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Edited Transcript of TUES earnings conference call or presentation 7-May-19 1:00pm GMT

Q3 2019 Tuesday Morning Corp Earnings Call

DALLAS May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuesday Morning Corp earnings conference call or presentation Tuesday, May 7, 2019 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 - Executive VP, CFO & Treasurer

* Steven Robert Becker

Tuesday Morning Corporation - CEO, President & Director

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Conference Call Participants

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* Alex Silverman

AWM Investment Company Inc.

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., 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 Third Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Stacie Shirley, CFO. Ma'am, you may begin.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & 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 Third Quarter Fiscal 2019 Earnings Conference Call. Joining me on the call today is Chief Executive Officer, Steven Becker. If you have not yet 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 also 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 EBITDA and 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 the review of our financial results before we open the call to questions.

I will now turn the call over to Steve.

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

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Thank you, everyone, for joining us this morning for our third quarter call. For the quarter, comparable store sales declined 5.3% as we anniversaried a very strong 9.1% comp increase from last year. During the March quarter of last year, we had 3 of our traditional ad events. As part of our continued efforts to rationalize our promotional activities, this year we ran only one of these ad events, which is smaller in size than the event from last year. Additionally, we were impacted by the Easter shift. While difficult to precisely quantify, our best current estimate for the size of the comp headwind as a result of both the ad reduction and Easter shift is approximately 350 basis points. Like many of our peers, we also saw the effects of unfavorable weather and a general softness in the environment. While we are disappointed with these results, we did see strong performance in some of our largest families, where we continue to execute the off-price model well, delivering great product at very sharp prices.

There is a clear opportunity to replicate this success throughout the merchandising organization. During the quarter, we engaged a consultant with deep off-price roots to assist us in evaluating our processes, organization and strategy. We recently made a change in our merchandise leadership and are currently involved in a search for a new chief merchant. We have also done some realigning of the team, including the recent hiring of some veteran off-price talent.

We will continue to drive the entire organization to consistently deliver the treasure hunt experience and outstanding value that we know resonates with our customer. As part of this process to evaluate our merchandise organization, strategy and related competencies, we are revisiting our warehouse layout and capacity needs. While we've been working on a thorough evaluation on our supply chain for some time now and are at the end of this process, we need to confirm that the capacity and layout we had planned can support growth of certain strategies. This has caused us to pause our plans while we explore these needs. While we are not certain whether this additional work will cause any delay in the start of the next phase of the project, we do know that we need to get this right and we are focused on making sure that happens. We will be in a position to share our plans as soon as this work is completed.

With our team deep into analysis for this project, we are especially pleased to welcome Reuben Slone, who will join our Board of Directors in the beginning of June. Reuben brings extensive knowledge and experience working with supply chains across multiple consumer-facing industries, and we look forward to leveraging his supply chain experience as we finalize the next steps for our distribution footprint.

We believe our top line performance this quarter is not indicative of our potential. Over the last 2 years, we've worked to set a strong foundation for this business. During this time, we have necessarily been focused on solving problems in the business, notably those around supply chain. We are now squarely focused on opportunities within our merchandise assortment. We can see strength in many of our businesses. These are scale businesses where we are constantly delivering a treasure hunt with great values. Our energies are directed towards replicating this success across our business.

On the marketing front, we have been gradually reducing our reliance on our traditional ad events and the associated print marketing costs shifting more of our spend to digital. We believe the heavy lifting of this shift is largely behind us. This should result in less of a drag to our top line performance next fiscal year.

We are also continuing to be selective with regards to real estate and expect to relocate and open stores opportunistically. We are now primarily engaged in lease renegotiations, which we believe will be an ongoing process over the next few years, as our existing leases come up for renewal.

Finally, we have done a lot of work managing our costs throughout the business. Our ability to deliver improved adjusted EBITDA, with a $12 million reduction in top line, speaks to these efforts. Looking ahead, despite a challenging environment, we're continuing to make progress in our merchandise assortment and look forward to delivering improved results.

With that, I will turn it over to Stacie to review our financial performance and outlook in more detail.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [4]

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Thank you, Steve. In the third quarter, net sales were $211 million, down 5.5% from Q3 last year, and comp sales decreased 5.3%. As Steve described, it was a challenging comparison to last year as we are up against the highest sales increase of the year at 10% and a comp increase of 9.1%. We were also negatively impacted by the number of additional factors that Steve already mentioned.

Comp transactions decreased 2.6% and average ticket decreased 2.8%. Storage relocated over the last 12 months continued to deliver strong performance, contributing approximately 120 basis points to comp sales in the quarter, driven by better real estate and larger average store footprint.

Gross margin increase once again this quarter was a 30 basis point improvement to 36.3% compared to last year's gross margin of 36%. However, as expected, based on the lower sales results, gross profit dollars decreased $3.8 million to $76.5 million versus $80.3 million in the same period last year. The higher gross margin rate was primarily driven by continued improvement in our initial merchandise markup and lower supply chain costs. Partially offsetting these improvements were increased markdowns and an increase in inventory strength. Lastly, continued transportation cost headwinds resulted in increased freight cost over the quarter.

SG&A expenses were $84.3 million for the third quarter compared to last year's expenses of $88.1 million. As a percentage of net sales, SG&A deleveraged 50 basis points to 40% compared to 39.5% last year. The decrease in SG&A dollars was driven primarily by lower store labor costs, lower workers comp expenses and lower advertising, which is reflective of the reduction in traditional print ads in the quarter. Partially offsetting these reductions were increased store rent and depreciation expenses. We also had increased incentive compensation and retention costs of approximately $2.5 million this quarter. Excluding these incentive and retention costs, we would have leveraged SG&A for the quarter.

Our operating loss for the quarter was about flat to last year at $7.8 million on $12.3 million lower sales. We reported a net loss of $8.3 million or $0.18 per share compared to the third quarter last year when we reported a net loss of $8.1 million or $0.18 per share. EBITDA improved slightly to negative $1.2 million compared to negative $1.3 million last year. And adjusted EBITDA was negative $0.4 million, which is an improvement compared to negative $0.9 million in the third quarter of last year. For year-to-date performance highlights, please refer to this morning's press release.

And now turning to the balance sheet. Cash and cash equivalents were $13.8 million as of the end of the quarter compared to $12.3 million at the end of the same period last year. Total liquidity was about $85 million, including approximately $71 million available on our revolver. As of quarter end, we had $35.2 million in borrowings outstanding under our line of credit. And on a net basis, we ended the quarter at $21.4 million compared to last year of $32.1 million.

We ended with our inventory in a good position of $238.3 million, which is a 2.7% decrease from a year ago. We continue to be pleased with the improvements we've made in regards to the flow of our inventory and feel very good about our inventory levels and the mix of regular-priced merchandise compared to clearance. Our overall inventory turns declined slightly to 2.6 turns compared to 2.7 turns a year ago. For the quarter, we invested $2.3 million of CapEx on a net basis, the majority of which was focused on our real estate initiatives.

And turning now to our outlook for fiscal 2019. Based on results to date, we are updating our guidance for the year. We now expect our fiscal 2019 comp sales to be approximately flat and for our fourth quarter comp sales to be flat to slightly negative. For the year, we continue to expect meaningful gross margin expansion and our net loss is currently expected to be approximately $13 million to $15 million, EBITDA to be positive at approximately $14 million to $16 million and adjusted EBITDA to be positive at approximately $17 million to $19 million, a significant improvement compared to fiscal 2018.

Our final real estate activity for the year is planned at 12 relocations, 1 expansion, 23 closures and 11 new stores. CapEx for the year remains unchanged from our last guidance of between $12 million and $15 million. And we continue to expect our fiscal 2019 ending net debt balance to be at or below our fiscal 2018 ending position.

I'll now turn the call over to Steve before we open it up for questions

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [5]

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In summary, our Q3 sales performance was negatively impacted by several factors. Despite this, we are pleased to deliver improved adjusted EBITDA. We see significant opportunity to replicate the merchandising success we've seen in certain winning categories, staying true to our history of delivering incredible product at amazing values to our customers. The merchandising leadership changes we are making are intended to drive this improvement, and we are being diligent in our DC analysis to ensure our next steps give us both the capacity and flexibility we need to position ourselves for long-term success.

We have plenty of work to do, but we are all excited about the changes in our merchandising team and the opportunities in our business overall.

With that, I'll turn it over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is going to come from Jeff Van Sinderen from B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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I know you set some stores earlier this year and I think that was facilitated by the DC bypass. Can you maybe touch on what you saw in warmer-weather markets? I think you made a little bit of a comment there in your prepared talk, but what did you see in the comp progression, maybe as we got through the major calendar shift? We just wonder if there is any color you can give us there? Anything you could say about April if you could? And then particularly in the last couple weeks, now that weather is maybe getting a little bit more normalized and we are beyond the calendar shift, any color you can give us?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [3]

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So, Jeff, we can't talk about the months and certainly can't talk about April. What we have been seeing in April is obviously baked into the guidance that we provided. But as we did call out what -- one of the negative impacts to Q3 was weather as spring came later, the cold weather remained a little longer than expected and so that did have an impact on us as well as others, and especially as it relates to our spring merchandise.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Okay. And then I know you talked about merchandise content a little bit. How much impact did the merchandise content misses have on the quarter? And then, also, can you speak more about the changes to the merchandise team in place?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [5]

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Yes. I think it's probably pretty difficult to quantify how much that impacted the quarter. I think it's more a recognition of -- we've been doing a lot of work on the merch organization. We've been taking a look at our merch strategy and taking a look at all the businesses that comprise our offering. And as we went through it very carefully, we recognized that there was a real opportunity for us to achieve greater consistency in our offering. And if you look at our business overall, we have a number of families that are performing exceptionally well and there is commonality in those families. The value equation is there, the pricing is very sharp, the offering is very broad and shallow, it's a real treasure hunt and you can see the results. And we have a number of other families where elements of that exist, but perhaps not consistently. And so whether it be offering more brands, whether it be having sharper pricing, having a broader assortment, whatever the case may be, there are a lot of opportunities within the assortment to improve it. And so we are focused on that. Part of that effort has been led by a consultant that we engaged, who is a veteran off-pricer, to help us take a look at the business and think about it. And to that end, we've also done some recruiting and added some talent that also has off-price DNA. And part of that whole process is involved some reorganization of the merch team as well. And so we're very enthusiastic about the offering. And for us, it's just a question of consistency.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [6]

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Okay. And then if we could just turn to the DC situation for a minute. I understand you're holding off on giving a lot of detail there, but just wondering if you could walk us through maybe the thought process around that at this point, kind of what's changed in your thinking, because I know you were thinking about giving some detail, maybe layouts, some of the elements of the plan that you're thinking about, any of the key milestones that you might be targeting, when you would expect the transition that you're thinking about to be complete and kind of supply chain running normalized? And, I guess, just anything you could say about the level of margin improvement you anticipate this plan delivering, even though you are not really revealing the detail yet, but just anything on that would be helpful.

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

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Yes. So,, Jeff, as we've talked about we've obviously made a lot of progress in supply chain. Supply chain is normalized at this point in time and we're happy with the work we've done. We have had some major initiatives, such as DC bypass that we talked about with you and we're continuing to expand that. So I'm happy with the way supply chain is currently functioning. We had planned to talk about the next step in our kind of supply chain realignment and I think as we've talked about there is kind of 4 options: The first option is do nothing, which is the benchmark; the second option is somehow retrofit your existing facilities; the third option would be to move a facility locally; and the fourth option would be to open up a new facility that's not within our existing footprint. And we're way down that path and we're really ready to talk about our plans with The Street. What happened -- the only thing that changed is, as I mentioned before, we're working with an off-price consultant and one of the learnings from that process is, is there an opportunity for us to do a greater proportion of flow and hold and pack and hold than we currently do. And so this is not -- the work we're doing is simply to see whether or not we have the capacity to do that within the plans as we had conceived them. We don't expect that work to take very long, and ideally, we'll have a conclusion relatively shortly and we'll be able to talk about our plans. So it's really -- this isn't a huge right turn. This is just a confirmation that should over time our merch strategy include a greater proportion of holding of inventory, do we have the capacity and current layout as we've conceived it in our plans to accommodate that.

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Operator [8]

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(Operator Instructions) Our next question comes from Alex Silverman from AWM Investment.

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Alex Silverman, AWM Investment Company Inc. [9]

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Jeff asked the vast majority of my questions. Wondering if you could touch a bit on the change in your EBITDA guide, flat to small negative on the comp side. Where is the pressure coming on the EBITDA versus prior guide?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [10]

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The main pressure is coming from the top line as we have brought down our sales guidance. What we have done and continue to do this year is we've done a great job of executing really disciplined expense management, which I think certainly we showed that in Q3 on a sales decline that we were still able to keep our profitability or the net loss at slight improvement in our adjusted EBITDA on that sales decline as well as continuing to show margin improvement. So really the biggest pressure is on the top line. And what we're expecting is gross margin improvement for this year.

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Alex Silverman, AWM Investment Company Inc. [11]

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Sorry, say the last part again.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [12]

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Just that we -- as we stated, we expect a meaningful improvement in our gross margin year-over-year. So we've given guidance at the beginning of year of 100 to 125 basis points and we still feel good about that range.

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Operator [13]

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And I'm showing no further questions. I would now like to turn the call back over to Steve Becker for further remarks.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [14]

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Thank you for joining us this morning. We look forward to joining you on our next quarterly conference call. Have a good day.

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Operator [15]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.