Tuesday Morning Corp.

Thank you for listening to Tuesday morning, fourth quarter and full year fiscal 2022 prepared remarks. As a reminder, this conference has been recorded. I will now turn the conference over to Caitlin Churchill, Investor Relations.

Hello and welcome to the Tuesday morning, fourth quarter and full year fiscal 2022 earnings call. Joining me on the call today is Fred Hand, our Chief Executive Officer and Mark Kast, our Chief Operating Officer and Interim Chief Financial 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 Form 10-K and other 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.

Thank you, Caitlin, and thank you for joining us for our fourth quarter and full year fiscal 2022 conference call. I will begin my remarks this morning by highlighting our recent transaction, and then we'll provide a brief review on fourth quarter and recent sales trends before turning it over to Mark, who will discuss our financial results and outlook in more detail. Earlier this week, we announced that we finalized our transaction and secured $35 million in financing from a group of investors comprised of retail e-commerce ventures, aka REV, Aon Capital, and our senior management team, including myself. This transaction is the result of a strategic capital process that began back in May. We wanted to turn over every rock to identify the absolute best option for Tuesday morning's long-term success. We are delighted that a strategic partner, Rev, was identified and our needs happened to coincide with their needs. Specifically, Rev was about to start a process to open roughly 200 Pier 1 stores over a multi-year period. Given we believe Pier 1 is a better, best brand that will resonate extremely well with our customers, having close to a 500-store chain national footprint made perfect sense. Tuesday morning, entering into a license agreement to sell Pier 1 products, which we will source ourselves, is just the first benefit to be realized from this relationship. Over time, we see tremendous opportunities in the following. First, access to other Rev brands, including Linens and Things and Radio Shack. Second, the ability to leverage REV's expertise, infrastructure and systems, technology, and e-marketing capabilities to drive incremental traffic to Tuesday morning stores. This includes store locator functionality on the Pier 1 website to drive customers to Tuesday morning stores, as well as the ability for Pier 1 to direct their email and text active customers to Tuesday morning stores. Third, branding potential over the longer term to open stores with a combined Tuesday morning and Pier 1 banner. And lastly, you have heard us talk before about our thoughts around e-commerce sales for an off-price retailer. Based on our experience, it's difficult to operate profitably. With that said, Rev has the expertise, technology infrastructure, and fulfillment network already in place. If anyone can make this work, it's them. So we're going to evaluate it as another potential opportunity. In addition, we believe this transaction will strengthen our financial position and provide sufficient liquidity to execute on our strategic plans. With this financial and strategic support, we're able to continue to focus on maintaining strong relationships with our valued partners and elevating offerings for our customers. In terms of our sales performance and our results for the fourth quarter, there has been significant commentary by other retailers regarding the impact of decades high inflationary pressures on the customer and an increasingly promotional retail environment during the quarter. We certainly felt this as well. We expected Q4 to be soft. And when we ended Q3 with store inventories up 24%, we made a conscious decision to reduce our fourth quarter receipts to avoid an inventory buildup at year end. Our teams did a nice job managing this as we ended with store inventories down 8% in line with the sales drop. As we move through the summer, our performance continued to be challenging before significantly improving in August as we brought in more receipts and our receipt freshness started to exceed last year. However, as our trends continued to improve, we began to see delays in product shipments given ongoing negotiations we were having with our vendors as we were working on securing additional financial support. These delays negated the improvement we saw in August as our September trend shifted back closer to what we experienced in July. This is all factored into our first quarter guidance. With that said, we were pleased to close the transaction earlier this week, and we are now back on track with our vendor partners. I want to thank each of them for their willingness to continue to work with Tuesday Morning as we enter a new phase in our transformation. In terms of the rest of the year, we expect sequential sales improvement as we move through the year, as we anniversary the easier comparisons and bring on Pier 1 product before the end of the year. As I mentioned before, we are sourcing the Pier 1 product ourselves. We see opportunity across many categories, including rugs, dinnerware, indoor furniture, candles, pillows, seasonal, and textiles, just to name a few. To be clear, sourcing product takes time. We anticipate the entire process taking four to six months, depending on the category. This is why we only added incremental volume in the fourth quarter. We believe this can be a much larger opportunity in 2024. Finally, as you can imagine, working on the capital raise since May has been an all-encompassing effort. While we're very pleased with the end result, it took up all of our time. We're still very focused on transitioning to a new DC network, enhancing our overall IT platform, and growing our store base with our new seed point strategy. I would now like to turn it over to Mark to discuss our financial results and outlook.

Thank you, Fred, and hello, everyone. I will now review our fourth quarter and full-year performance before providing our outlook for the first quarter and full-year fiscal 2023. I will begin by discussing our fourth quarter financial results and will focus on year-over-year comparisons as we have now anniversaried the elimination of promotional events, as well as the actions the company took related to its reorganization under Chapter 11 and the impact related to COVID-19. In addition, our shift toward a more typical retail calendar driven by weeks starting on Sunday and ending on Saturday resulted in us revising comparable store sales for both this year and last year to ensure consistency. We delivered net sales of 162 million compared to 177 million in Q4 fiscal 2021. During the quarter, one store was closed, and we entered the quarter with 489 stores, which was comparable to 490 at the end of the fourth quarter of fiscal 2021. Compared to Q4 of 2021, comp store sales declined 8% in Q4 fiscal 2022, driven by a reduction in transactions. As Fred previously mentioned, we believe the decline in sales was the result of decades high inflationary pressures on the consumer, coupled with a highly promotional retail environment. As a reminder, our comp store sales calculation is based on the same number of days for both this year and last year. Gross margin was $30 million, compared to $47 million for the fourth quarter of fiscal 2021. Gross margin rate in the fourth quarter of fiscal 2022 declined to 18.7% compared to 26.3% in the fourth quarter of fiscal 2021. This was primarily driven by an increase in recognized supply chain and transportation costs. In addition, we experienced a reduction in markup and incremental markdowns versus last year. SG&A was $57 million in Q4 fiscal 2022 compared to $60 million in the same period of fiscal 2021. As a percentage of net sales, SG&A increased to 35.4% from 33.6% in the same period of fiscal 2021, driven by store occupancy expense deleverage on the lower sales performance. Our operating loss was $27 million compared to a loss of $16 million in Q4 fiscal 2021. Our net loss was $28 million or $0.33 per share for Q4 fiscal 2022. This compared to a net loss of $19 million or $0.29 per share for the fourth quarter of fiscal 2021. Adjusted EBITDA, a non-GAAP measure, was a loss of $22 million for the fourth quarter of fiscal 2022, compared to a loss of $8 million for the same period of fiscal 2021. Turning now to our full year results. For the full year, net sales increased 8.5% to $750 million, compared to $691 million in fiscal 2021. The increase was primarily due to the COVID impact, which negatively impacted the first six months of fiscal year 2021. During fiscal 2022, four stores were closed and three opened for an ending store count of 489 as of July 2nd, 2022. Gross profit was 192 million compared to 206 million for fiscal 2021. Gross margin for fiscal 2022 declined to 25.6% compared to 29.8% last year. The decrease in gross margin was primarily a result of higher supply chain and transportation costs recognized in the current year. For the full year, recognized supply chain and transportation costs were $31 million higher than the prior year. Moving to SG&A as a percentage of net sales, SG&A was 32.1% compared to 35.3% in the same period last year. SG&A was $241 million in fiscal 2022 compared to $244 million in the same period last year. The decrease was due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Also contributing to the favorable comparison were reduced advertising costs and lower corporate expenses. Operating loss was $52 million compared to an operating loss of $49 million in fiscal 2021. In fiscal 2022, we incurred a net expense of $1 million related to our reorganization items including professional and legal fees. This compares to the net benefit of $60 million we received in fiscal 2021 related to reorganization items, including $66 million net gain from store lease terminations and the termination of our Phoenix Distribution Center lease under our permanent closure plan, and a $50 million gain from the sale leaseback transactions pursuant to the plan of reorganization. These benefits were partially offset by $35 million in professional and legal fees related to our reorganization, as well as $20 million in non-cash charges related to the execution of our rights offering. For fiscal 2022, we reported a net loss of $59 million, or 70 cents per share. This compared to net income of $3 million, or 5 cents per share for fiscal 2021. Adjusted EBITDA, a non-GAAP measure, was negative 30 million for fiscal 2022 compared to a negative 20 million for the prior year period. Turning now to the balance sheet. We ended the year with an inventory position of 148 million, an increase of 2% compared to Q4 2021. As Fred previously mentioned, store inventory levels decreased 8% versus last year. We are pleased to have ended the year with a relatively clean inventory position, especially in light of the uncertainty of the macroeconomic environment that continued into Q1. Total liquidity as of the end of fiscal 2022 was $12 million, including $10 million of availability under our ABL facility. As of year end, we had $57 million in borrowings outstanding under our line of credit and $15 million in letters of credit outstanding compared to $12 million at the end of Q4 2021. Cash and cash equivalents at the end of Q4 increased to $7.8 million from $6.5 million last year. Cash-in-cash equivalents, including restricted cash, at July 2, 2022, decreased $21 million to $7.8 million from $29 million at June 30, 2021. The decrease in cash-in-cash equivalents, including restricted cash, were driven by payments for bankruptcy court-approved petition claims. As Fred noted, earlier this week, we secured $35 million in financing which will be used to provide liquidity to support ongoing operations, repay a portion of the ABL and 7.5 million of FILO loans, as well as closing costs related to the transaction. We expect this transaction to provide a net $20 million of additional liquidity, providing us sufficient resources to pay down creditor and supplier obligations and support operations moving forward. Now a few comments as it relates to Q1 and fiscal year 2023. With respect to the first quarter, as Fred previously mentioned, we have two different factors affecting our Q1 sales. As we started the quarter, the continued macro headwinds and heavy promotional retail environment pressured sales. In August, we started to see a significant positive change in trend, especially as our receipt freshness improved. Unfortunately, in September, challenges surfaced due to delays in product shipments as we worked with our vendor partners while simultaneously attempting to obtain a capital infusion. With all that said, we expect the first quarter comparable store sales to decline by 10 to 12 percent. We also expect an adjusted EBITDA loss between 21 million and 24 million for the period. With respect to the full year, we expect to deliver sequential top-line improvement by quarter as we anniversary easier comparisons and receive Pier 1 product in Q4. We expect comparable store sales to range from flat to a 3% decrease. We also expect for adjusted EBITDA to be in the range of negative 18 and 23 million. From a cash flow point of view, we expect incurred supply chain and transportation costs to be approximately $15 million less than the recognized costs, which are reflected in the annual EBITDA guidance. This is due to several profit improvement measures we have implemented, including the elimination of a less productive D.C. weekend shift, more efficient D.C. staffing, lower detention charges, and reduced freight rates. We are planning CapEx to be approximately 5 million. Finally, we plan to open approximately one new store and close approximately five stores in fiscal 2023. I will now turn the call back over to Fred for concluding remarks. Fred?

Thank you, Mark. Before we close, I really want to take a minute to thank our associates and vendors. To our associates, I'm very cognizant that these last few months have been extremely requiring of your time, not to mention stressful. We have experienced higher than normal turnover and quite frankly would not have completed the transaction without a Herculean effort from many of you. I would like to thank you from the bottom of my heart and express my sincere gratitude. I have a similar message for our vendor partners. You have supported us through not only the good, but the difficult times as well. Your support is invaluable to us and we take our relationships with you very seriously. I would like to thank all of you and we sincerely appreciate your continued support. Thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.