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TUES > SEC Filings for TUES > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for TUESDAY MORNING CORP/DE

Form 10-Q for TUESDAY MORNING CORP/DE


29-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of the Quarterly Report on Form 10-Q.

Business Overview

We operated 840 discount retail stores in 43 states as of September 30, 2012. We sell upscale, decorative home accessories, housewares, and famous maker gifts which we purchase at below wholesale prices. Our stores have periodic "sales events" that occur in each month except January and July. As we conduct physical inventories at all of our stores, we are normally closed for up to five days during the months of January and July, which traditionally have been weaker months for retailers. We purchase first quality, brand name merchandise at closeout prices and, in turn, sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, specialty, catalog and e-commerce retailers, which sell, among other products, home furnishings and related products similar and often identical to those we sell. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell.

Our ability to continuously attract buying opportunities for closeout merchandise, and to anticipate consumer demand as closeout merchandise becomes available, represents an uncertainty in our business. By their nature, specific closeout merchandise items are generally only available from manufacturers or vendors on a non-recurring basis. As a result, we do not have long-term contracts with our vendors for supply, pricing or access to products, but make individual purchase decisions, which are often for large quantities. Although we have many sources of merchandise and do not foresee any shortage of closeout merchandise in the near future, we cannot assure that manufacturers or vendors will continue to make desirable closeout merchandise available to us in quantities or on terms acceptable to us or that our buyers will continue to identify and take advantage of appropriate buying opportunities.

Under the retail inventory method, permanent markdowns result in cost reductions in inventory. We utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and traffic for a specified period of time. Markdowns during the first quarter of fiscal 2013 were 5.1% of sales versus 5.0% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at September 30, 2012 would result in a decline in gross profit and earnings per share for the first quarter of fiscal 2013 of $1.7 million and $0.02, respectively. Under current economic conditions, forecasts can vary significantly from the actual results we achieve.

Net sales for the first quarter of fiscal 2013 were approximately $172.8 million, an increase of 1.3% compared to the same period last year. Comparable store sales for the quarter ended September 30, 2012, increased by 1.7% compared to the same period last year, which was primarily due to a 4.7% increase in average ticket offset by a 3.0% decrease in traffic. Net loss for the quarter was $7.0 million and loss per share was $0.17.

In September 2012, we named a new Chief Executive Officer. Future strategic decisions made by the new Chief Executive Officer may have a significant impact on our financial results in future quarters.

We opened 4 new stores and closed 16 existing stores during the first quarter of fiscal 2013. In addition, we relocated 14 existing stores during the first quarter of fiscal 2013.

Store Openings/Closings



                                     Three Months    Three Months    Fiscal Year
                                         Ended           Ended          Ended
                                     September 30,   September 30,    June 30,
                                         2012            2011           2012
Stores open at beginning of period             852             861           861
Stores opened during the period                  4               6            24
Stores closed during the period                (16 )           (14 )         (33 )
Stores opened at end of period                 840             853           852

Results of Operations

The following table sets forth certain financial information from our consolidated statements of operations expressed as a percentage of net sales. Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in


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the quarter ending December 31, which includes the holiday season. There can be no assurance that the trends in sales or operating results will continue in the future.

                                                Three Months Ended
                                                   September 30,
                                                 2012         2011
Net Sales                                         100.0 %      100.0 %
Cost of Sales                                      62.4         61.9
Gross Profit                                       37.6         38.1
Selling, general and administrative expenses       43.9         43.1
Operating loss                                     (6.3 )       (5.0 )
Net interest expense and other expense             (0.2 )       (0.4 )
Loss before income taxes                           (6.5 )       (5.4 )
Income tax benefit                                 (2.5 )       (2.1 )

Net loss                                           (4.0 )%      (3.3 )%

Three Months Ended September 30, 2012

Compared to the Three Months Ended September 30, 2011

During the first quarter of fiscal 2013, net sales increased to $172.8 million from $170.7 million, an increase of $2.1 million or 1.3%, compared to the quarter ended September 30, 2011. The increase in first quarter sales was primarily due to a 1.7% increase in comparable store sales. The increase in comparable sales for the first quarter of fiscal 2013 was comprised of a 4.7% increase in average ticket offset by a 3.0% decrease in traffic.

Gross profit decreased $0.1 million or 0.1% to $64.9 million for the first quarter ended September 30, 2012 compared to $65.0 million for the same quarter last year. As a percentage of net sales, gross profit decreased to 37.6% for the quarter ended September 30, 2012 compared to 38.1% for the same quarter in fiscal 2012 due to higher freight costs, slightly higher markdowns and a small change in product mix.

Selling, general and administrative expenses increased $2.3 million, or 3.2%, to $75.8 million for the first quarter of fiscal 2013 from $73.5 million for the same quarter last year. Of the $2.3 million increase in selling, general and administrative expenses, approximately $1.5 million relates to non-recurring charges primarily for consulting, legal and recruitment. The remaining increase in selling, general and administrative expenses is primarily driven by an increase in store wages incurred for cleaning and organizing of certain stores. As a percentage of net sales, excluding non-recurring expenses related to one-time charges for consulting, legal and recruitment, selling, general and administrative expenses remained relatively flat at 43.0% in the first quarter of fiscal 2013 compared to 43.1% in the same quarter last year. Excluding non-recurring charges related to consulting, legal and recruitment, selling, general and administrative expenses, on a per store basis, were up 2.7% year over year.

The income tax benefit for the quarter ended September 30, 2012 was $4.3 million compared to $3.6 million for the same period last year. The effective tax rates for the quarters ended September 30, 2012 and September 30, 2011 were 38.1% and 38.5%, respectively. The effective tax rate was lower in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 due to a decrease in expected permanent tax differences for fiscal 2013.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our borrowings have historically peaked during October as we build inventory levels prior to the holiday selling season. Given the seasonality of our business, the amount of borrowings under our revolving credit facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Net cash used in operating activities for the three months ended September 30, 2012 and 2011 was $45.1 million and $6.0 million, respectively. The $45.1 million of cash used in operating activities for the three months ended September 30, 2012 was primarily due to the result of an increase in inventory of $66.1 million, an increase in other assets of $5.4 million, net loss of $3.4 million excluding depreciation and amortization, largely offset by an increase in accounts payable and accrued liabilities of $24.0 million and $6.0 million, respectively. The increase in inventory was due to an increase in purchases in preparation for the holiday selling season and the timing of payments to vendors. There were no significant changes to our vendor payment policy during this time.


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Capital expenditures are principally associated with new store openings or relocations, existing store maintenance, or enhancements to warehouse and office equipment and systems, and totaled $3.6 million and $2.5 million for the three months ended September 30, 2012 and 2011, respectively. We expect to spend approximately $8.0 to $9.0 million for additional capital expenditures during the remainder of fiscal 2013, which will primarily include systems improvements, the opening of new stores, relocations of existing stores, enhancements of selected stores, fixtures for existing stores and purchases of equipment for our distribution center and corporate office.

On August 22, 2011, the Company's Board of Directors adopted a share repurchase program pursuant to which the Company is authorized to repurchase from time to time shares of Common Stock, up to a maximum of $5.0 million in aggregate purchase price for all such shares (the "Repurchase Program"). On January 20, 2012, the Company's Board of Directors increased the authorization for stock repurchases under the Repurchase Program from $5.0 million to a maximum of $10.0 million. The Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. The Board will evaluate the Repurchase Program each year and there can be no assurances as to the number of shares of Common Stock the Company will repurchase. During the three-month period ended September 30, 2012, 7,677 shares were repurchased under the Repurchase Program at an average cost of $5.49 per share and for a total cost (excluding commissions) of approximately $42,000. All such shares were purchased by the Company in connection with the tax liability associated with the vesting of restricted stock awards under the Company's equity incentive plan.

We have a credit agreement providing for an asset-based, five-year senior secured Revolving Credit Facility (the "Revolving Credit Facility") in the amount of up to $180.0 million. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets. On November 17, 2011, we entered into a third amendment to the Revolving Credit Facility. This amendment, among other things, extended the maturity date of the Revolving Credit Facility from December 15, 2013 to November 17, 2016 and removed the "clean down" provision. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, sell assets or merge or consolidate with any other entity. In addition, we are currently required to maintain availability under the Revolving Credit Facility of not less than $18.0 million. As of September 30, 2012, we were in compliance with all required covenants. Interest expense of $0.4 million for the quarter ended September 30, 2012 was due primarily to commitment fees of $0.2 million, interest expense of $0.1 million and the amortization of financing fees of $0.1 million.

At September 30, 2012, we had $12.5 million outstanding under the Revolving Credit Facility, $8.1 million of outstanding letters of credit and availability of $159.4 million under the Revolving Credit Facility subject to minimum availability requirements as discussed above. Letters of credit under the Revolving Credit Facility are primarily for self-insurance purposes. We incur commitment fees of 0.375% on the unused portion of the Revolving Credit Facility. Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our average daily availability changes.

Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-04: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The Amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Specifically, the amendments clarify the intent around applying existing fair value measurements and disclosure requirements, as well as, those that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. These amendments are to be applied prospectively for annual periods beginning after December 15, 2011, and early application is not permitted. Due to the level of immateriality of the Level 1, 2 and 3 assets and liabilities that are addressed with these amendments, the Company does not believe that any of these amendments will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This standard eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The preparer is given the option to present all nonowner changes in stockholders' equity in a single continuous statement of comprehensive income or in two separate but consecutive statements. This alternative presentation of comprehensive income is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As this accounting standard update became effective for the Company as of July 1, 2012 the Company has adopted a two statement approach, and included a Statement of Comprehensive Income and associated disclosures, herein.

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