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Edited Transcript of TUES earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q1 2020 Tuesday Morning Corp Earnings Call

DALLAS Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuesday Morning Corp earnings conference call or presentation Tuesday, November 5, 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

* Steven Robert Becker

Tuesday Morning Corporation - CEO, President & Director

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Conference Call Participants

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* Christopher Walter Krueger

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

* David Berman

Berman Capital Management LP - General Partner and President

* 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 morning, ladies and gentlemen, thank you for standing by and welcome to the Tuesday Morning Corporation First Quarter Fiscal 2020 results conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Stacie Shirley, CFO. Please go ahead, ma'am.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP & CFO [2]

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Thank you, operator, and good morning everyone. Thank you for joining us. Joining me on the call today is Chief Executive Officer Steven Becker. If you've not received a copy of today's earnings release, you may attain 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 first quarter call. For the quarter, our comparable store sales were down 0.7% compared to a positive 3.8% last year. While we knew this would be our toughest compare of the year, we were also not helped by the weather with both the hurricane and the unseasonably warm temperatures in much of the country.

As we mentioned last quarter, given the plan pullback and relocation activity, the difference between our total comparable store sales growth and base store comparable sales growth is increasingly immaterial. This is in sharp contrast to last years comparable sales growth which had 280 basis points of contribution from relocated stores. Total comp performance not withstanding, we continue to be pleased with our transaction count having grown our comp transactions 2.4% for the quarter. We believe the improvement in transactions is due to a combination of the right merchandise as well as improved real estate and more effective marketing. Offsetting this improvement and transactions was a 3% decline in our basket. The decrease in basket was primarily related to the decline year-on-year and a handful of families that carry a higher average unit retail as well as the mix impact of the growth we were seeing in some lower than average AUR families.

As it relates to the higher AUR families, we've made changes to the management of these and taken other steps to improve their sales productivity including addressing the values and price points being delivered. We are seeing early signs of improvement in these specific businesses. Ensuring that our values are competitive across our merchandise assortment is a key priority. This endeavor is a process but we are making progress.

Our merchant team is coming together nicely. We are pleased that we are able to attract talented merchants to enhance the strength and depth of our Tuesday Morning team. During the quarter, we added a veteran divisional merchandising manager, our third DMM, and 2 more veteran buyers all from well-known off-price peers.

Since the spring, we've replaced our entire merchant leadership team, and in total, recruited 8 merchandise professionals with significant off-price pedigree. We've also continued to provide the team additional resources and support to allow them to have a more frequent and effective presence in the market. We feel good about the momentum that it's building. The progress this team is making, and especially the exciting product we're finding in the market.

By the spring season, a significant portion of our assortment will be indicative of a more consistent focused discipline on delivering value to our customer. We continue to see opportunity to drive both sales and profitability to our focus on delivering great value, optimizing our marketing spend and driving efficiencies within our supply chain.

The work we have done shifting marketing dollars into digital has not only optimized our spend but has also begun to attract a younger customer as we discussed on our last call. As it relates to supply chain, we're proceeding with a retrofit of our Dallas distribution center. In the meantime, we continue to make headway improving our cost per piece across our facilities. We reduced cost in both Phoenix and Dallas this quarter and we're finding savings from the ongoing work from our transportation team.

We expect that the retrofit will result in significant savings and we will continue to make headway reducing our costs along the way. Additionally, we're in the process of exploring the monetization of our noncore real estate distribution assets. The interest in these assets has been robust and we look forward to updating you on the progress of this process.

Finally, with our store fleet in a much improved position following the significant store relocation opening -- store relocation opening and closing activity of the last 5 years, our primary real estate focus this year has shifted to rent renegotiation. Of the approximately 170 leases up for renewal this fiscal year, we've already renegotiated about two-thirds with a significant number of these on more favorable terms.

Given our lease expiration schedule, and with a renegotiation process, progress, we are seeing, it is entirely reasonable to expect our rent costs to begin to decline quarter-over-quarter at some point in the near future. For this year, we expect to open approximately 3 new stores, complete 5 relocations and close 25 to 35 stores. We will be opportunistic about opening new stores and finding relocation sites that have recently improved a number of projects for next fiscal year.

In summary, we're very pleased with the work on many fronts, particularly with our merchandise team and the enhanced focus on consistently executing our core off-price model and delivering great value. We've also continued our focus on managing costs throughout the organization highlighted by improvements in rent and transportation spend. We look forward to delivering continued improvement and updating you on our progress. Stacie?

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

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Thank you, Steve. Net sales were $224.4 million, down 1.3% from Q1 last year and comp sales decreased 0.7% on top of last year's positive 3.8% comp performance. We expected the first quarter to be our most challenging compare given our strong comp performance last year which included a 280 basis point contribution from relocated stores. And as Steve mentioned, weather was also a headwind.

Comp transactions increased 2.4%, and average ticket decreased 3%. Gross profit was almost flat at $81.1 million versus $82.4 million last year. Gross margin decreased slightly to 36.1% compared to last years gross margin of 36.3%. The gross margin rate decline was primarily driven by increased markdowns compared to last year. In Q1 of last year, we completed the transition to a new markdown management process which resulted in a timing shift that caused a favorable markdown rate last year. As expected, we anniversaried this timing shift in Q1 of this year which drove the overall decrease in gross margin rate.

As we look to the balance of the year, our quarterly market down rate should be more comparable with the prior year quarters. Continued improvement in initial merchandise markup as well as lower supply chain and transportation costs were gross margin tailwinds in the quarter.

SG&A expenses were $89.8 million for the first quarter compared to last years expenses of $90.0 million. The decrease in SG&A dollars was driven primarily by reduced spending on our real estate projects. As a percentage of net sales, SG&A de-levered 40 basis points to 40% compared to 39.6% last year. It is also worth noting that total rent expense was relatively flat compared to last year.

As Steve discussed, we have continued to have success in our rent renegotiations and are starting to see the benefits of those efforts. Our operating loss for the quarter was $8.7 million compared to a loss of $7.6 million in the first quarter of last year. We reported a net loss of $9.6 million or $0.21 per share compared to the first quarter last year when we reported a net loss of $8.1 million, or $0.18 per share.

Lastly, EBITDA was negative $2.2 million compared to negative $0.9 million last year. And adjusted EBITDA was negative $1.5 million compared to negative $0.1 million in the first quarter of last year. Turning now to the balance sheet. Cash and cash equivalence were $5.3 million a the end of the quarter compared to $12.6 million at the end of the first quarter of last year. Total liquidity was $70 million, including approximately $65 million available on a revolver. As of quarter end, we had $57.9 million in borrowings outstanding under our line of credit compared to $55.6 million last year.

We ended the quarter with our inventory in a good position at $285.9 million which is a decrease of 0.2% from a year ago. Our overall inventory turns to flat to last year at 2.6 turn. Our accounts payable balance declined $113 million compared to $132 million a year ago. The year-over-year change was primarily driven by the inventory decline and timing factors. We expect accounts payable to be more in line with historical levels by the end of Q2.

For the first quarter, we invested $4.5 million of CapEx on a net basis. Turning now to our outlook. As you saw from our press release, we are reiterating the financial outlook for Fiscal 2020 that we provided on our last call. We continue to expect comp store sales for Fiscal 2020 to increase in the low single digits. As a reminder, Q2 will be a challenging comparison as we anniversary a strong comp from last year which included a 170 basis point contribution from relocated stores.

Also, as Steve noted, while we've identified and are working on driving improvement in the higher AUR families that are pressuring our basket, these changes take time. And finally, we expect it to be a competitive holiday season with promotional pressure in the market resulting from retailer store closure activity as well as a holiday calendar that has 6 [gear] days between Thanksgiving and Christmas.

We are encouraged by the transaction progress we have seen and as we move into the second half of Fiscal 2020 with easing same-store sales comparisons and a greater portion of our assortment impacted by the new merchant team, we look forward to driving improvement in our comp trends.

As it relates to gross margin, we continue to expect to achievement in gross margin for the full year driven by improved initial merchandise market and lower supply chain expenses. Given prior year comparisons, we would expect the gross margin improvement to be delivered in the second half, which is our spring season. While we expect our markdown rate to normalize going forward, as I just discussed, we do expect Q2 gross margin to be down versus last year as we anniversary the material 280 basis point expansion which included significant IMU improvement.

In addition, we incurred increased freight costs late last fiscal year which were capitalized into inventory at that time. These higher costs will be recognized as we sell through the associated inventory in Q2 of this year, putting additional pressure on gross margin. Consistent with our prior guidance, SG&A expenses for the year are expected to be relatively flat on a rate basis and we continue to expect meaningful EBITDA improvement.

Total CapEx this year is still expected 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, a potential sale of certain non-core real estate distribution assets that Steve mentioned, and if necessary, borrowings on our credit facility. I'm now going to turn the call back over to Steve before we open up for questions.

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

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In closing, we're pleased with the progress we're making and we are well positioned to execute against our goals for the remainder of the year. With the important holiday season in front of us, we look forward to continuing to deliver a great product at amazing value to our customers. I want to thank all of our teams for their hard work. We look forward to updating you on the progress on our next call.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP & CFO [6]

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Operator, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question coming from the line of Jeff Van Sinderen with 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 more about the store impact in the quarter? Just wondering if this is bounce back in the storm impacted areas and also are you seeing anything different in store traffic so far in Q2 and then maybe if you could touch on your thinking around the fewer days between Thanksgiving and Christmas? I know you mentioned that. And any color you can provide on your toy business and the changing competitive landscape for toys?

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

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Yeah, so a few different things there, Jeff. Firstly, you know, regarding the storm impact, there was impact, we're not going to quantify it. Those areas have bounced back since that.

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

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I think you called out the compression of the time between Thanksgiving and Christmas; certainly, it's going to impact us just like it is everyone else since it's trying to figure out the challenge that that's going to put to Q2. It's a very competitive, you know, market right now from a promotional standpoint and I think some of that compression has led some retailers to go ahead and start promoting already.

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

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Yeah, and Jeff --

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

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Yep, go ahead.

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

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As regard to your question on toys, you know, obviously, we have some competitors who have left the market. Other folks have stepped up to improve their toy offerings. We think toy has always been a big business for us and is a big opportunity and we think we're well positioned to hit it this Christmas.

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

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Okay, good. And then I know you gave a little bit of color in your outlook talk about the year-over-year comparisons and obviously those are a factor in Q1. As the fiscal year progresses, just kind of considering the fewer relocations and the margin gains that you had last year, maybe you could just touch more on the potential to improve margins in the current fiscal year from freight, I think you mentioned, maybe any other elements there. Maybe just touch on order of magnitude around those, how we should think about that and just anything we can consider around individual quarters beyond Q2.

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP & CFO [9]

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Okay, sure. So, a couple of things. For margin, I would say that we did reiterate that we are still expecting the year to improve year-over-year, not to the same degree that we experienced in Fiscal 2019. And really the opportunity is more so in the spring. If you look at Q2, we had significant expansion last year in our gross margin, which was really driven by IMU; the 280 basis point improvement. And so as we're anniversarying that, that's going to be a real challenge for us which is why we have guided to our margins being down in Q2.

The -- you know, we do still think that there's opportunity from IMU standpoint, but certainly not to the degree that we have experienced over the past few years we've consistently increased our IMU. Some of that has been through better negotiations, it's been through mix and it's been through the changes that we've made to our traditional advertising. And so as we move forward, still some opportunity but just not to the same degree and especially as we continue to focus on really getting our value proposition right.

From a supply chain standpoint, definitely believe there's additional opportunity there from both the operations of our DC and becoming more efficient in getting our cost per piece down as well as from a transportation perspective. We've done a lot of things from transportation in both processes through DC bypass and consolidation as well as the work that our new head of transportation has done from renegotiating our rates with our carriers.

Transportation can bounce around a bit which is, you know, we called that out as far as that being a headwind for Q2 this year because of how the accounting works and how those costs will come through. But as we move into the spring, again, we think that there's more opportunity there as we have -- the work that has been done, has, takes, more -- full effect especially from our rate perspective and so we think that that's a real opportunity.

And somewhat from the same point from sales, you know, when we gave our guidance at the end of the year, low single digit, we knew that most of that opportunity was going to be in the spring because you have Q1, which was the most difficult compare, Q2 is still a difficult compare and the couple of things that I called out that makes the quarter challenging from, again, what we just called out with the compression, the promotions that are out there and for us, having less real estate activity so we don't have that strong contribution that we've had in the past.

And then, you know, what Steve talked about from the standpoint of really hitting these areas and having the full effect of a new merchant team; that will take more effect in the spring.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [10]

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Yeah, and Jeff, I would add to that. I mean, I think there's a lot of optimism about the spring. We -- you know, we change out the entire leadership of our merchandising organization. In total, we have 8 new individuals working on that team and the whole team has really come together. We've [changed] some of the responsibilities and I think in the whole, you know, we've really embraced off-price and I think you're going to see that in the spring. So, in the spring you're going to see a lot of inventory that we've packed and held, especially with spring seasonal. You're going to see additional brands. I think our price points are getting increasingly more compelling and that -- that should really start to come together. I mean, if you think about it, we have a number of new senior members of the team that have only been here a few months. And so their ability to impact the assortment thus far has been relatively limited, but as you get into the spring, that changes considerably so. I think especially where we were last spring, where we think we're going to be this spring; there's a lot of opportunity.

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Operator [11]

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And our next question coming from the line of [Greg Shogrin with Paragon Associates].

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Unidentified Analyst, [12]

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Just curious if you guys have an update on the timeline for the monetization of the Dow's distribution assets? And then, do you have an estimate for how much in duplicative costs you may be carrying today?

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

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So, let me answer the second piece first. We're not carrying duplicative costs. We are ultimately going to consolidate a couple of buildings that we can accommodate within our existing DC infrastructure and then ultimately monetize those.

We are in the process of monetizing those, that is currently happening. We feel very good about it. It's been very robust and we've gotten very good feedback from the market thus far. We don't have an update on the timing, though it is in process and I think it should be a fairly normal process and we look forward to updating you on the results of that as soon as we have them.

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Operator [14]

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Our next question coming from the line of Chris Krueger with Lake Street Capital Markets.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [15]

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Can you -- I know you just touched on the Dallas initiative, can you remind us of the overall timing of getting that retrofit completed and when you expect that to happen?

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

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So we expect to be done the summer of 2021, it's about a 2 year process.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [17]

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Okay, so right around the end of Fiscal 2021, roughly?

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Stacie R. Shirley, Tuesday Morning Corporation - Executive VP & CFO [18]

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Yes, exactly.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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Okay. Then you guys touched on the toy category from a couple of callers ago. Can you talk about the pets category and babies categories and what you think there?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [20]

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Yeah, I mean, baby, not dissimilar from toys, a major player, exit the market which I think has created opportunity for everyone else. We have been growing our baby business, adding a lot of venders and brands and we think it's a big opportunity. Obviously, the baby customer allows us to attract the younger customer and we've talked about -- we've seen consistently the average age of our customer decline. It has even declined again recently. So, we think the baby offering is a great offering for us, the customer is responding to it and we're very happy with that. And similarly, our pet business has been a very good business as well. I mean, I think the pet parent trend is very strong and our customer responds to our pet offering. I also would comment that when you think about overall our basket, you know, those are 2 businesses that generally speaking, have a lower AUR than our average and so we've seen tremendous growth from a number of businesses that similarly have a low AUR.

So for us to get our basket up, we obviously have to improve the mix and drive strength in a handful of families that historically have had a higher AUR and we've done a lot of work on that over the course of the last couple of quarters. We've changed out some buying responsibilities and some management of buyers and we feel good about the progress that we're making. And ultimately, you know, getting the right mix between some businesses like a pet which might have a lower AUR and some higher AUR businesses getting that mix correct and driving our average unit retail up will solve the basket issue.

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Operator [21]

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And our next question coming from the line of David Berman with Berman Capital.

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David Berman, Berman Capital Management LP - General Partner and President [22]

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Just wanted to ask a question, when I looked at your payables, you have 70 days of payables which is almost 2 months, actually 2 and a half months. Are you -- so the payables are down 14% year-over-year, are you -- how easy is it for you to get a new product and credit from the vendors because obviously you getting a new product is key to success but yet your payables are high already. So, I'm wondering what kind of pressure you're feeling from the vendors and if you're able to get new product and if that's an issue?

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

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Yeah, we haven't had an issue whatsoever. I mean, the difference in payables this quarter was related to a lowering of inventory and some timing differential but we haven't seen that at all.

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David Berman, Berman Capital Management LP - General Partner and President [24]

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Okay, so getting fresh inventory is not an issue and your goal with inventory is, I guess, you don't want to increase it too much. What is your goal with inventory? I mean, it's basically flat year-over-year, sales are flat year-over-year, but you have 180 days of inventory. How good is that inventory that's 180 days of inventory and what's it looking like for fresh product?

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

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So the inventory -- our inventory is fresh, and we've talked about this over the last number of quarters, you know, we've consistently driven that down. We feel very good about our freshness. Obviously we want to continue to improve turn. We've talked about -- we've engaged an off-price consultant and we've worked very hard to continue to drive turn and in some of our families, we've worked hard to lower the [weak] supply to pick up the turn. So, that is -- it's definitely -- we haven't stated a public goal but it's a significant initiative of the organization to improve the turn and to get our rate of sale up and it's something that we talk to regularly and in certain places we're making a lot of progress there.

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David Berman, Berman Capital Management LP - General Partner and President [26]

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What is the issue with improving it? Because in the last year, you have 180 days a year ago and you've got 180 days now, it's almost exactly the same. So there hasn't been an improvement at least in the last year.

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

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Well, I mean --

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David Berman, Berman Capital Management LP - General Partner and President [28]

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What has been the problem with that?

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

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Well, you know, as we've stated, we changed out our entire merch organization and we've hired a consultant to help us to improve that. So obviously we too were not pleased with the turn and we've made a lot of changes to the organization to focus on improving that. I mean, at the end of the day --

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David Berman, Berman Capital Management LP - General Partner and President [30]

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So we should expect to see the turns improve in the future quarters, but we haven't yet, is that what you're saying?

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

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I think that's fair.

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David Berman, Berman Capital Management LP - General Partner and President [32]

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So we should expect to see inventories going down, year-over-year, and you don't feel that that's -- obviously with your consultants and stuff, you don't feel that's going to hurt sales?

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [33]

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Look, you know, we're not guiding to where our inventory is going but we think there's a lot of opportunity for us to be more efficient with our inventory use and obviously lower our working capital usage.

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David Berman, Berman Capital Management LP - General Partner and President [34]

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Yeah, I mean certainly it would unlock cash if you could reduce your inventories which would be good, yeah.

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Steven Robert Becker, Tuesday Morning Corporation - CEO, President & Director [35]

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Yep.

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Operator [36]

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And I'm not showing any further questions at this time. I would like to turn the call back over to Mr. Steven Becker for closing remarks.

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

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Thank you for joining us today. We look forward to our next quarterly call. Thank you.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may all disconnect. Good day.