Tuesday Morning Corp.

Good day and welcome to the Tuesday morning Q1 fiscal 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star then one on a touch-down phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to turn the conference over to Jennifer Robinson. Please go ahead.

Good morning. I would like to welcome you to the Tuesday morning first quarter fiscal 2022 call. Joining me on the call today is Fred Hand, our Chief Executive Officer, and Mark Katz, our Chief Operating Officer. Before we begin today's prepared remarks, I would like to remind you that some of the information presented may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information regarding the company's risk factors was included in our press release and in our SEC filings. 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 may be found in the investor relations section of the Tuesday morning website at TuesdayMorning.com. I will now turn the call over to Fred.

Good morning, and thank you for joining us for our first quarter fiscal 2022 conference call. I would like to begin with some key accomplishments within the quarter. First, we exceeded our plans in both sales and adjusted EBITDA. Second, we delivered a comp store sales increase of 3.2% compared to the first quarter of fiscal 2020, despite store inventories being down 42%. Also, as a reminder, we no longer conduct promotional events, while Q1 of fiscal 2020 included nine events. Third, we completed the hiring of our senior leadership team with the announcement of Paul Metcalf as our permanent principal chief merchandising officer. And finally, we officially completed the bankruptcy process and negotiated the final claims resulting in $14 million of cash in returns to the company. When we spoke on our last earnings call, I discussed how our focus going forward is to improve our execution of the off-price model across all areas of the organization. When we talk about the off-price model, we're looking to deliver our customers a treasure hunt through an exciting assortment of highly desirable brands at a remarkable value every day. This model requires having the right goods at the right value at the right time and in the right store. As an off-price retailer, it is important that we remain flexible, ensuring that we have appropriate levels of open to buy while focusing on delivering fresh receipts with a clear value proposition for our customers. We deliver value through desirability, quality, brand, and price. This is accomplished with minimal pre-season purchasing. allowing us to stay liquid and chase what's working in season. Our assortments must be shallow and broad with many national brands to choose from and few items for style. Most recently, we have enhanced our assortment by focusing on higher average unit retail categories such as housewares and textiles and reducing our penetration in lower AUR categories such as craft, paper, and food. Finally, the off-price model relies on the appropriate balance of pack and hold and flow and hold. The use of pack and hold allows us to obtain seasonal deals from highly desirable national brands at great prices. In addition, flow and hold affords us the ability to keep items per style at a minimum. and replenish by store as necessary. The improvement in inventory turn is a key indicator that our off-price merchandising strategy is working by focusing on fresh, new product with limited depth of style. We ended last year with an annual turnover of 3.9 multiple. While this was a nice improvement from the prior year of 2.8, This is well below industry standards, and we believe represents an opportunity for us to increase gross margins and improve working capital over time. Moving beyond merchandising, as we look ahead, we will continue to focus on the three key areas of improvement, supply chain, stores, and systems. The area that we believe will take the most time and expertise will be with our supply chain. We recently engaged the third party that specializes in supply chain network strategy to help us identify our optimal distribution network. This is one of the most important decisions we will make over the next few years, and we will not rush to a quick answer. This work just started last week, and we expect that the project will run through our third quarter of fiscal 2022. While we continue to have up to two and a half years remaining on our Dallas distribution center lease, our teams will be working hard to ensure our next model is set up to appropriately execute the off-price fundamentals in a much more efficient manner than we do today. We look forward to sharing more with you as we continue to make progress with this initiative. In our stores, our priority is to improve the store experience. In October, we rolled out wayfinding signage in all stores to allow customers to locate product categories more easily, as well as raise the awareness of the range of products that we sell. We have also taken steps to lessen the clutter in the front of our stores while maintaining a few tables designated for specific merchandise presentations, which is currently set up for holiday gifts. As the year progresses, we will evaluate all the tasks being performed within our stores to identify efficiencies which would provide more time for customer service. In addition, we will be rolling out a new customer experience survey during the second quarter. This survey will provide us timely customer feedback that we can use to improve the shopping experience. Lastly, I mentioned on our call last quarter that we have the opportunity to implement and enhance our existing systems and infrastructure. We believe efficiencies can be gained by simplifying the business, reducing manual work, and improving the decision-making process. Along those lines, one of the first enhancements we're looking to make this year is aligning our merchandising and financial calendars so that the entire company is reviewing our business in the exact same way. Just to be clear, we're not changing our fiscal year, which runs July through June. We're working toward aligning all weeks to run like a typical retail week, Sunday through Saturday. While our merchandising systems operate this way today, our calendar-based financial systems do not. This will be our first step in a multi-year IT roadmap. While we're still very much in the early days of our transformation, I believe we're focused on the right areas. In our experience, we've seen these opportunities before and have confidence in our ability to transform Tuesday morning into a world-class off-price home goods retailer. It will take time and a great deal of effort, which is why we're so focused on execution. Before I wrap up, I do want to acknowledge the continued headwinds we're faced with due to the ongoing global supply chain dislocation. We are certainly not immune to the continued delays in shipments and increased costs. With that said, we're comfortable with the quality of our inventories currently in the stores, as well as our goods in the pipeline to be received in the next 45 days during the all-important holiday period. I also want to thank our vendors for the ongoing support of Tuesday morning. They have been terrific partners as we're managing through the supply chain dislocation and through the completion of the bankruptcy process. I would now like to turn it over to Jennifer to discuss our financial results.

Thank you, Fred, and good morning, everyone. As Fred mentioned, we are pleased to have exceeded our plan for sales and adjusted EBITDA for the first quarter. Despite the continued headwinds we faced, with respect to gross margins due to the ongoing global supply chain disruption. As we previously noted, comparability to prior periods is difficult due to actions the company took related to its reorganization under Chapter 11, as well as the impact related to COVID-19 and the elimination in promotional activities. For comparable sales growth and inventory specifically, we will be comparing first quarter fiscal 2022 against first quarter fiscal 2020. Compared to Q1 of 2020, we delivered comp store sales growth of 3.2% in Q1 of fiscal 2022. The comp increase was entirely driven by an increase in AUR. This is a direct result of our merchandising strategy that is focused on higher AUR categories, as Fred mentioned earlier. It is important to note that the first quarter of fiscal 2022 contained no promotional events, while Q1 of 2020 contained nine. Our comp store ending inventories were down 42% compared to 2020 levels. While we were pleased to drive positive comp store sales growth with significantly lower inventory levels, due to the timing of certain receipts, we did under receive our receipt plan in Q1. Based on our current receipt pipeline, we are confident these goods will be received in Q2. For all other metrics discussed, I will provide context on our performance compared to fiscal 2021. We delivered net sales of $177 million compared to 162 million in Q1 of fiscal 2021. During the first quarter of fiscal 2022, one store was closed for an ending store count of 489 as of September 30th, 2021. Gross profit was $51 million compared to $51.1 million for the first quarter of fiscal 2021. Gross margin in the first quarter of fiscal 2022 declined to 28.8% compared to 31.6% in the first quarter of fiscal 2021. The decrease in gross margin was primarily driven by higher supply chain and transportation costs, which also contributed to lower merchandise margins. Looking ahead, we expect the headwinds associated with inbound and outbound freight costs will remain elevated until the end of calendar 2022, with some easing expected in the second quarter of the calendar year. Moving to SG&A, as a percentage of net sales, SG&A was 34.1% compared to 38.4% in the same period of fiscal 2021. SG&A was $60 million in Q1 of fiscal 2022 compared to $62 million in the same period of fiscal 2021. The decrease in SG&A was primarily due to lower store expenses, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Our operating loss was $11.7 million compared to an operating loss of $16.5 million in Q1 of fiscal 2021. Our net loss was $14.6 million or 17 cents per share for Q1 of fiscal 2022. This compared to net income of $18.6 million or 41 cents per share for the first quarter of fiscal 2021. The first quarter of fiscal 2022 had restructuring and reorganization costs of 1.3 million. compared to a net benefit of $37.6 million in the prior year period. Adjusted EBITDA, a non-GAAP measure, was negative $5.7 million for the first quarter of fiscal 2022 compared to negative $6 million for the same period of fiscal 2021. Now turning to the balance sheet. We ended the quarter with an inventory position at $174 million. As Fred mentioned, despite the ongoing supply chain challenges, we feel very good about the quality and level of our inventory ahead of the holiday period. Total liquidity was $44.2 million, including $39.7 million under our revolver. As of fiscal quarter end, we had 22.4 million in borrowings outstanding under our line of credit compared to 100,000 in Q1 of 2021. The increased outstanding balance was driven by higher inventory levels. As of the end of the quarter, we have resolved all claims associated with the bankruptcy filing and have received approximately $14 million of cash, which was previously held in escrow. Given the continued global supply chain dislocation, we believe there will be a large pack and hold opportunity at the end of the holiday season. In order to be able to capitalize on that opportunity, we have increased our forecasted inventory purchases to have the liquidity available to meet that demand. Obviously, if the pack and hold opportunity is less than we think, we will not spend the open to buy. With that said, we now expect to maintain an average total monthly liquidity over the next 12 months of approximately $40 million. We believe this is more than enough capacity to cover our obligations and meet our plans for the rest of 2022. In addition, we continue to expect an adjusted EBITDA loss for the year, slightly improved from fiscal 2021. I will now turn the call back over to Fred for some concluding remarks. Fred?

Thank you, Jennifer. I would like to close our prepared remarks by thanking the entire Tuesday morning team for their hard work in delivering a solid first quarter, for their efforts in embracing the changes that we're putting into place, and for showing a tremendous desire to become a world-class off-price retailer.

We will now open the call up for questions.

We will now begin the question and answer session. To ask a question, you may press 1 on your telephone keyboard. To prepare your question, please press 1. The next question is from with BWS Financial. Please go ahead.

Good morning. So first question was in the press release, you're talking about exceeding your financial plan. Could you just elaborate on that? Is that regarding your inventory plans and the pack and hold strategy?

Yeah, good morning, Hamid. Thank you for the question. Our Q1 adjusted EBITDA fee was really based on two factors. First was our feed on the sales plan. We achieved a very healthy flow through to the bottom line. This was worth approximately around $2 million. Secondly, we had a shift in our receipts from Q1 to Q2 and experienced lower supply chain costs, which we expect the timing of this to correct itself in Q2. In terms of the $2 million feed, We didn't update our financial guidance for two reasons. First, we expect to spend a little bit more money on our in-store hiring of seasonal help. Because as you've all heard, and everybody, it's all over the news, hiring challengers are not just a retail issue, but far more widespread. And we have about a third of our stores that are struggling a little bit to be able to complete their hiring. So we are investing more money to make sure that we're able to address that. The second piece is, as Jennifer mentioned in our prepared remarks, we believe the pack-and-hold opportunity is going to be plentiful by the end of this holiday season. And we want to make sure that we have enough dry powder to be able to capitalize on that. And as a result of that, we also believe that there will be increased supply chain costs. So the increased store payroll costs and supply chain costs will be an offset to the $2 million that we have. That's the reason why the financial update on our annual guidance did not change.

Okay, understood. But in the press release you were talking about a financial plan so I just wanted to see if you could elaborate what what you meant by financials we were talking about adjusted EBITDA okay all right that was referencing okay got it and then as far as the inventory is concerned I understand you're feeling comfortable with the inventory being up this quarter and further so with the a pack-and-hold strategy, but how are you managing that through store attendance from customers? Are your traditional customers coming back and spending more? Are you just capturing new customers that your AUR is going up?

Let me first take the store inventory question that I think you were referring to. We had mentioned we were down 42%. Let's talk a little bit about that and the inventories and the pipeline that we're talking about. We definitely ended Q1 a little bit lower than we wanted to be. And remember, we're measuring ourselves against 2020, Hamid, where we brought a lot of goods in for promotional events, and we generally just operated with more inventory than we do today. So getting back to 2020 is obviously something we're not looking to do. But as Jennifer mentioned in her prepared remarks, we had a timing issue on certain receipts that we under-received at Q1, and those are going to come into Q2. It's really important for us to land that Q1 receipt mess in addition to our receipts for Q2. And our merchants have been very active in market, working with the vendor community to make that happen. So fortunately, we've had some very heavy DC shipping weeks for about five, six weeks in a row now. And our store inventories as of this morning are down 33%. So 33% is kind of in line with our expectations and we want to be. And then we talk about the pipeline a lot within the script. And just to be clear, when we talk about our pipelines, We're talking about goods that have been picked up from a domestic warehouse and on our way to the D.C., or they're in our D.C. or on our yard, or they're in a pool point or on the way to a pool point. So these are goods that we are very comfortable will be in our stores within the next 45 days and will clearly make holiday. We talk about our pipeline. We are not talking about container ships that are sitting off West Coast ports. So that's why we feel that we're making the statement that we really think we're properly positioned for the holiday season.

Okay, and my other question was just given that the improvement in gross margin, you're obviously getting a lift with the comps going up. How are you not able to capture more pricing power so that you could reduce the loss or even potentially reach profitability?

So when you talk pricing power, you talk about raising retails?

Yeah, raising the selling price, yes.

Yeah, I tell you what, we don't want to be the first to do that. This is the off-price business model. This is all about value, and this is all about maintaining a value gap with department stores and specialty stores out there. We really believe having great values on the floor is what brings our customers back. And that doesn't mean that there aren't certain places and at certain times, you know, we can do that. But we've done very little to that to date because we're so focused on the values on the floor.

Okay. And then the other question I had was just given that you're not doing any more promotions from a price standpoint, what are you doing to actually capture new customers on the promotions side, if any?

So I'll take that. I mean, promotions are not part of the off-price model, right? So it's an everyday low-price model focused on quality national brands at a great value. And, you know, what we're really focused on in making sure that the treasure hunt experience is what she enjoys and what brings her back. And I will tell you that when you look at the results, and for us to have the comp performance of 3.2%, being up against nine promotional events, speaks to the customer likes what she sees. And I will tell you to piggyback on what Mark talked about from an inventory point of view. I feel very good about the level of inventory we have in our stores, and I feel very good about the quality of the product and the value that we're really putting in front of the customer. So that's really those are the vehicles that we're going to continue to focus on to make sure that we get new customer acquisition as well as our existing customers. and the improvement in customer service that I talked about in my earlier remarks. That's an opportunity for us. We're going to continue to focus on reducing tasks in our stores. That's a process that we're going to go through to make sure that our associates are really, really focused on customer service. And those are the elements that I think is going to continue to improve our level of service and bring the customer back.

Okay, great. Thank you. Thank you, Hamid.

This concludes our Q&A session. I would like to turn the conference back over to management for any closing remarks.

Thank you for your interest. I really appreciate your participation, and I want to wish everybody a very happy and safe holiday season, and we will talk to you guys when we announce our Q2 earnings.

Thanks so much. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.