Stacie will address this further in her remarks. As we move through 2018, the reduction of these costs should improve our gross margin and overall profitability meaningfully.

Second, continued improvement in working capital management. During the fourth quarter, we reduced our inventory balance by $20 million versus last year, and reduced borrowings on our bank line by $10 million versus the prior quarter. The reduction in our inventory balance was largely the result of improvements in the efficiency of our supply chain, a decrease in cycle times and reduction in the amount of inventory held in our distribution centers. We have increased our inventory turn and expect that progress to continue.

Third, repositioning of our real estate portfolio. This remains a top priority, as we continue to experience strong results from our new and relocated stores. This year, we relocated 52 stores, opened 21, closed 41 and expanded 13 stores. We continue to be pleased with the performance of our new real estate, and we remain focused on upgrading our portfolio, while managing the costs associated with this program. For instance, year-to-date, 42 of our top 100 stores were relocations or new stores added within the past year.

We continue to believe we have a long runway to improve our portfolio, and as noted, by the end of next year, we will have touched approximately 45% of our store base. For fiscal 2018, we expect to relocate 45 stores, open 15 stores, close 15 and expand 10 stores.

Fourth, increase the effectiveness of our marketing dollars. We are focused on our marketing efforts to drive customer engagement. As you know, we recently hired Catherine Davis as our Senior Vice President of Marketing. Catherine has worked with her team to build out plans to engage both new and existing customers. We've been working with a new advertising agency, and we are rolling out new advertising, with a new look and feel as we speak. We also improved our data capture, and have significantly increased our customer database.

Fifth, we continue to edit and improve our assortment to focus on our core competencies. This season, we have left considerable open to buy, and we are very actively chasing product in an excellent deal environment. The overall retail environment has allowed us to open some new vendor relationships and add great brands to our product mix. We continue to be very focused on improving store level turn by driving a compelling product assortment, with a sharp value proposition and carefully managing our weeks of supply. We continue to minimize non-core categories, while at the same time, expanding our breadth of assortment in core businesses, such as textiles and home furnishings.

And finally, cost controls. During the quarter, we completed the headcount rationalization in our corporate office and restructuring of our field operations. We have a lean organization, and feel very comfortable with our current staffing levels.

Now let me turn to our fourth-quarter performance in more detail. When we spoke to you last, we noted that our top line performance had improved as the in-store inventories improved. We feel good about the 1.8% comp we delivered this quarter. Adjusting for the Easter shift, we estimate that our comp would have been approximately 2.5%. Our operating loss for the fourth quarter continued to be burdened by the realization of capitalized costs related to our supply chain issues.

We have made significant personnel and process improvements in our supply chain team. We are processing increased volumes at a lower per unit processing cost. I cannot understate (sic) [overstate] the time and effort that has been involved in our peak preparation this year to ensure that we have the product to the stores on time and on budget.

Looking to fiscal 2018, we expect to achieve comps in the range of 2% to 5%. We expect to significantly improve our EBITDA versus last year in spite of the amortization of the remaining portion of the elevated supply chain costs that we experienced in fiscal 2017. Importantly, we plan to self-fund our strategic initiatives in fiscal year 2018, and we expect to end the fiscal year with debt levels relatively flat to fiscal year 2017. We expect to achieve this through improvements in working capital and a significant increase in EBITDA versus 2017.

With that, I will turn the call over to Stacie to review our performance and outlook in more detail. Stacie?

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [4]

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Thank you, Steve.

In the fourth quarter, net sales were $223.6 million, approximately flat to Q4 of last year, despite having 20 fewer stores in our store base. As Steve mentioned, comp sales increased 1.8%, as compared to an increase of 6% in Q4 last year. Comp transactions increased 2.6%, and average ticket declined 0.8%. Relocated stores contributed approximately 300 basis points to comp sales in the quarter.

Gross margin for the fourth quarter was 31.4% compared to last year's gross margin of 35.4%. The impact of the previously capitalized supply chain and freight costs that were recognized in the fourth quarter was a 410 basis point decrease to our gross margin, which was driven significantly by the elevated costs associated with our supply chain issues from earlier in fiscal 2017.

We also incurred a higher level of markdowns compared to last year. Partially offsetting these increase in costs was an improvement in initial merchandise markups. As Steve said, we recognized approximately $7 million more in capitalized supply chain related costs this quarter than what we actually incurred. Of that amount, we estimate about half relates to incremental cost incurred directly as a result of the issues we encountered in Q2 and Q3.

As I will explain in more detail in a moment, these costs will continue to burden our income statement for the first part of fiscal 2018 until the elevated level of expenses are completely recognized. We have already experienced a meaningful decrease in our incurred [processing] cost, which will be reflected in improved gross margins in fiscal 2018. Again, I will give more guidance in a moment.

SG&A expenses were $87.4 million for the fourth quarter versus last year's expenses of $85.3 million. As a percentage of net sales, SG&A was 39.1% versus 38.3% in the same period last year. The 80 basis point increase in rate was driven primarily by higher store rent, depreciation and real estate project expenses, due in part to our strategy to improve store real estate. Additionally, our corporate labor costs increased year-over-year. Partially offsetting these increased costs were reductions in certain other corporate expenses, including legal and professional fees, which decrease as a percentage of net sales in the current year quarter from the prior year quarter.

Our operating loss for the fourth quarter was $17.1 million compared to an operating loss of $6.3 million in the fourth quarter of fiscal 2016. We reported a net loss of $17.3 million or $0.39 per share compared to last year's net loss of $3.9 million or $0.09 per share for the quarter. Also, adjusted EBITDA was negative $9.8 million compared to positive $1.8 million for the fourth quarter of fiscal 2016, primarily driven by the change in net loss. For further details on the remaining reconciling items, please refer to our earnings release for the reconciliation of adjusted EBITDA.

Now let me review our results for the full year ended June 30, 2017. Net sales were $966.7 million compared to $956.4 million for the same period last year. This is a 1.1% increase in total sales, and again, this was on a base of 20 fewer stores.

Comp store sales growth was 2.2% as compared to last year's 7.8%. This 2.2% comp was driven by a 3.4% increase in transactions, which was partially offset by a 1.2% decrease in average ticket. As Steve mentioned, our relocated stores continue to have strong sales performance. Sales at the 52 stores relocated during the past 12 months increased approximately 52% on average for the year, as compared to fiscal 2016, driven primarily by the better real estate and larger store footprint, and contributed approximately 290 basis points to the comp sales growth.

Gross margin for fiscal 2017 was 33.2% compared to last year's gross margin rate of 35.7%. The decrease in gross margin was a result of the same factors that impacted our fourth quarter I just walked through, including elevated costs associated with our supply chain operations that were recognized in the current period, increased markdowns, all of which were partially offset by an improvement in initial merchandise markup.

SG&A expenses were $353 million for fiscal 2017 compared to last year's expenses of $339.4 million. As a percent of net sales, SG&A was 36.5% versus 35.5% in the same period last year. Drivers of the increase in SG&A for the year are similar to those I just laid out with regards to the increase in expenses for Q4, with additional share-based comp expense in the first half of the year as compared to the prior-year period due to executive vacancies in the prior-year period.

Our operating loss for fiscal 2017 was $32.3 million compared to an operating profit of $2.4 million in fiscal 2016. We reported a net loss of $32.5 million or a loss of $0.74 per share compared to last year's net income of $3.7 million or $0.08 per share. Adjusted EBITDA was a negative $2.8 million compared to positive $30.3 million for fiscal 2016.

Turning now to the balance sheet. Cash and cash equivalents were $6.3 million as of the end of the year compared to $14.1 million at the same time last year. There was $30.5 million outstanding in cash borrowings under our line of credit, which was a reduction of $10 million from Q3. We ended the quarter with inventory at $221.9 million, an 8.4% decrease from a year ago. The decrease in inventory was driven primarily by lower inventory levels in our distribution centers, as we are operating on a FIFO basis out of our DC. The decrease was offset slightly by increased buying, distribution and freight costs which are capitalized into inventory. This improvement in our working capital supported the reduction in our outstanding revolver borrowing.

For the quarter, we invested $13.2 million of CapEx on a net basis. The majority of the spend was focused on our real estate initiatives. During the quarter, we opened 8 stores, relocated 22 stores and expanded 3 stores. And for the year, our net capital spend was $39.1 million, the majority of which is related to investments in our real estate strategy for new stores, relocation, expansions and remodels, as well as IT investments.

Turning now to our outlook for fiscal 2018 to reiterate Steve's comments. We are currently expecting our fiscal '18 comp sales performance to be in the range of 2% to 5%. Due to the lag effect of the capitalized cost from the DC issues in fiscal 2017, our gross margin and earnings results will continue to be negatively impacted in fiscal 2018, with substantially all of the residual headwind realized in Q1.

We expect first half margins to be down slightly from prior year. While Q1 will see substantial gross margin headwinds from these last of the higher supply chain costs incurred last year, they will be largely offset by shifts in markdowns in Q2. In Q2, we expect to see the lag negative impacts to our P&L subside significantly, but that will be largely offset by the adjustments in markdown shift.

We expect in the second half of the year, we will deliver substantial gross margin improvement in the range of approximately 250 to 300 basis points. We believe this will result in a significant improvement in our fiscal 2018 EBITDA. We are planning our capital spend to be in the range of $25 million to $30 million for the year. As Steve mentioned, we plan to self-fund our capital expenditures through working capital improvements and EBITDA growth, and outside of our seasonal working capital needs, we expect to end the year with our debt relatively flat with fiscal 2017 year end.

Now with that, we will open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jeff Van Sinderen from B. Riley.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [2]

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Congratulations on the positive comps in a tough environment. A couple of questions on gross margin. I think you said -- did you say 250 to 300 basis point gross margin improvement for the year? Or was that in second half? I missed what you said there.

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [3]

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Jeff, no, that was in the second half. That's when we expect to see the turn.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [4]

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In the second half?

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [5]

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Yes. In the first half, we expect to be slightly below year-over-year.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [6]

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Got it, okay. And then in thinking about the non-relocated stores, how should we think about the comps there? I mean, I know obviously some of those locations are really not the locations you want to be in going forward. But I mean do you think that there's a way to get those stores? I know it's a process to convert to real estate [phase], but to get those stores sort of running positive comps (inaudible)?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President and Director [7]

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Jeff, that's a big internal focus of ours. We definitely have a series of initiatives internally to improve the look and feel of those stores.

As you know, we've been working with the new marketing firm and we're rolling out new in-store signage. We spent an awful lot of time over the last 6 months on data capture at the register, and we've increased our e-mail collection significantly, and the internal message is to grow the base. Obviously, we're getting terrific results out of our new and relo stores. But for this business to really work, we have to drive more sales through our existing stores, and so we're spending a lot of time on the look and feel of the stores and how we can drive more customer traffic and get more out of the customers that are in the store.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [8]

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Okay, fair enough. And then just to touch on markdowns for a minute. When do you expect markdowns to be down? I know I think you said there were a couple of things going on in Q2, and just wondering how we should think about that.

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [9]

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So yes, so there's going to be a shift in just -- it's just a shift in timing between Q1 and Q2. But as we look at the balance of the year, we do expect our markdowns to be lower as a percentage of sales in '18 than what they were in '17.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [10]

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Okay. And I'm sorry, what is the shift in timing?

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [11]

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The shifts are normal. We take these -- our normal kind of cadence of the markdowns. It's just shifting a couple of weeks based on our promotional calendar.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [12]

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Okay. Got it. And then one more if I could throw it in there, if you guys run comps up 2% to 5% in this fiscal year, when do you start to leverage SG&A on that?

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Stacie R. Shirley, Tuesday Morning Corporation - CFO, EVP and Treasurer [13]

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So I mean, obviously, a lot of that depends on the investments that we're making, but we would expect at -- if we're able to hit this 2% to 5% range we're confident in, that we would see some leverage in our expenses. There's some headwinds that will continue to as it relates to rents and depreciation. But as we look to '18, given this guidance, we would expect to see some leverage.

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Operator [14]

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And I am showing no further questions from our phone lines. I will now like to turn the conference back over to Steve Becker for any closing remarks.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President and Director [15]

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Sure.

I just want to reiterate why the entire management team and our board continue to believe in Tuesday Morning.

We have the right team in place. We're very experienced and highly committed. We have new group heads from supply chain to merchandising to marketing that are all contributing meaningfully. The challenges in retail have allowed us, our senior team, to add depth, experience and talent across the organization and we know we're in the sweet spot for retail in the off-price sector.

We have extraordinary dedication from our team here. We put in place a tremendous amount of hard work, and we're all highly confident in our Christmas season. Thank you very much.

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Operator [16]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.