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TUES > SEC Filings for TUES > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for TUESDAY MORNING CORP/DE


31-Oct-2013

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 interim consolidated financial statements and the notes thereto included in

Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on
Form 10-K for the fiscal year ended June 30, 2013.

Business Overview

We sell upscale, name brand home furnishings, housewares, gifts, and seasonal goods and related items significantly below retail prices charged by department stores and specialty and on-line retailers in 820 stores in 42 states. We also have a unique event-based selling strategy that creates a sense of urgency and excitement for our customer base.

We are currently executing a business turnaround strategy to improve our store operations, merchandise offerings, sales productivity and overall profitability. A number of specific costs have been and will continue to be incurred as we execute this strategy. To provide enhanced information regarding our business performance, we have shown the effects of these specific costs in the Results of Operations section.

One key goal of our new strategy is to significantly increase our inventory turnover. As a result, our approach to pricing, the timing of markdowns, and our level and quality of inventory differs significantly from prior years.

Net sales for the first quarter of fiscal 2014 increased $10.9 million or 6.3%, to $183.7 million from $172.8 million in the same period last year. Comparable store sales for the quarter ended September 30, 2013 increased by 9.1%, compared to the same period last year, which was due to a 13.4% increase in transactions and a 4.3% decrease in average ticket.

Cost of sales, as a percentage of net sales, for the first quarter of fiscal 2014 was 65.5% compared to 62.4% in the same period last year.

Selling, general and administrative expenses were essentially flat at $75.9 million for the first quarter of fiscal 2014, compared to $75.8 million for the same quarter last year.

We incurred a net loss of $12.0 million and a net loss per share of $0.28 for the quarter ended September 30, 2013, compared to a net loss of $7.0 million and a net loss per share of $0.17 for the same period last year.

Inventory levels at September 30, 2013 increased $48.4 million to $260.4 million from $ 212.0 million at June 30, 2013 due to normal seasonal buying patterns. Compared to the same date last year, inventories decreased $71.3 million from $331.7 million at September 30, 2012.

Cash and cash equivalents at September 30, 2013 decreased $15.6 million to $13.3 million from $28.9 million at June 30, 2013. Cash and cash equivalents were $3.3 million higher than cash and cash equivalents of $10.0 million at September 30, 2012, which was offset by $17.9 million in borrowings and cash overdraft.


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Results of Operations

The following table sets forth certain financial information from our consolidated statements of operations. Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31. There can be no assurance that the trends in sales or operating results will continue in the future. In addition to our reported results, we have also provided adjusted (Non-GAAP) financial information to provide readers with additional information comparing our core results between the two periods.

(in thousands, except for per share data, percentages and ratios)

                               Three Months Ended September 30, 2013        Three Months Ended September 30, 2012
                                             Non-GAAP        Adjusted                     Non-GAAP        Adjusted
                               GAAP         Adjustments     (Non-GAAP)      GAAP         Adjustments     (Non-GAAP)
Net sales                      183,678                 -       183,678      172,795                 -       172,795
Percent increase from
prior year                         6.3 %               -           6.3 %        1.3 %               -           1.3 %
Comparable store sales
increase (1)                       9.1 %               -           9.1 %        1.7 %               -           1.7 %
Gross profit                    63,427                 -        63,427       64,906                 -        64,906
Selling, general and
administrative expenses
(3)                             75,894            (2,393 )      73,501       75,790            (1,492 )      74,298
Operating income/(loss)
(2)                            (12,467 )           2,393       (10,074 )    (10,884 )           1,492        (9,392 )
Interest expense                  (375 )               -          (375 )       (422 )               -          (422 )
Other income, net                   84                 -            84           58                 -            58
Income tax
provision/(benefit)               (749 )             341          (408 )     (4,287 )             569        (3,718 )
Net income/(loss) (2)          (12,009 )           2,052        (9,957 )     (6,961 )             923        (6,038 )
Diluted income/(loss) per
share (2)                        (0.28 )            0.05         (0.23 )      (0.17 )            0.03         (0.14 )
Ratios as a percent of net
sales:
Gross profit                      34.5 %               -          34.5 %       37.6 %               -          37.6 %
Selling, general and
administrative expenses           41.3 %            (1.3 )%       40.0 %       43.9 %            (0.9 )%       43.0 %
Operating income/(loss)           (6.8 )%            1.3 %        (5.5 )%      (6.3 )%            0.9 %        (5.4 )%



(1) Stores are included in the comparable store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is still considered the same store for purposes of this computation.

(2) See "Non-GAAP Financial Measures" below for a discussion of these non-GAAP measures and reconciliation to their most directly comparable GAAP financial measures and further information on their uses and limitations.

(3) See "Non-GAAP Financial Measures" below for detail of these adjustments.


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Non-GAAP Financial Measures

We report our financial information in accordance with United States generally accepted accounting principles (GAAP). However, we present certain financial measures identified as non-GAAP under the rules of the SEC to assess our results. We believe that the non-GAAP financial measures provide useful information to the Company's management, investors, and other interested parties because they allow them to understand and compare our core operating results during the first quarter of fiscal 2014 to the prior year period in a more consistent manner. We believe this also facilitates the comparison of our results to the results of our peer companies. The non-GAAP financial measures presented in the tables below should not be viewed as an alternative or substitute for our reported GAAP results, but in addition to our GAAP results.

The following non-GAAP financial measures are adjusted to exclude the impact of our management and board transition charges (including compensation and severance, consulting, legal, search and recruiting costs related to the transition) and e-commerce discontinuation charges.

Adjusted Operating Loss: The following table reconciles operating loss, the most directly comparable GAAP financial measure, to adjusted operating loss, a non-GAAP financial measure:

(in thousands, except for ratios)

                                       Three Months Ended
                                         September 30,
                                        2013        2012
Operating loss (GAAP)                $  (12,467 ) $ (10,884 )
As a percent of net sales                  -6.8 %      -6.3 %
Non-GAAP adjustments:
Compensation                              1,554         144
Legal, consulting, and recruiting           839       1,348
Adjusted operating loss (Non-GAAP)   $  (10,074 ) $  (9,392 )
As a percent of net sales                  -5.5 %      -5.4 %

Adjusted Net Loss from Continuing Operations: The following table reconciles net loss from continuing operations, the most directly comparable GAAP financial measure, to adjusted net loss from continuing operations, a non-GAAP financial measure:

(in thousands)

                                                               Three Months Ended
                                                                  September 30,
                                                               2013           2012
Net loss from continuing operations (GAAP)                  $   (12,009 )  $   (6,961 )
Non-GAAP adjustments:
Add compensation, net of tax of ($364) and $55(1)                 1,918            89
Add legal, consulting, and recruiting, net of tax of
($190), and $514(1)                                               1,029           834
Add deferred tax asset valuation allowance                         (895 )           -
Adjusted net loss from continuing operations (non-GAAP)     $    (9,957 )  $   (6,038 )



(1) The effective tax rate utilized in this non-GAAP adjusted net loss reconciliation is (23.2%) for the three months ended September 30, 2013 and 38.1% for the three months ended September 30, 2012. This rate is inclusive of a deferred tax asset valuation allowance of $15.0 million recorded at September 30, 2013.


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Adjusted Diluted EPS from Continuing Operations: The following table reconciles diluted EPS from continuing operations, the most directly comparable GAAP financial measure, to adjusted diluted EPS from continuing operations, a non-GAAP financial measure:

                                                               Three Months Ended
                                                                 September 30,
                                                                2013         2012
Diluted EPS from continuing operations (GAAP)                $    (0.28 )  $  (0.17 )
Non-GAAP adjustments:
Add compensation, net of tax(1)                                    0.05           -
Add legal, consulting, and recruiting, net of tax(1)               0.02        0.03
Add deferred tax asset valuation allowance                        (0.02 )         -
Adjusted diluted EPS from continuing operations (non-GAAP)   $    (0.23 )  $  (0.14 )



(1) The effective tax rate utilized in this non-GAAP adjusted net loss reconciliation is (23.2%) for the three months ended September 30, 2013 and 38.1% for the three months ended September 30, 2012. This rate is inclusive of a deferred tax asset valuation allowance of $15.0 million recorded at September 30, 2013.


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Three Months Ended September 30, 2013

Compared to the Three Months Ended September 30, 2012

Net sales increased $10.9 million, or 6.3%, to $183.7 million during the first quarter of fiscal 2014 from $172.8 million in the same quarter in fiscal 2013. The increase for the first quarter of fiscal 2014 was primarily due to a 9.1% increase in sales from comparable stores. Stores are included in the same store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is still considered the same store for purposes of this computation. Non-comparable store sales include sales from new stores not included in comparable store sales and sales from stores that have closed. The increase in comparable store sales for the first quarter of fiscal 2014 was comprised of a 13.4% increase in transactions offset by a 4.3% decrease in average ticket. Our comparable store sales increase was partially offset by our non-comparable store sales and e-commerce sales, which decreased $4.3 million or 2.4% of net sales for the prior year quarter. The non-comparable store sales decrease is driven by 27 store closures since the end of the first quarter of fiscal 2013, and only seven openings in that time.

(in thousands)

                             Three Months    Three Months
                                 Ended           Ended                        %
                             September 30,   September 30,   Increase/    Increase/
                                 2013            2012        (Decrease)   (Decrease)
Comparable Store Sales             180,581         165,443       15,138          9.1 %
Non-comparable Store Sales           2,740           4,726       (1,986 )      -42.0 %
Total Store Sales                  183,321         170,169       13,152          7.7 %
e-commerce                             357           2,626       (2,269 )      -86.4 %
Total Company Sales                183,678         172,795       10,883          6.3 %

We opened one new store and closed nine existing stores during the first quarter of fiscal 2014. In addition, we relocated two existing stores during the first quarter of fiscal 2014. Our store base decreased by eight stores in the first quarter of fiscal 2014, while the store base decreased by 12 stores in the same period in fiscal 2013.

Store Openings/Closings



                                     Three Months    Three Months    Fiscal Year
                                         Ended           Ended          Ended
                                     September 30,   September 30,    June 30,
                                         2013            2012           2013
Stores open at beginning of period             828             852           852
Stores opened during the period                  1               4            10
Stores closed during the period                 (9 )           (16 )         (34 )
Stores open at end of period                   820             840           828

Gross profit for the first quarter of fiscal 2014 was $63.4 million, a decrease of 2.3% compared to $64.9 million in gross profit for the same quarter in fiscal 2013. The decrease in gross profit as a percentage of net sales, from 37.6% in the first quarter of fiscal 2013 to 34.5% in the first quarter of fiscal 2014, was primarily due to a lower initial mark-up and higher markdowns. One goal of the Company's business turnaround initiative is to increase merchandise sell-through and inventory turnover. As a result, retail pricing was more competitive and markdowns on seasonal and aged inventory have been accelerated relative to prior years.

Selling, general and administrative expenses were essentially flat for the first quarter of fiscal 2014 at $75.9 million, compared to $75.8 million for the same quarter last year. As a percent of net sales, selling, general and administrative expenses decreased to 41.3% in the first quarter of fiscal 2014 from 43.9% in the same quarter of fiscal 2013. We incurred selling, general and administrative expenses of $2.4 million in the first quarter of fiscal 2014 and $1.5 million in the first quarter of fiscal 2013 in connection with our business turnaround primarily related to executive compensation, severance, and legal expenses. Excluding these expenses, which we do not believe to be indicative of our on-going expense structure, selling, general and administrative expenses decreased to 40.0%, as a percent of net sales, compared to 43.0% in the same quarter last year.

Operating loss was $12.5 million as compared to operating loss of $10.9 million in the first quarter of fiscal 2013. The Company's operating results in the first quarter of fiscal 2014 versus the same quarter last year were impacted by the decline in gross margin and the incremental $0.9 million in business turnaround charges, which related primarily to legal and severance expenses.


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Income tax benefit for the quarter ended September 30, 2013 was $0.8 million compared to $4.3 million for the same period last year. The effective tax rates for the quarters ended September 30, 2013 and September 30, 2012 were 5.9% and 38.1%, respectively. The effective tax rate was lower in the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 due to the establishment of a deferred tax asset valuation allowance beginning in the second quarter of the fiscal year ended June 30, 2013. The deferred tax asset valuation allowance as of September 30, 2013 was $15.0 million.

Net loss was $12.0 million or $0.28 per share compared to net loss of $7.0 million or $0.17 per share in the first quarter of fiscal 2013. The Company's results were impacted by the effects of the items described above and a reduced effective tax rate due to the establishment of a deferred tax asset valuation beginning in the second quarter of fiscal 2013. Excluding the business turnaround charges, non-GAAP adjusted net loss was $10.0 million or $0.23 per share for the first quarter ended September 30, 2013 compared to a non-GAAP adjusted net loss of $6.0 million or $0.14 per share in the same period last year.

Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended September 30, 2013 and 2012 was $13.2 million and $45.1 million, respectively. The $13.2 million of cash used in operating activities for the three months ended September 30, 2013 was primarily due to an increase in inventory of $48.4 million, an increase in other assets of $1.3 million, and a net loss of $9.1 million excluding depreciation, largely offset by an increase in accounts payable and accrued liabilities of $43.1 million and $2.2 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 the three months ended September 30, 2013. The $45.1 million of cash used in operating activities for the three months ended September 30, 2012 was primarily due to an increase in inventory of $66.1 million, an increase in other assets of $5.4 million, and a net loss of $3.4 million excluding depreciation, largely offset by an increase in accounts payable and accrued liabilities of $24.0 million and $6.1 million, respectively.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended September 30, 2013 and 2012 relates to capital expenditures. Capital expenditures are primarily associated with new store openings or relocations, capital improvements to existing stores, or enhancements to warehouse and office equipment and systems, and totaled $3.2 million and $3.6 million for the three months ended September 30, 2013 and 2012, respectively

Cash Flows from Financing Activities

Net cash provided by financing activities was $0.8 million for the three months ended September 30, 2013, compared to net cash provided by financing activities of $19.0 million for the three months ended September 30, 2012. The changes relate primarily to proceeds in the prior year quarter, net of repayment, on the revolving credit facility of $12.5 million and none in the current fiscal year quarter and a favorable change in cash overdraft of $5.4 million in the prior year quarter.

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 lenders' 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 coverage ratio requirement. As of September 30, 2013, we were in compliance with all required covenants.

At September 30, 2013, we had no amounts outstanding under the Revolving Credit Facility, $6.9 million of outstanding letters of credit and availability of $144.5 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 $0.4 million for the three months ended September 30, 2013 was due to commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.


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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 were $13.3 million as of September 30, 2013 and $10.0 million at September 30, 2012. Our cash flows will continue to be utilized for the operation of our business and the use of any excess cash 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 and Contractual Obligations

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

As of September 30, 2013, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under "Contractual Obligations" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim 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.

There were no changes to our critical accounting policies during the first quarter of fiscal 2014.

Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns during the first quarter of fiscal 2014 were 6.4% of sales versus 5.1% 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, 2013 would result in a decline in gross profit and earnings per share for the first quarter of fiscal 2014 of $1.3 million and $0.03, respectively.

For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Recent Accounting Pronouncements

There were no recently issued accounting pronouncements during the first quarter of fiscal 2014 that affected the Company.


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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations, estimates and projections. These statements may be found throughout this Quarterly Report on Form 10-Q, particularly in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," among others. . . .

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