Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TUES > SEC Filings for TUES > Form 10-K on 28-Aug-2013All Recent SEC Filings

Show all filings for TUESDAY MORNING CORP/DE

Form 10-K for TUESDAY MORNING CORP/DE


28-Aug-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

Overview

During fiscal 2013, we began a transformation of our Company in order to regain our identity as a leader in the off-price retail space.


We sell upscale, name brand home furnishings, housewares, gifts, and seasonal goods and related items significantly below retail prices charged by department stores, specialty and on-line retailers in 828 stores throughout 43 states. We have a unique event-based selling strategy that creates a sense of urgency and excitement for our customer base.


For fiscal 2013, net sales were $838.3 million, an increase of 3.1% compared to fiscal 2012. The store base decreased by 24 stores in fiscal 2013, decreased by nine stores in fiscal 2012, and increased by nine stores in fiscal 2011.


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 which matures on November 17, 2016. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets. 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, or make investments or acquisitions unless they meet certain requirements. Our financial covenant requires that we maintain availability of 10% of our calculated borrowing base, but never less than $15 million. As of June 30, 2013, we were in compliance with all required covenants. As of June 30, 2013 and June 30, 2012, we did not have any outstanding borrowings on our Revolving Credit Facility.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory-Our inventories are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. Amounts are removed from inventory based on the retail inventory method which applies a cost-to-retail ratio to our various retail deductions such as sales, markdowns and shrink, to arrive at our cost of sales. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are charged to cost of sales as the related inventory is sold. The retail inventory method, which is used by a number of our competitors, involves management estimates with regard to items such as markdowns. Such estimates may significantly impact the ending inventory valuation at cost as well as the amount of gross margin recognized.

We capitalize into inventory all merchandise costs and certain costs incurred to purchase, distribute and deliver merchandise to our stores in order to more accurately match the cost of merchandise with


Table of Contents

the timing of its sale. These costs are included in cost of sales when the merchandise is sold. Other cost of sales components include merchandise markdowns, shrink and damages, which are expensed as they are incurred.

We conduct full physical inventories at all stores at June 30 and December 31 to measure quantities on hand and make appropriate adjustments to our financial statements. During periods in which physical observations do not occur, we utilize an estimate for recording shrinkage reserves based on our historical experience from the results of our physical inventories. This estimate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventories yield a different result. Thus, the difference between actual and estimated amounts may cause fluctuations in the quarters ending in March and September. Since we conduct physical inventory counts twice a year, the subjective nature of our shrink percentage is reduced and our exposure to the risk of a significant error is minimized. In addition, we have loss-prevention programs that we believe minimize shrinkage. Although inventory shrinkage rates have not fluctuated significantly in recent years, if the actual rates were to differ from our estimates, then revisions to the inventory shrinkage expense could be required.

Inventory is the largest asset on our balance sheet and represented approximately 66%, 67%, and 70% of total assets at June 30, 2013, 2012, and 2011, respectively. In the second quarter of fiscal 2013 we made a strategic decision to accelerate the sale off of certain inventory by the end of the 2013 calendar year. In connection with this decision, we recorded a pre-tax $41.8 million inventory write-down in cost of sales. Inventory decreased 20.2%, or $53.6 million, from June 30, 2012 to June 30, 2013. Inventory increased 0.5%, or $1.3 million, from June 30, 2011 to June 30, 2012, On a per store basis, inventory decreased 17.9% from June 30, 2012 to June 30, 2013 and increased 1.5% from June 30, 2011 to June 30, 2012.

Markdowns-We utilize markdowns to promote the effective and timely sale of merchandise which allows us to consistently provide fresher merchandise to our customers. We also utilize markdowns coupled with promotional events to drive traffic and stimulate sales during non-sales event periods. Markdowns may be temporary or permanent. Temporary markdowns are for a designated period of time with markdowns recorded based on quantities sold during the period. Permanent markdowns may vary throughout the quarter or year in timing with higher markdowns traditionally recorded in the quarters ended June 30 and December 31 due primarily to seasonal merchandise.

Temporary markdowns are for a designated period of time with markdowns recorded based on quantities sold during the period. Permanent markdowns are charged to cost of sales immediately based on the total quantities on-hand in the stores. We review inventory by age each quarter to ensure all necessary pricing actions are taken to adequately value our inventory at the lower of cost or market. Beginning in December 2012, we revised our strategy to accelerate the selling of our aging inventory to enable us to continually provide new and fresh merchandise in our stores. Changes in markdowns from period-to-period are discussed as a part of our Results of Operations analysis below. Actual required permanent markdowns could differ materially from management's initial estimates based on future customer demand or economic conditions. The effect of a 1.0% permanent markdown in the value of our inventory at June 30, 2013 would result in a decline in gross profit and an increase in the loss per share for the fiscal year ended June 30, 2013 of $2.1 million and $0.05, respectively.

Insurance and Self-Insurance Reserves-We use a combination of insurance and self-insurance plans to provide for the potential liabilities associated with workers' compensation, general liability, property insurance, director and officers' liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers' compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors.


Table of Contents

The insurance liabilities we record are primarily influenced by changes in payroll expense, sales, number of vehicles, and the frequency and severity of claims and include a reserve for claims incurred but not yet reported. Our estimated reserves may be materially different from our future actual claim costs, and, when required adjustments to our estimated reserves are identified, the liability will be adjusted accordingly in that period. Our self-insurance reserves for workers' compensation, general liability and medical were $6.0 million, $2.6 million, and $0.8 million, respectively, at June 30, 2013; $5.9 million, $3.1 million, and $0.9 million, respectively, at June 30, 2012; and $6.9 million, $2.6 million, and $1.3 million, respectively, at June 30, 2011.

We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims are paid from our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers. Expenses for workers' compensation, general liability and medical insurance were $4.0 million, $2.1 million and $8.5 million, respectively, for the fiscal year ended June 30, 2013; $3.4 million, $2.8 million and $9.5 million, respectively, for the fiscal year ended June 30, 2012; and $1.7 million, $3.2 million and $9.1 million, respectively, for the fiscal year ended June 30, 2011.

Share-based compensation-The Compensation Committee of our Board of Directors and, through express consent of the Compensation Committee, our CEO, are authorized to grant stock options and restricted stock awards from time to time to eligible employees and directors. Those awards may be service or performance based. We grant options with exercise prices equal to the market price of our common stock on the date of the option grant as determined in accordance with the terms of our equity incentive plans. The majority of the options granted prior to June 30, 2008 have a vesting period of three to five years and expire ten years from the date of grant. Options granted after June 30, 2008, typically vest over periods of one to three years with equal portions of the grant vesting on an annual basis and expire ten years from the date of grant. In accordance with U.S. generally accepted accounting principles, we recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. We calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.


Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operations data, expressed as a percentage of net sales, as well as the number of stores open at the end of each period. There can be no assurance that the trends in sales or operating results will continue in the future.

                                                      Fiscal Year Ended June 30,
                                                     2013          2012       2011
   Net sales                                           100.0 %       100.0 %   100.0 %
   Cost of sales                                        69.1          62.0      61.8

   Gross margin                                         30.9          38.0      38.2
   Selling, general and administrative expenses         37.6          37.1      36.0

   Operating (loss) income                              (6.7 )         0.9       2.2
   Net interest and other expense                       (0.8 )        (0.2 )    (0.3 )
   Income tax (benefit) expense                         (0.7 )         0.2       0.7

   Net (loss) income                                    (6.8 )         0.5       1.2

   Number of stores open at end of period                828           852       861

Selling, general and administrative expenses are comprised of wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses and corporate office costs. Selling, general and administrative increases and decreases are generally attributable to changes in variable expenses. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

Year Ended June 30, 2013 Compared to Year Ended June 30, 2012

Net sales increased $25.5 million, or 3.1%, to $838.3 million in fiscal 2013from $812.8 million in fiscal 2012, primarily due to an increase in sales from comparable stores (stores open at least one year) of 3.9%. The increase in comparable store sales was comprised of an increase in customer traffic of 1.4% and an increase in comparable average transaction of 2.5%.

Gross profit for fiscal 2013 was $259.4 million, a decrease of 16.0% compared to $308.9 million in gross profit for fiscal 2012. As a percentage of net sales, gross margin decreased to 30.9% in fiscal 2013 compared with 38.0% in the same period last year. This decrease in gross margin rate of 7.1% was primarily driven by a strategic decision to accelerate the sell off of certain inventory in preparation for fresh new products and brands as part of our transformation. This decision resulted in an inventory devaluation charge recorded in the second quarter of fiscal 2013 in the amount of $41.8 million. The effect of this charge was a 5% decrease in gross margin rate. The remaining 2.1% decrease in gross margin rate is due to higher markdowns on clearance inventory and the flow-through of buying, distribution and freight costs resulting from the significant decrease in inventory levels year over year.

Selling, general and administrative expenses increased $14.5 million, or 4.8%, to $315.9 million in fiscal 2013 from $301.4 million in the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased to 37.7% in fiscal 2013 from 37.1% in fiscal 2012 due to expenses incurred as part of our strategic company turnaround. The nature of these expenses, primarily legal, consulting, recruiting, store reorganization and cleanup, and employee severance totaled $13.3 million and are not considered to be indicative of our on-going expense structure.

Net interest and other expense increased $4.9 million to $6.9 million in fiscal 2013 compared to $2.0 million in fiscal 2012. This increase was primarily attributable to the disposal of assets related to the replacement of our store point of sale hardware, discontinuing our e-commerce platform and elimination of our crossdock facilities approximating $5.6 million, offset by slightly lower interest expense due to improved terms of our credit facility.


Table of Contents

Income tax benefit for fiscal 2013 was $7.0 million compared to income tax expense of $1.5 million in the prior fiscal year. As a result, our effective tax rate decreased from 27.6% in fiscal 2012 to 11.1% in fiscal 2013 in large part, due to recording a $16.2 million valuation allowance against our deferred tax assets in fiscal 2013.

Year Ended June 30, 2012 Compared to Year Ended June 30, 2011

Net sales decreased $8.4 million, or 1.0%, to $812.8 million in fiscal 2012 from $821.2 million in fiscal 2011, primarily due to a decrease in sales from comparable stores (stores open at least one year) of 3.1%. The decrease in comparable store sales was comprised of a decrease in customer traffic of 3.3%, offset by an increase in comparable average transaction of 0.2%.

Gross profit for fiscal 2012 was $308.9 million, a decrease of 1.4% compared to $313.3 million in gross profit for fiscal 2011. As a percentage of net sales, gross margin decreased to 38.0% in fiscal 2012 compared with 38.2% in the same period last year. This decrease of 0.2% in gross margin percentage was partly due to higher freight costs resulting from a slight increase in fuel costs combined with slightly higher markdowns.

Selling, general and administrative expenses increased $6.1 million, or 2.1%, to $301.4 million in fiscal 2012 from $295.3 million in the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased 1.1% to 37.1% in fiscal 2012 from 36.0% in fiscal 2011 in part attributed to severance costs of $2.7 million associated with the departure of our Chief Executive Officer. Excluding the $2.7 million in costs associated with the departure of the CEO, selling, general and administrative cost was $298.7 million or 36.7% of net sales. On a per store basis adjusted selling, general and administrative expense, excluding the aforementioned costs increased 2.2% compared with fiscal year 2011. This increase was primarily due to the decline in expense leverage from lower sales volume and higher rent expense from increased square footage in certain new and relocated stores.

Net interest and other expense decreased $0.5 million to $2.0 million in fiscal 2012 compared to $2.5 million in fiscal 2011. This decrease was primarily attributable to a decrease in total interest expense related to the improved terms of our amended credit facility and lower borrowings in fiscal 2012.

Income tax expense decreased to $1.5 million in fiscal 2012 from $6.0 million in the prior fiscal year. Our effective tax rate decreased from 38.4% in fiscal 2011 to 27.6% in fiscal 2012, in large part, due to the recognition of the Hire Act Retention Tax Credit in fiscal year 2012 and the reduction of non-deductible expenses in fiscal year 2012.

Liquidity and Capital Resources

Cash Flows from Operating Activities

In fiscal year 2013 cash used in operating activities was $3.2 million, compared to cash provided by operating activities of $59.5 million in the prior year. In fiscal year 2013 cash used in operating activities was primarily due to a net loss of $56.4 million combined with a decrease in accounts payable of $25.1 million and a decrease in deferred income tax of $7.1 million, partially offset by a decrease in inventory of $53.5 million, a loss on disposal of assets of $6.2 million and an adjustment for depreciation expense of $13.5 million. Our fiscal year loss of $56.4 million includes a significant non-cash charge related to our inventory devaluation charge of $41.8 million and $10.8 million in expenses associated with our strategic Company turn around plan. In fiscal year 2012 cash flow from operating activities was $59.5 million primarily driven by net income of $3.9 million, and an increase in accounts payable of $35.8 million due to the timing of inventory receipts and an adjustment for depreciation expense of $14.5 million. In fiscal year 2011 cash used in operating activities was $0.1 million, primarily driven by an increase in inventory of $25.7 million, offset by net income of


Table of Contents

$9.6 million adjusted for $16.1 million partially in depreciation expense, and an increase in accounts payable of $2.7 million.

Cash Flows from Investing Activities

Net cash used in investing activities was due to capital expenditures of $9.6 million, $13.8 million and $20.6 million for the fiscal years ended June 30, 2013, 2012, and 2011, respectively. During each year these expenditures were primarily technology improvements, store merchandise fixtures and leasehold improvements. We currently expect to incur capital expenditures in the range of $15 to $20 million in fiscal year 2014 primarily related to new cash registers for all stores, store maintenance and improvements and system enhancements.

Cash Flows from Financing Activities

Net cash provided by financing activities for fiscal year 2013 was primarily due to the proceeds from employee common stock transactions of $1.7 million. Net cash used in financing activities of $25.4 million in fiscal 2012 was due to a change in cash overdraft of $18.8 million and the purchase of treasury shares of $6.1 million. Net cash provided by financing activities in fiscal 2011 of $16.4 million was primarily related to the change in cash overdraft of $15.4 million.

Secured Credit Facility

We have a credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million which matures on November 17, 2016. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. Our financial covenant requires that we maintain availability of 10% of our calculated borrowing base, but never less than $15 million. Our secured credit facility may, in some instances, limit payment of cash dividends and repurchases of the Company's common stock. In order to make a restricted payment, including payment of a dividend or a repurchase of shares, we must maintain availability of 17.5% of our lender's aggregate commitments under the Revolving Credit Facility for three months prior to and on a pro forma basis for the six months immediately following the restricted payment, and must satisfy a fixed charge ratio requirement.

At June 30, 2013, we had no amounts outstanding under the Revolving Credit Facility, $6.9 million of outstanding letters of credit and availability of $103.6 million under the Revolving Credit Facility. Letters of credit under the Revolving Credit Facility are primarily for self insurance purposes. We incur commitment fees of up to 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, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin). These rates are increased or reduced as our average daily availability changes. Interest expense of $1.7 million for fiscal 2013 was due primarily to commitment fees of $0.8 million, the amortization of financing fees of $0.7 million and $0.2 million in interest expense on borrowings. As of June 30, 2013, we were in compliance with all required covenants.

Liquidity

We have financed our operations with funds generated from operating activities, available cash and cash equivalents and borrowings under our Revolving Credit Facility. Cash and cash equivalents as of June 30, 2013, 2012, and 2011, were $28.9 million, $39.7 million, and $19.4 million, respectively. Our cash flows will continue to be utilized for the operation of our business and the use of any excess cash


Table of Contents

will be determined by the Board of Directors. 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. Our primary uses for cash provided by operating activities relate to funding our ongoing business activities and planned capital expenditures. We may also use available cash to repurchase shares of our common stock. We believe funds generated from our operations, available cash and cash equivalents and borrowings under our Revolving Credit Facility will be sufficient to fund our operations for the next year. If our capital resources are not sufficient to fund our operations, we may seek additional debt or equity financing. However, we can offer no assurances that we will be able to obtain additional debt or equity financing on reasonable terms.

Off-Balance Sheet Arrangements

    We had no off-balance sheet arrangements as of June 30, 2013.

Contractual Obligations

    The following table summarizes our contractual obligations at June 30, 2013
and the effects such obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):

                                                 Payments Due by Period
                                       1 Year or                                     More than
Contractual Obligations     Total        Less        2 - 3 Years     4 - 5 Years      5 Years
Non-cancelable
operating leases          $ 189,916    $   62,228    $     85,424    $     36,081    $    6,183
Maintenance, insurance
and taxes on operating
leases                       29,296         9,599          13,177           5,566           954
Commitment fees on
Revolving Credit
Facility                      2,009           596           1,191             222             -

Total                     $ 221,221    $   72,423    $     99,792    $     41,869    $    7,137

We do not consider merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order. Contractually required payments for maintenance, insurance and taxes on our leased properties are estimated above as a percentage of rent based on historical trends. These amounts can vary based on multiple factors including inflation, macroeconomic conditions, various local tax rates and appraised values of our rental properties. Commitment fees on our Revolving Credit Facility are calculated based on contractual commitment fees and standby letter of credit fees assuming our current balances of zero on the Revolving Credit Facility and letters of credit totaling $6.9 million. It is likely we will incur additional interest expense than that calculated above as we may borrow amounts, from time to time, under our Revolving Credit Facility.

Quarterly Results and Seasonality

The following tables set forth some of our quarterly financial data for the eight quarters ended June 30, 2013. The quarterly information is unaudited but has been prepared on the same basis as the audited financial statements included elsewhere in this Form 10-K. We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. The results of operations for any quarter are not


Table of Contents

necessarily indicative of the results for any future period. (In thousands, except for per share data and comparable store sales.)

. . .

  Add TUES to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TUES - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.