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Edited Transcript of TUES earnings conference call or presentation 22-Aug-19 1:00pm GMT

Q4 2019 Tuesday Morning Corp Earnings Call

DALLAS Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuesday Morning Corp earnings conference call or presentation Thursday, August 22, 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.

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Ethan Steinberg

SG Capital Management LLC - Senior MD

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Paul J. Solit

Potomac Capital Management Inc. - President

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Tuesday Morning's Q4 and Fiscal 2019 Year-end Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. 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 Fourth Quarter and Fiscal 2019 Earnings Conference Call. Joining me on the call today is Chief Executive Officer, Steven Becker. If you've 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 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 & Director [3]

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Good morning, and thank you, everyone, for joining us for our fourth quarter and 2019 fiscal year-end call. Fiscal 2019 was an important year for Tuesday Morning. We delivered significant improvement in our operating performance as evidenced by doubling of adjusted EBITDA driven by 110 basis points of gross margin expansion. Our sales increased slightly despite significantly reducing our traditional ad events and operating 12 fewer stores. We also generated free cash flow, reduced our net debt and extended our bank line on favorable terms for an additional 5 years.

There were important operational accomplishments in fiscal 2019. After successfully repositioning our store portfolio, including opening, relocating and expanding approximately 285 stores over the last 5 years as well as the closure of many of our least attractive locations, we've now pivoted our real estate strategy and made substantial headway in our rent renegotiation program. We are pleased with our results thus far, and with 170 leases coming up for renewal in fiscal 2020, we expect more progress to come.

Our supply chain ran smoothly and efficiently, handling 7% more units with lower cost per piece and lower overall costs. We introduced distribution center bypass and domestic consolidation to further improve distribution freight and transportation efficiencies and also completed the groundwork to begin the next phase of our supply chain repositioning. We completed a 3-year reduction of our traditional ad events, which improved our gross margins meaningfully, improved our working capital efficiency and allowed us to shift ad dollars to more efficient digital channels.

We grew our brand impressions by 100%, continued to grow e-mail capture and are now at over 3 million e-mail addresses in our database. We improved our markdown management, which help drive our gross margin improvement, and we enhanced our merchant organization with the addition of a number of merchandise managers and buyers, all of whom have significant experience in off-price.

Looking more closely at how we finished this year and the underlying drivers of our performance. We delivered positive comp growth of 0.7% for the quarter, driven by transaction growth of 3.1%. The decline in basket was directly related to a handful of businesses that we've taken concrete steps to address. As discussed last quarter, we continue to strengthen our merchant organization by recruiting best-in-class off-price talent. Over the past few months, we've hired 2 new divisional merchandise managers and 3 new buyers, all of whom have spent significant time at other off-price leaders. As a result, we are better positioned to replicate the success we have seen in key merchandise categories more broadly across the assortment.

We are very focused on finding great deals for our customers and have recognized the merchant team -- reorganized the merchant team and added significant additional support resources. The marketplace for goods continues to be strong and we've added meaningful new brands and negotiated some great deals, which we're excited to pass along. In the current retail environment, our ability to source high-quality goods, be very sharp on price and deliver greater value is paramount. I cannot overemphasize the amount of work we've done here and the excitement that our team feels around the momentum in our merchant organization.

On the marketing front, we continue to do our efforts to drive more effective communication with new and existing customers. We're growing our customer e-mail list and becoming more efficient with our digital marketing efforts. We're seeing success in our diversified media approach, and in the past year, we've expanded digital programs and run video and TV tests, which yielded a promising lift in brand awareness. We're also very encouraged by KPIs across e-mail subscribers and engagement, impression, site traffic and social followers, all of which showed strong increases for the year. And we're particularly pleased that these efforts have helped attract the younger customer, as our average customer age is 4 years younger than it was only 18 months ago.

We've now completed the heavy lifting to shift our marketing mix away from the traditional event-driven messaging. This shift did create a sales headwind for us but was a gross margin tailwind and importantly sets us up for what we believe will be a more efficient and effective marketing program in fiscal 2020 and beyond. This year, we expect our traditional ad events to be roughly similar in number and size, but more effective due to the quality of deals we're finding and the work we've done with our merchant team to focus on finding new vendors and great products.

As we look ahead, we remain squarely focused on supporting our merchant organization to effectively execute the off-price model. We're also focused on positioning Tuesday Morning for sustainable growth. As we announced this morning, we'll begin the next phase of our supply chain repositioning, which we believe will help drive efficiencies and cost savings over time.

After an exhaustive process reviewing the alternatives, including analyzing various locations and building configurations, we made the decision to retrofit our primary Dallas distribution facility. As a reminder, the current Dallas distribution complex consist of 3 distinct buildings that are not physically contiguous and not all in the same campus. This path forward provides us the highest return on investment while also carrying the lowest associated risk of all the alternatives we studied. The process will involve consolidating our Dallas distribution activities into 1 facility that we currently own and operate, which is 3 miles from our Dallas headquarters.

As we've previously discussed, the primary issue with the current Dallas distribution operations, as configured today, is the inefficiency of working in multiple buildings that are not in the same campus and, to a lesser extent, the layout and age of the equipment. By consolidating into 1 facility and upgrading the equipment, the new Dallas distribution center will have significant cost and efficiency benefits. The project will largely involve the installation of new equipment much of it current -- in currently underutilized space as well as upgrades to existing systems. While these installations are occurring, the current Dallas facilities will continue to operate. Once the new capacity is online, we'll gradually wind down the legacy facilities.

We're well into the planning phase and expect to be working in earnest on this project shortly after the fall peak. We currently believe this process will largely be complete and our primary Dallas facility will be fully operational by summer of 2021. Over the next 2 years, we expect to spend CapEx of approximately $28 million to $30 million on the retrofit of the Dallas facility. We're actively in the process of evaluating the disposition of certain noncore real estate distribution assets. Based on market data, we believe the potential value of these assets could be in the high-teen million range, which combined with expected cash flow generation will fund our DC retrofit investment. Any temporary timing mismatches, if they occur, will be funded as necessary by borrowings on our credit facility.

We expect the benefit of the Dallas retrofit and other supply chain efficiencies to contribute approximately 150 basis points of gross margin expansion with potential for future benefit as additional efficiencies are gained.

Given the company's experience with the Phoenix DC that was opened in May of 2016, I think it's important to highlight how and why this situation is very different. The Phoenix project was far more complex and involved significant changes in process as well as multiple software system implementations. We also had to hire and train a new team as well as contend with the introduction of an entirely new transportation process, while at the same time executing a new merchandise strategy that involves significant unit volume growth.

In contrast, the Dallas DC retrofit is designed to significantly reduce the risk and complexity we experienced when opening the entirely new Phoenix facility, namely we're using existing facility to install new equipment in largely unused space, we're using an existing warehouse management system that will be upgraded. To minimize any disruption, we'll operate our current Dallas facilities and only wind those down when the new capacity is fully operational.

We're leveraging our Dallas distribution talent with this retrofit and we'll benefit from the proven expertise and effectiveness they've already demonstrated when operating the current Dallas facilities. And finally, the proximity of this facility allows for greater management oversight. We look forward to entering the execution phase of this important project to further improve our distribution infrastructure and benefit from the associated efficiencies and cost savings.

Finally, let me touch on our outlook for our real estate activity going forward. As you know, over the last few years, we've made tremendous progress resetting our real estate footprint. As we look forward, we'll continue to approach openings and relocations opportunistically, and we'll be heavily focused on renegotiating leases, which will continue to decrease the headwind from rent we've experienced over the past 4 years.

We've already had great results with renegotiating some leases. And with a favorable environment, we believe we'll continue to be able to capitalize on improved terms as 170 leases come up for renewal this year. While fewer relocations reduces the comp sales tailwind, we're pleased with our current store portfolio. With the rightsizing of our traditional ad events behind us and a strong overall market for deals, we believe we're well positioned to drive positive comp growth going forward. And as Stacie will discuss shortly, there are also gross margin drivers of the meaningful adjusted EBITDA improvement we expect this fiscal year.

I will now hand it over to Stacie to go over the details of our financial performance and provide more comments on our outlook for fiscal 2020.

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

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Thank you, Steve. Before I discuss our fourth quarter results in more detail, I'd like to briefly review the highlights of our full year performance. As Steve mentioned, we drove significant improvement in our operating performance this past year, which demonstrates the strong progress we continue to make against our key initiatives. While we did have some headwinds to our top line related a purposeful reduction in traditional ad events and fewer stores, we were pleased to deliver slightly positive comps. We also drove 110 basis points of gross margin expansion, doubled our adjusted EBITDA to $20 million and delivered positive free cash flow. So it was great overall progress for the year.

Now let me review our fourth quarter results. Net sales were $230.5 million, flat with Q4 last year, and comp sales increased 0.7%. Comp transactions increased 3.1%, and average ticket decreased 2.3%. Storage relocated over the last 12 months continued to deliver strong performance, contributing approximately 90 basis points to comp sales in the quarter, driven by both better real estate and larger average store footprint. As our real estate activity has moderated, the contribution of relocated stores to comp sales will be relatively insignificant.

Gross profit was relatively flat to last year at $76.7 million, while gross margin decreased to 33.3% compared to last year's gross margin of 33.4%. The gross margin decline was primarily driven by increased transportation costs, partially offset by continued improvement in initial merchandise markup.

SG&A expenses were $88.1 million for the fourth quarter compared to last year's expenses of $86.5 million. As a percentage of net sales, SG&A delevered 70 basis points to 38.2% compared to 37.5% last year. The increase in SG&A dollars was driven primarily by increased incentive compensation and retention costs.

Advertising increase for the quarter, which was timing-related and rent expense was up also very slightly year-on-year reflecting the favorable lease negotiations we've achieved. Partially offsetting these increases, workers' compensation and insurance expenses were lower coming from favorable claims experience. Excluding incentive comp and retention expense, SG&A expenses would have leveraged approximately 20 basis points.

Our operating loss for the quarter was $11.4 million compared with $9.4 million in the fourth quarter of last year. And we reported a net loss of $12 million or $0.27 per share compared to the fourth quarter last year when we reported a net loss of $10.3 million or $0.23 per share. EBITDA was negative $4.8 million compared to negative $2.8 million last year, and adjusted EBITDA was negative $4 million compared to negative $2 million in the fourth quarter of last year. For our full year performance highlights, please refer to this morning's press release.

Turning now to the balance sheet. Cash and cash equivalents were $11.4 million at the end of the year compared to $9.5 million at the end of last year. Total liquidity was $76.4 million, including approximately $65 million available on our revolver. As of year-end, we had $34.7 million in borrowings outstanding under our line of credit compared to $38.5 million last year. We improved our overall net debt position by $5.7 million for the year.

We ended the year with our inventory in a good position at approximately $238 million, which is an increase of 1.5% from a year ago. Our overall inventory turns declined slightly to 2.7 turns compared to 2.8 turns a year ago. And for the fourth quarter, we invested $4.8 million of CapEx on a net basis; and for the year, we invested $14.6 million.

And now for our outlook for fiscal 2020. We currently expect comp store sales for fiscal 2020 to increase in the low single digits. As we look at the cadence for the year, fall, or Q1 and Q2 for us, will be the most challenging comparison as we are anniversarying our strongest comps from last year, which included a higher contribution from relocated stores. For the spring, again, Q3 and Q4 for us, we will be going up against a negative 5.3% and positive 0.7%, respectively, so the comparison is much easier.

We again expect to achieve improvement in gross margin driven by improved initial merchandise markup and lower supply chain expenses. SG&A expenses are expected to be relatively flat on a rate basis. And for the year, we expect meaningful EBITDA improvement. For the year, we expect to open approximately 3 new stores, complete 5 relocations and close 15 to 25 stores.

As Steve reviewed, over the next 2 years, we plan to spend approximately $28 million to $30 million in CapEx for the retrofit of our Dallas DC. As we currently look at the cadence of spend for the project, we believe the total related CapEx will be roughly balanced between the 2 years though we'll keep you updated as we make progress.

For fiscal 2020, we expect total CapEx to be approximately $25 million to $27 million, with a year-over-year increase related to the retrofit of our Dallas DC as well as an increase in investments in information technology, partially offset by lower spend on stores. We plan to fund these investments through a combination of cash from operations, potential sale of certain noncore real estate distribution assets, as Steve mentioned, and if necessary, borrowings on our credit facility.

I'll now turn the call back 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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So in summary, we're pleased to deliver the substantial improvement in profitability at Tuesday Morning in fiscal 2019. Importantly, with the strides we're making across marketing and merchandising, supply chain and real estate, we enter fiscal 2020 on strong footing. The great off-price merchandising talent we're hiring, the resources we're providing to our team and the improved processes we are putting in place better position us to take advantage of an outstanding deal environment.

Combined with more effective marketing, our improved positioning is resonating with customers and is evident in the good transaction growth we delivered in Q4. With a clear path forward for our distribution footprint, we look forward to generating the associated efficiencies and cost savings. We look forward to updating you on our progress as we move through the year.

Before we get to Q&A, I want to recognize the entire team. We accomplished a lot this year. The team worked extraordinarily hard, and I want to thank you all for our dedication.

With that, I'll turn it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Jeff Van Sinderen from B. Riley.

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

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Can you speak a little bit more about or a little bit about trends you've experienced in traffic and conversion so far in Q1? Are there changes in marketing this year versus Q1 last year that could impact your cost for Q1? I know the anniversary, you talked about that, a little tougher in the first half and usually the second, but just anything -- any other color there would be helpful.

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

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So I mean look, we obviously were pleased with the transaction growth that we saw in Q4. We think the transaction growth is really a product of a lot of initiatives that we've had in place for a while. Obviously, we repositioned a lot of our real estate, and I think we put ourselves in better locations, and that helps. We've done lots of work on the marketing side. And if you look at all of the KPIs around our marketing, they're all up, whether it's site traffic or social followers or brand impressions, e-mail subscribers and engagement, it's all positive, and I think that's contributing. We've also done a lot of work on our merch assortment, and we have some families that are very strong for us that tend to attract repeat traffic. And so there's no reason for me to believe that as we look into next year, those trends won't continue, but we're not giving quarter-by-quarter guidance. And as we pointed out earlier, Q1 is the toughest compare.

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

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The only thing that I would add to that, Jeff, is we, again, not giving any guidance to the quarter. So as we look across the full year, the other thing that we won't be contending with to the same degree is the headwind that we had related to the traditional ad events and how we had really pulled back on that, which has been a tremendous headwind for us for the past number of years. And so we won't -- and as we look at -- you asked about marketing, we'll be much more on par as it relates to those traditional events in '20 compared to where we were in '19, in some cases, we might be even investing a little bit more. So that will be a positive to the -- as we look to '20.

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

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Jeff, I don't think you can underscore that enough. I mean we really set down a path 3 years ago to reduce our reliance on those events. And as we've talked about before, we felt like there were far too many of them. We felt like it was obviously putting undue pressure on our margins because of the promotional nature of the products and the associated IMU. We felt like the messaging to our customers, it was, hey, you only have fantastic deals on these ad events, and we think that's far from the truth. The reality is every day there's terrific value in the store. And so we set down a path to reduce those and we went from 17 to 15 to 12, and now we've really rightsized those. And obviously, they had a real impact on each of those 3 years on our comps, and this is the first year when we think that at the base case it should be flat. And we think there's a reason to have some optimism. We spent a lot of time looking at those events and thinking about the product that's in those. I think the team has done a superb job in finding really sharp values, and we internally are very excited about them. We have -- the first one of the year is coming up this Sunday, and we're excited about the product that's in it, and we think that there could be a tailwind. We're not sure of that, but we've done a lot of work and we're optimistic.

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

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Okay. Good to hear. And then just turning to the DC and opportunistic buys, can you speak more about your evolving concentration of opportunistic close-out buys versus others types of buys? And how you see that impacting your business? And then also just getting into the DC evolution plans, maybe talk about how the timing unfolds as well as the impact on your balance sheet given the real estate just maybe if you can -- (inaudible) I think you said mid-teens probably for real estate sales, and then sort of the transient expenses as part of that. And then I know you said 150 basis points, just wondering when you think that 150 basis points kicks in, would that be for holiday 2021?

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

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So let's tackle that in 2 parts. I'll hit the first part and then I'll hand it over to Stacie to talk a little about the economics of the DC. So as we talked about, we engaged a consultant, who was a former senior executive at a couple of the top leading off-pricers. And that individual has been working us for a while -- with us for a while now. And one of the learnings from that is that I don't think we have been using pack and hold as aggressively as we could have. And so we've been in the market very aggressively over the last few months. We found a lot of product, typically end of season product, which is very standard in off-price but not a practice that we had been doing in a big way. And we have -- we're packing and holding a lot of that product. I think our pack and hold right now is kind of double what it was a year ago, and I expect that to continue to grow. So that to us is tremendously advantageous. We're finding typically end of season product that we can price extremely sharply. And I think some of those values will be much more compelling than they were a year ago. So we are doing much more pack and hold. And obviously, part of the DC retrofit is to make sure that we don't have any capacity issues associated with that. And Stacie, do you want to touch on the DC retrofit issues?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [8]

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Yes. So I think one of your questions was the value. And so what we -- based on market data, we're expecting somewhere in the high teens. From a working -- I think one of your questions was maybe around working capital balance sheet, there's -- is that what you're asking in that regard, Jeff?

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [9]

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Yes. I'm just trying to get a sense of kind of how that shakes out.

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

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I mean we're not expecting -- other than the pack and hold that Steve talked about that we might be doing more of that, that's going to be really the only thing. But there's also you're thinking about the fact that if you're going from 3 buildings to 1 building, there's an efficiency that's gained as you're moving the product through in a more fast -- in a quicker fashion.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [11]

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Yes. So I think -- so I think there could be very modest working capital implications from pack and hold. We're not particularly concerned about at this point. We do think ultimately, as Stacie just pointed out, moving to 1 facility, we'll have positive working capital implications because we'll just shave some time off the total length that it takes product to get to the DCs. Jeff, I think you're also curious about the overall economics in terms of what we think the return is going to be.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [12]

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Yes.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [13]

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So our view is that this project and kind of associated work that we're doing around it as we move into it and thereafter, ultimately should be something in the neighborhood of 150 basis points of goodness. Do I think there's opportunity beyond that over time? Yes, but we're not committing to that at this point in time. I think when we have the product by the time, the DC is fully functional, there's at least 100 basis points and then over the course of that next year, we think there's opportunity to get to 150 and then beyond that. We think there's opportunity, but given our past experience, we'd rather show you than commit to that at this point.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [14]

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Okay. Understand. And then just one quick one if I could throw it in. Just wondering, on the merchant org, I know you mentioned some changes there. Kind of what's the status of the merchant org? I guess at this point what slots do you still need to fill?

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

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So we're currently in a search for a chief merchant. That continues. We've seen lots of very good candidates, but obviously we're being thoughtful and methodical in that process. In the meantime, we've hired 2 divisional merchandise managers that we're very excited about and we continue to interview some excellent candidates. As I mentioned, we've hired 3 additional buyers and we continue to interview candidates there. And our view is that we have a really strong merch team and we're very excited about the team that we have. We've added some resources to that team to allow them to be in the market more frequently, and I think that's been successful. Our teams have been really traveling a lot domestically and have been able to locate some really exciting deals. I mean we have a large deal that just hit the stores this week. That was a brand new vendor and something we hadn't had before that we're all excited about. So I feel very good about the evolution of the merch team. We've reorganized some of the responsibilities, and we'll continue to do so. And I'm also very excited about the caliber of the talent and the pedigrees of the individuals that we've been able to attract. I mean they're definitely impacting the organization positively.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [16]

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Okay. Good to hear. Go ahead.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [17]

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Yes, I wanted to follow up with one thing on the retrofit and the balance sheet, just to make sure that we're clear. So as Steve mentioned, as we look at how we're going to fund that CapEx, the $28 million to $30 million, exploring the opportunity to sell those assets, which, again, we said would be in the -- expect to be the high teens. So that in addition to our cash flow from operations, which we guided to for the year, taking that into consideration for this year and next year, we feel very good about how we're going to be funding this project. And if needed, on a time basis, we'll use our revolver.

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

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(inaudible) billings in the high teens and you're basically are going to come out of pocket for $28 million to $30 million. And we said we expect meaningful improvement to EBITDA this coming year. If you even held the EBITDA constant where it was this past year for the next 2 years, that's $40 million. On top of that, you have the proceeds. And if your CapEx was roughly constant for the next 2 years and given where our real estate program is, I don't foresee it would be terribly different than that. You're comfortably covered. Obviously, to the extent we have a timing discrepancy, we have plenty of room on the revolver, but if all goes well, that shouldn't be something that we need to use in [a way].

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Operator [19]

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And our next question comes from the line of Alex Silverman from AWM Investments.

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Alex Silverman, AWM Investment Company Inc. [20]

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A few questions. Jeff asked a bunch of them. But just so I can confirm I understood this correctly, less of a revenue tailwind from new and relocation stores, but also less of a drag from change in traditional ad events. Is that fair?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [21]

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Yes. That's fair. Both of those factors will come into play.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [22]

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Yes. I mean we've had this funky construct that we inherited, which is talking about comp and then base comp. And going forward, those 2 basically should become the same because our relocation activity really moderates. I mean if you think about, even in this quarter, where we comped 0.7% positive, we had the negative effect of the second year relows. We had, I think, something in the 40s that were in the low period. And so our base stores actually comp positive. I realize it's all -- it's complex and we look forward to getting away from that. And then obviously as you think about the ad events, as I mentioned before, it's just been a 3-year drag, and I think we're enthusiastic that this is the year when that should turn.

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Alex Silverman, AWM Investment Company Inc. [23]

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Got it. In terms of SG&A, I just want to make sure I heard this correctly. Did you say excluding the higher incentive and retention comp there would have been a 20 basis point improvement as a percent of revs?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [24]

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Yes. In Q4, it would have been -- we would have leveraged 20 basis points. And for the year, the impact was even greater. We would have leveraged about 65 basis points. So it was a significant incremental expense this year. Put it in other terms, as we talked about, we adjusted -- our adjusted EBITDA increased by about $10 million. And without those incremental costs, it would have been closer to $18 million. So it was a big number this year for us.

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

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So remember, Alex, last year, there was very little incentive comp. There was retention comp and very little incentive, and this year, you had retention comp and incentive. And I think it's worth pointing out that the retention comp this year was...

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [26]

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It was about $2.4 million. And as we go into fiscal '20, not going to be nearly as significant. It's roughly 1/3 of that for '20.

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Alex Silverman, AWM Investment Company Inc. [27]

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Okay. That's helpful. And then in terms of real estate negotiations, how should we think about how rents should change with those 170 leases?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [28]

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Well, here's how I would kind of frame it. If we look at the past number of years, we've been on this journey for 5-or-so years. In the past 2 years, our rent expenses increased on average $10 million. So it's been a big headwind. In fiscal '19, that decreased significantly as a result of both the negotiation success that we're having as well as lower real estate activity, and that increase was around $3 million, $3.2 million. So going from this $10 million down to $3.2 million and then as we go into fiscal '20, again, continued success with negotiations as well as the more moderate pace, we expect the incremental increase to be even less than what we experienced in '19.

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Alex Silverman, AWM Investment Company Inc. [29]

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I assume -- sorry, I assume part of the rent increase, though, over the years is more square footage from the relocations, no?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [30]

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That's definitely part of it because on average, when we relocated a store, opened a new store, we've increased the square footage pretty significantly, about 3,000 to 5,000 square feet. And then also we've been going from very bad locations to much improved. So it's kind of the combination of those things.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [31]

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I mean the other -- the good news in our -- in the real estate portfolio is that we have lots of leases that are coming up. The bad news is also that we have lots of leases coming up. And so while the vast majority of the leases that we renegotiate are positive and we have an opportunity there, we also have some outstanding locations where unfortunately we had very short-term lease rates. And so some of the growth in rent comes from a lease that is coming due where we didn't have the lease rights that frankly, I think, we -- today, as we do these deals, we have multiyear extensions for the most past. And so we didn't have some of those in the past and we do suffer when we have a terrific location that we have to renegotiate.

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Alex Silverman, AWM Investment Company Inc. [32]

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Okay. My last question is around transportation costs. Clearly, we're all seeing the same headlines around pricing coming down. How do you think about it in terms of your guidance for the coming year?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [33]

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So we factor that in. Transportation cost is probably one of the more difficult things to forecast or predict, I think even more so for off-pricers because of how the complexity of not always knowing where you're sourcing your -- the merchandise from. That being said, we're doing a lot of things, the DC bypass and domestic consolidation, as Steve mentioned, we'll continue those efforts. I think that the unit flow that will go through those will increase this year. We've seen that especially with the DC bypass. And then lastly, we've had hired a new head of transportation, who's a veteran in the industry, and he's doing a great job looking at all of our partnerships, all of our carriers as well as all of our contracts to see where there's opportunity and we're pleased with the progress we've seen so far.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [34]

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We're in the middle of a significant renegotiation program there as well. He's reviewing everything that we're doing.

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Operator [35]

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And our next question comes from the line of P.J. Solit from Potomac Capital Management.

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Paul J. Solit, Potomac Capital Management Inc. - President [36]

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Congrats. It looks like some signs of attraction on a lot of fronts. Jeff and Alex covered most of my questions. But I guess one thing is in the merchandising area, which you've focused on. What specifically is working or not working these days?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [37]

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P.J., we don't -- for competitive reasons, we don't like to get into great detail there. I would say that we've had a handful of growth businesses that continue to have traction. But I would make a point that when you think about our basket this last quarter, we obviously had nice transaction growth and our basket was down slightly. And there are 5 or so businesses where frankly I don't think our execution was what it should have been. And in all of those businesses, we've made some strategy changes around how we're going to market the product that we're going to have, the way we're going to price that product and also in each of those cases, we've made changes in the buyer and the manager of that buyer. So we recognized very specifically where the issues are from a basket standpoint, and we've taken steps to address them.

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Operator [38]

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And our next question comes from the line of Chris Krueger from Lake Street Capital.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [39]

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Most of my questions have been answered, but I guess, just one quick question is you've stated that your average customer age is 4 years younger, I believe, than it was 8 months ago. Is this driven by any certain product categories? Or how should we look at that?

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

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Yes. I mean I think it's largely driven by marketing, to be honest. I mean we have -- I think that obviously we've shifted to digital and away from print, and I think that helps to attract a younger customer. And we're just seeing a lot of success in all of the metrics that we follow, as I mentioned before, specifically around social. So all of those things when you're marketing people digitally, you're definitely attracting a younger customer, and I think that engagement that we're seeing in the marketing programs around bloggers, on Instagram, Facebook, et cetera, is contributing to driving a younger customer into the store.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [41]

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I think the other thing is probably as we talked about that we've touched close to 300 of our stores, and so repositioning those stores and putting them in, in many cases much higher traffic centers, I think that has helped with that as well. It's taken a little bit of time, but I think that is contributor to that as well.

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Operator [42]

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And our next question comes from the line of Ethan Steinberg from SG Capital.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [43]

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Couple of things, most everything got asked. But the average ticket down but the transactions up. Was the average ticket down, do you feel like more consumer driven or merchandise driven?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [44]

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We believe it's merchandise driven. I mean we think that we can really pinpoint the businesses that had challenges versus a year ago and what's changed there. And as I mentioned before, we think it was our execution and we've taken steps to address those.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [45]

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Got it. And that sort of leads to having the new folks in there. How quickly are you seeing or do you expect to see them put their fingerprint on that where we could see the average ticket change?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [46]

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Well, look, I think that some of the changes are starting to flow through. Obviously, it takes time. But we're definitely seeing merchandise that has been bought by some of the newer buyers as well as some of the existing buyers where we made some changes within the organization and refocused our strategy. So I think this fall, it's reasonable to expect that you'll see some improvement or at least evidence of, I'm not going to predict improvement, I would like to see improvement, but we're definitely seeing product flow in that we've purchased under this regime. And our view is that these are the appropriate steps to fix these businesses.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [47]

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Okay. And then the 150 basis points benefit on the supply chain initiatives, can you -- how long roughly should that take to get?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [48]

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So as we look at it, of course, there are things that we're doing right now to continue with the efficiencies. After that first year of being fully operational, which will for us will be fiscal '22, from where we are today, we expect 100 basis points of improvement at that point. And then roughly another 50 that next year with opportunity beyond that.

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Ethan Steinberg, SG Capital Management LLC - Senior MD [49]

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Okay. Great. And then I think just the last thing is so as you're realigning the current DC structure, I think you laid out the capital commitment. Is there much extra cost as you've got some duplicate processes going on it sounded like?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP, CFO & Treasurer [50]

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No, we don't expect a notable increase in our operating expenses. We're obviously working very hard to make sure that, that doesn't happen. There'll obviously be professional fees and most of that will be capitalized. And we're not really running redundant facilities. So the retrofit will be occurring as we're continuing to operate. It's not as if we have another facility. So we're not going to be incurring costs related to that.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [51]

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I mean if you visualize it, Ethan, there's a lot -- there's a significant piece of space in the facility that we're going to be -- that we're going to end up in that currently isn't -- it's kind of underutilized. And so we're going to do a lot of work there. And then once that is up and running, we can kind of wind down the work in the other building. And so we don't -- from a labor standpoint, we don't expect redundancy, and that's really where your costs would come from.

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Operator [52]

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And I'm showing no further questions at this time. I would like to turn the call back to -- over to Steve Becker for closing remarks.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [53]

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Thank you all for tuning in. We look forward to updating you on our first quarter conference call. Have a great day.

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Operator [54]

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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 great day.