Tuesday Morning Corporation
Q1 2022 Earnings Call Transcript

Published: 6 Nov 2021

[Operator:]

Good day, and welcome to the Tuesday Morning Q1 Fiscal 2022 Earnings Call. Please note, this event is being recorded. I would like to turn the conference over to . Please go ahead.

[Jennifer Robinson:]

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 Marc 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.

[Fred Hand:]

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 9 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 preseason 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 products 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 3 key areas of improvement

[Jennifer Robinson:]

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 face with respect to gross margin 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 activity. 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 9. 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, 1 store was closed for an ending store count of 489 as of September 30, 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 $0.17 per share for Q1 of fiscal 2022. This compared to net income of $18.6 million or $0.41 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?

[Fred Hand:]

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.

[Operator:]

The next question is from Hamed Khorsand with BWS Financial.

[Hamed Khorsand:]

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?

[Marc Katz:]

Thank you for the question. Our Q1 adjusted EBITDA beat was really based on 2 factors. First was our beat on the sales plan as 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 beat, we didn't update our financial guidance for 2 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 challenges are not just a retail issue but far more widespread. And we have about 1/3 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 her prepared remarks, we believe the pack and hold opportunity is going to be plenty for 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 beat that we have. And that's the reason why the financial update on our annual guidance did not change.

[Hamed Khorsand:]

But in the press release, you were talking about a financial plan. So I just wanted to see if you could elaborate what you meant by financial plan?

[Fred Hand:]

When we said financials, we're talking about adjusted EBITDA and that's what I was referencing.

[Hamed Khorsand:]

And then as far as the inventory is concerned, I understand you're feeling comfortable with the inventory being up this quarter and then further so with the pack and hold strategy. But how are you managing that through store attendance from customers? Are you traditional customers coming back and spending more? Are you just capturing new customers that your AUR is going up?

[Fred Hand:]

Let me first take the store inventory question. I think you were referring to. We had mentioned we were down 42%. And 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, Hamed, 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 in Q1 and those are going to come into Q2. It's really important for us to land that Q1 receipt 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 5, 6 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 pipeline, we're talking about goods that have been picked up from a domestic warehouse or on the way to the DC or they're in our DC 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 we'll 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 -- and we're making the statement that we really think we're properly positioned for the holiday season.

[Hamed Khorsand:]

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 from -- so that you could reduce the loss or even potentially reach profitability?

[Marc Katz:]

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

[Hamed Khorsand:]

Yes, raising the selling price, yes.

[Marc Katz:]

I'll 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, 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.

[Hamed Khorsand:]

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 promotion side, if any?

[Fred Hand:]

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 what we're really focused on is 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 9 promotional events speaks to the customer likes what she sees. And I will tell you to piggyback on what Marc 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.

[Operator:]

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

[Fred Hand:]

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.

[Operator:]

The conference call has now concluded. Thank you for attending to this presentation. You may now disconnect.