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Edited Transcript of TUES earnings conference call or presentation 31-Jan-19 2:00pm GMT

Q2 2019 Tuesday Morning Corp Earnings Call

DALLAS Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuesday Morning Corp earnings conference call or presentation Thursday, January 31, 2019 at 2:00:00pm 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.

* Ethan Steinberg

SG Capital Management LLC - Senior MD

* 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 Second Quarter Fiscal 2019 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Stacie Shirley, Chief Financial Officer. Please go ahead.

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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 Second Quarter Fiscal 2019 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 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 and the most directly comparable GAAP financial measures can be found in the Investor Relations section of the Tuesday Morning Web site 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 open the call up to Steve.

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

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Thank you, Stacie, and thank you, everyone, for joining us this morning for our second quarter call. We had a solid holiday season, comping positively while also significantly improving operating income. I am pleased with the continued progress we are making in our operating and financial metrics, with the most notable highlights being our gross margin expansion of 280 basis points and the $7.8 million and $11.8 million improvement in adjusted EBITDA for the quarter and year-to-date periods, respectively. We are focused on managing our business efficiently and generating free cash flow and are pleased to have shown significant progress on both fronts during the quarter and first half of our fiscal year.

We have made and will continue to make business decisions with the goal of returning Tuesday Morning to profitability and positive cash generation. We are pleased to be guiding to adjusted EBITDA of $21 million to $25 million for the fiscal year. We remain focused on driving sales density in our store base. We will continue to edit our assortment and drive our merchandising efforts to deliver our customers a compelling treasure hunt which we believe is key to success in the off-price marketplace.

For the December quarter, we comped up 1.9%. And while we had one more ad event sale in the quarter versus the same quarter last year, in total, our ad events had less inventory, fewer highly promotional items and less marketing spend than the prior year. We estimate the comp headwind of this event pullback was approximately 150 to 200 basis points versus the same quarter last year. It has been our goal to reduce these traditional event sales and instead focus on our everyday values and deal messaging.

From an advertising standpoint, these ad events are expensive and inefficient and we prefer to invest our dollars in our digital marketing campaigns where we continue to see good results. While this decision creates a headwind for the top line, it has a number of other benefits including a meaningful positive impact on our selling margins. This approach reflects our strategy to drive more profitable actions throughout the business.

Based on our sales results in the December quarter and our intention to continue to reduce the size and number of these events in the spring, we are reducing our annual comp guidance to between 2% and 3% for the full year. We are also planning fewer relocations this year than originally budgeted which I will explain in a moment. Our changing guidance reflects the impact of both of these factors and is not reflective of the tone of our everyday business.

From the perspective of merchandising strategy, we continue to be focused on turn and freshness. We saw a meaningful reduction in our markdowns for both the second quarter and the first half. This reduction is the result of initiatives to manage our weeks of supply and increase the frequency of our markdown cadence, as well as solid execution by the merchandise team. We ended the holiday quarter in a good position in terms of overall clearance. We are actively editing our assortment to drive turns in slower moving families while emphasizing those families that are experiencing rapid growth. There is significant work being done internally on our merchandise strategy to continue to drive a highly compelling treasure hunt and focus on our high growth businesses.

Moving to our supply chain. During the holiday quarter, we saw significant operational improvement in realized cost efficiencies. Our processing cost per piece declined meaningfully. We also successfully implemented DC bypass, and along with our work with DC consolidation, we're gaining efficiencies in our transportation network. These initiatives are now in full swing and we look forward to realizing the associated benefits of efforts like these as we move through the spring season. And just to touch on our ongoing work as we map out our future distribution footprint, we've made substantial progress on this analysis and expect to provide an update on our next earnings call.

On the real estate front, during the quarter we opened 2 stores, closed 1 store, and relocated 3 stores. We remain disciplined and flexible with regard to our real estate portfolio. Over the next 12 months, approximately 25% of our store fleet comes up for renewal. We will aggressively renegotiate our rents and will close stores opportunistically should those negotiations not result in a reasonable outcome for Tuesday morning.

Looking forward, while we are starting to see compelling relocation and new store opportunities, as always these have to be balanced against the economics of existing rents as we renegotiate them. As I previously mentioned, we have not completed as many deals as we originally expected at the start of the year and we currently expect moderate real estate activity as the market shakes out. Given this, as Stacie will discuss, we are reducing our expectations for capital expenditures this year.

In summary, we feel good about our performance during the first half of the year and the substantial improvement in EBITDA we have delivered year-to-date. Tuesday Morning has meaningful opportunities for profit improvement and we remain focused on disciplined execution of all of our key initiatives to position our company for long term profitable growth.

Stacie will now go over our financial results and our 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 second quarter, net sales were $338.4 million, up 1.4% from Q2 last year despite having 4 fewer stores this year, and comp sales increased 1.9%. Comp transactions increased 1.1% and average ticket increased 0.8%. Stores relocated over the last 12 months continue to deliver strong performance, contributing approximately 170 basis points to comp sales in the quarter, driven by both better real estate and larger average store footprint.

Gross margin increased 280 basis points for the second quarter to 34.5% compared to last year's gross margin of 31.7%. Gross profit increased to $116.7 million, an increase of $11 million versus $105.7 million in the same period last year, driven by continued improvements in initial merchandise markup and reduced markdown. As Steve mentioned, shrinking our reliance on our traditional ad events has had a positive impact on gross margin. Also benefiting gross margin this quarter were lower supply chain costs as our cost per piece in our DCs decreased meaningfully. Partially offsetting all of these improvements were increased freight costs, largely due to transportation cost headwinds including higher fuel charges in addition to shipping higher volumes this year.

SG&A expenses were $100.4 million for the second quarter compared to last year's expenses of $97.4 million. And as a percentage of net sales, SG&A de-levered 50 basis points to 29.7% compared to 29.2%. Higher rents and depreciation as a result of our ongoing real estate strategy continued to be a headwind and was a factor in driving the SG&A de-leverage this quarter. However, as Steve discussed, we continue to experience positive results when we renegotiate our leases and have seen the rate of growth in rent expense slow.

Also contributing to the increase in SG&A expenses were increased advertising costs as well as higher incentive compensation and retention costs. These increases were partially offset by reduced store labor costs which leverage as a percentage of net sales.

Our operating profit improved by $8 million to $16.3 million for the quarter compared to an operating profit of $8.3 million last year, an increase of 96%. We reported net income of $16 million or $0.35 per share compared to the second quarter last year when we delivered net income of $8.7 million or $0.19 per share.

And we improved EBITDA to $23.3 million compared to $15.2 million last year. Adjusted EBITDA was $24.4 million which is a significant improvement compared to $16.6 million in the second quarter of last year. For our year-to-date performance highlights, please refer to this morning's press release.

Turning now to the balance sheet. Cash and cash equivalents were $6.1 million as of the end of the quarter compared to $9.4 million at the end of the same period last year. Total liquidity was approximately $100 million, including approximately $93.7 million available on our revolver. As of quarter end, we had $5 million in borrowings outstanding under our line of credit. We ended the quarter with inventory of almost $227 million, a 3.1% increase from a year ago. We feel very good about our inventory levels and the mix of regular priced merchandise compared to clearance. Our overall inventory turns improved to 2.7 turns compared to 2.6 turns a year ago, our sixth consecutive quarter of improvement.

For the quarter, we invested $3.2 million of CapEx on a net basis, the majority of which was focused on our real estate initiatives.

A look for fiscal 2019. As Steve already reviewed, we are updating our guidance for the year, reflecting our performance for the first half of this year. Given our results to date, as well as more moderate real estate activity than originally expected, and the plans to continue to reduce the reliance on our traditional ad events, we now expect our fiscal 2019 comp sales performance to be in the range of 2% to 3% and we expect a narrower spread between total sales and comp sales versus our original expectation which was about 50 basis points.

As we look to the back half, it is important to remember that we will be anniversarying a very strong third quarter comp of 9.1% which was driven by the benefits of a promotional shift as well as an earlier Easter last year. Additionally, in Q3 we plan to have only 1 of our traditional ad events this year versus 3 we had last year during the same period. Despite this, we currently expect to generate slightly positive comps in Q3 and sequential comp improvement in Q4.

Based on our better than expected first half results, we are increasing our gross margin guidance to be above the high end of our prior guidance of 125 basis point improvement over last year and now expect our net loss to be approximately $8 million to $12 million, EBITDA to be approximately $17 million to $21 million, and adjusted EBITDA to be approximately $21 million to $25 million, all significant improvements compared to fiscal 2018.

With regards to real estate activity for the year, we now plan to relocate 12 to 15 stores, expand 1 store and close 20 to 25 stores. And we continue to plan to open 10 to 12 new stores. We now expect CapEx for the year to be between $12 million and $15 million. We continue to expect our fiscal 2019 ending net debt balance to be at or below our fiscal 2018 ending position. And lastly, as noted in our press release this morning, we are also pleased to announce that we have amended our credit facility and have extended our ABL facility for an additional 5 years with similar terms.

I will now turn it back over to Steve before we open the call up for questions.

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

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Thank you, Stacie. In closing, we feel very good about the progress we are making across the business. We're pleased to be able to provide more detailed guidance regarding our expectations for significant improvement in key profitability measures and we'll continue to make disciplined decisions that we believe better position Tuesday Morning for long-term success. I want to thank all of our teams for their continued hard work and we look forward to updating you on our progress next quarter. With that, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Van Sinderen with B. Riley FBR.

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

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Good morning, everyone. First, let me say congratulations on the substantial improvement in gross margin and EBITDA in the quarter. Steve, maybe you can give us a sense of, or Stacie, give us a sense of the comp progression that you saw during the quarter and maybe touch on the December period. Just wondering kind of what you saw in terms of the lull in early December in traffic, maybe speak about the legacy nonrelocated stores and the comps there versus the 40-some odd percent increase in the relocated stores?

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

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Sure. Thanks, Jeff. So we don't really comment on monthly cadence of our comps, but I will say that each month did comp positively. And we were pleased with our non-ad days, how those performed kind of in between all of the promotions that we had. As it relates to the base stores, those did comp positively as well. It was at a 0.6% comp for the quarter and about a little over a 1% comp for the fall period. All of those, of course, were impacted by the comments that we made regarding our traditional ad events as well.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [4]

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So Jeff, as you think about traditional ad events, they are heavily weighted historically towards that second quarter. And so in the months of November and December, over half of the days are covered by one of those events. So taking those events down in size, removing some of the extremely promotional items that are in them, advertising them less, all really has an impact. However, we were really pleased with the performance we saw in the non-ad days. But when you adjust it all, it's 150 to 200 basis points of impact that we saw from taking those ads down. Now obviously we think that there's lots of positives associated with that, not the least of which is the gross margin improvement that we saw, but there are a whole series of other positives and we take the dollars that we don't spend on that and we redirect them towards our digital programs that we're very excited about.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [5]

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Right. Along those lines, would it make sense at this point to, I don't know, look at more aggressive digital ads? Or how are you thinking about that?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [6]

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We continue to test different mediums. We continue to really play with that program. We're pleased with what we're seeing. We're getting a lot more impressions for a lot less dollars than we were getting with print and everything that we see is positive. So I think we're doing that in a thoughtful, metered way. We're doing a lot of testing, we're pleased with the results we're getting, and obviously, the choice that we made, we have been working on cutting back on these traditional print ad events for a very long time. But that choice is really driven by the positive results that we're seeing in our day to day business which is a composition of a lot of factors, but not least of which is the fact that the emails and the digital advertising are driving customers in every day. And therefore, we're more focused on that and less on pushing these monthly ad events

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [7]

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And I think you will continue to see us doing that. Obviously in the second quarter when it's so promotional to begin with, although we made a lot of progress in the strategy, it's a little more challenging. But as we mentioned, in Q3 we're going from 3 events down to 1 and those dollars then are just shifting to the much more efficient marketing spend.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [8]

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Then if we can change gears a minute, I think you mentioned your real estate plans have shifted a bit for this year. Could you touch on what you're seeing with the landlords on lease renewals? I think you said you have about 25% of the base coming up over the next 12 months. Maybe speak to the latest thoughts on the longer-term plan for how many relocations and renewals you might be looking at.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [9]

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I would say that the market is obviously continuing to adjust. We are having a lot of success renegotiating our leases. As Stacie mentioned, really, it's still a change in the rate of growth. Historically it was something like $10 million a year and I think this year we think it will be at or about $5.5 million of rent growth. So obviously over time there's a lot of opportunity to continue to work on that. We have a lot of stores that we would like to relocate, but obviously you have to look at every store on a case by case basis. The economics change when you're able to renegotiate an existing rent. Your hurdle to then move that store becomes that much higher.

So I suspect that the first part of the equation has already opened up in that landlords are clearly willing to renegotiate rents. The second piece is on these, when we want to find a new location, can we find a suitable rent that makes the economics work? We're starting to see that. I would say the trend has changed ever so modestly, but a couple of months doesn't a trend make. So, we'll see, but to the extent that we can find the right economics, we're not constrained by capital and we have a desire to continue to move the stores and we're pleased with the performance when we do move them. And so, it's just a question of finding the right deal.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [10]

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Okay, great. And then I don't know how much more you want to add on this, but any sense you can give us on how we should be thinking about gross margin for Q3? Maybe order of magnitude increase year-over-year. And then also, relevant to SG&A, just wondering what level of comp you would need to leverage SG&A going forward.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [11]

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Sure. For gross margin, as we said, we expect to be above that -- we had previously given a range of $100 million to $125 million and we're expecting to be ahead of that, at the top end of that range. As we look to the second half, there will be improvements. It won't be to the magnitude of what we achieved in the first half. Some of that has to do with, just like the sales comp, the margin comparison is a little more difficult in the second half. If we think about last year, we still had a little bit of that drag from supply chain in the first quarter. So again, we'll see improvement in the second half, it's just not to the same degree as what we experienced in the first half.

As far as what it takes to leverage, we think that we're still in a low single digit is what it would take. Given -- if we think about all the different factors of from an inflationary standpoint and what we're doing there versus some of the goodness that we've seen related to rents that we just talked about, as well as leveraging some of the store expenses, those sorts of things, so that we think that we're in that range we should see some leverage.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [12]

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And obviously the variables there that we can't control are transportation costs and the effect of tariffs, etc. But the things we can't control -- we can control obviously are rent, and we're doing our best with a lot of efficiency initiatives in the store operations group to control our labor expenses.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [13]

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Right. Are you seeing any easing of the pressures of transportation costs? Or is it pretty much just steadily headwind there?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [14]

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I wouldn't say that we're really seeing any easing. What we are very focused on is the DC bypass which really just started to see the benefit of that in the second quarter as we implemented that. We'll continue to see that ramp up. The initial implementation was on the west coast, we'll go to the east coast, so there's a steady kind of path there. And then the domestic consolidation was the other thing. So we're very focused on all of those initiatives to mitigate the impact of these headwinds, but it's as you know, fairly unpredictable and a little volatile. But certainly, as Steve said, doing what we can to control the things that we can control.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [15]

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Okay. I just have one more. Just wondering, obviously you're thinking about tariffs and I'm sure you're taking steps to mitigate the potential tariff risk. Maybe if you could just touch on that and how we should think about impact to the P&L.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [16]

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For us, as far as the impact, it's probably not as great as it is for others. Our import business runs around 20% of our total business. So not all of that 20% is going to be subject to the tariffs. As far as what we've been doing since all this was announced several months ago is a number of things. One is, first, working with our vendors to see what we can do to adjust pricing. Secondly is just looking at the pricing and what we need to do to ensure we're maintaining our margin goal. And then lastly is looking at other resources where the tariff isn't an issue. And so, we've been very focused on that for several months and prepare for whatever might come in the coming weeks.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [17]

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And the other resources you're looking at, is there an opportunity there to reduce that roughly 20% substantially? Or how should we think about that?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [18]

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You've got to imagine that everybody else is doing the same thing we're doing. So first of all, vendors are moving some of their production to countries that aren't impacted by the tariff. So I think there is an opportunity, but it's obviously somewhat resource constrained because everybody is trying to do the same thing at the same time.

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Operator [19]

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

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Alex Silverman, AWM Investment Company Inc. [20]

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Wondering if you could talk a bit about what you're seeing in terms of freight in general, and then specifically, how your plans to mitigate some of those issues have worked out?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [21]

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So Alex, you're talking about freight costs?

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Alex Silverman, AWM Investment Company Inc. [22]

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Yes. Sorry, freight costs.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [23]

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So the 2 -- we've really done I would say 3 things. The first is an effort that we call domestic consolidation and that involves when we sweep for freight in the LA basin and also on the east coast, collecting freight and making sure we're shipping full trucks. And that's been very effective and that's helped us to decrease our costs. The second initiative, which started to ramp up in the second quarter and I think is going to become pretty sizable over time, is something we call distribution center bypass. And what that involves is when we're taking in freight, imported freight, to the extent that that freight is ready to go to the store, we'll basically break it up and ship it out to pull points and then ship it directly to store. So what you avoid there is that leg to Phoenix or to Dallas and then back to a pull point. And that has a freight benefit obviously, but it also has some other benefits. For instance, damages in theory should decrease because your touches decrease, and obviously there are labor benefits because you have fewer touches. So that's something that we've been working on, we've implemented successfully. It's ramping up, we're enthusiastic about it. And it has lots of goodness, freight being the major one.

And then the third is obviously like anybody, when your freight costs go up, you spend a lot of time working on efficiency initiatives. So we spend a lot of time making sure our trucks are well packed and fully packed and you get very focused on making sure that you're not shipping air. Those are the major initiatives. We're pleased with the effects they've had. We think you're going to continue to see those effects going forward. But obviously to the extent that the transportation costs go up, that's really the only way we can manage that.

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Alex Silverman, AWM Investment Company Inc. [24]

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Can you give us any sense of how much of the increase it has mitigated?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [25]

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We really can't. I mean, I think it's been meaningful and we're very pleased with it, but I can't break that out.

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Alex Silverman, AWM Investment Company Inc. [26]

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I'm just trying to get a sense for whenever freight goes down, whenever that might be in the future, how much of a benefit, how much of a benefit this will be for you.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [27]

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I think it will be a real benefit and I think some of these initiatives, especially distribution center bypass, are kind of in their early days. And if you think about the sorts of freight that you're handling with distribution center bypass, a lot of time that's lawn and garden furniture that's coming in from Asia that's very bulky, and so I think there's a real opportunity when those costs come down for this to be a big net positive, but that remains to be seen.

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Alex Silverman, AWM Investment Company Inc. [28]

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Okay, and then just to switch gears, can you -- any comments you can make on where the process stands with the Dallas DC and what future plans you have there?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [29]

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I can say that we've done a tremendous amount of work, we're toward the end of that process. We plan to make a recommendation to the Board relatively shortly. As you can imagine, there are lots of puts and takes and variables there. Some of those variables, like distribution center bypass which I've just talked about, have changed during the process. So we've seen the effect of that. We're able to now forecast that out and it changes our thinking in terms of capacity needs for that facility. So it's at the late stages and we look forward to talking about it more fully on the next call.

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Operator [30]

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Our last question comes from Ethan Steinberg with SG Capital.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [31]

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Can I get a little more color on the 280 bps of gross margin improvement as far as sort of different areas where that came from?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [32]

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Sure. So it's really the same kind of 3 areas that we've seen over the past couple of quarters. First is our IMU improvement which we've had multiple quarters in a row where we've seen improvement there. And that really has to do with the way we're buying. We're buying much more disciplined, much tighter, even the way we're buying for the traditional ad events. So the percentage of regular price inventory that we have on the floor is much greater today than what it has been in the past, that mix of reg price versus the lower margin goods to support those ads.

Secondly is markdowns. Our markdowns were down for both the quarter and the fall pretty meaningfully. And that is a result of again, tighter buying, the impact of the traditional ad events, and then importantly, kind of the continued evolution of the change that we made in our strategy where we are being much more strategic about how we take those marks and we're taking them more frequently. And then the last piece is supply chain. As we talked about, the cost per piece has gone down significantly, and as a result, that's been a real margin contributor as well.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [33]

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Got it. Then looking forward, is there -- are all of those reasonable or is it reasonable to assume most of those can continue?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [34]

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It is. From an IMU standpoint, we still think that there's opportunity there as we continue to optimize some of these events where we're not as focused on these extremely low margin merchandise to support those events. Markdowns, again, is a continued evolution of that. Supply chain, as you look as far as if we kind of weight the 3 of these categories, supply chain has the biggest runway just given how we're operating today and the things that we have ahead. But all 3 of them have opportunity.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [35]

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Got it. And then just a little more color on the SG&A 50 basis points de-leverage. Can you parse out a little bit what's going on as far as the higher rent, the higher ad cost and the incentive comp?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [36]

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Sure. So Steve mentioned rent. For the past few years, our rent increase has been about $10 million on an annual basis. We expect to be roughly half of that for this year which is a result of the improved negotiations that we've been experiencing as well as lower activity. From an incentive comp and retention standpoint, that's been a pretty big drag. Retention expenses for the year-to-date period was about $1.7 million and that was split fairly evenly between the 2 quarters. For the full year, we're expecting that to be around $2.6 million. So as you can imagine, that is a drag. Certainly, the incentive comp, as we're normalizing those dollars for the year, will also be a drag.

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Alex Silverman, AWM Investment Company Inc. [37]

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Got it. And can you help us at all with what you think SG&A as a percentage does for the rest of the year?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [38]

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We do expect to de-leverage, but if you excluded the normalization of incentive comp and those retention costs that I just laid out, we would be leveraging. But we do expect to de-leverage slightly.

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Operator [39]

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Thank you. And that does conclude today's question and answer session. I would now like to turn the call back to Steve Becker, Chief Executive Officer, for any further remarks.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [40]

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Thank you all. Thank you for joining us today. We look forward to our next quarterly conference call. Have a good day.

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Operator [41]

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