TUESDAY MORNING CORP TUES S
December 03, 2013 - 3:56pm EST by
Handley
2013 2014
Price: 13.50 EPS $0.00 $0.00
Shares Out. (in M): 43 P/E 0.0x 0.0x
Market Cap (in $M): 582 P/FCF 0.0x 0.0x
Net Debt (in $M): -13 EBIT 0 0
TEV ($): 569 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

Sign up for free guest access to view investment idea with a 45 days delay.

  • Insider selling
  • Retail

Description

Summary:

The market has given full credit to Steve Becker’s ability to turn around Tuesday Morning given his prior success with Hot Topic, but he has already sold more than half of his shares over the last 3 months and the margins are still solidly negative.  I think the stock is worth $8 or less.

 

Business Overview (from the 10-k)

We are a leading closeout retailer of upscale decorative home accessories, housewares, seasonal goods and famous-maker gifts in the United States. We opened our first store in 1974 and operated 828 stores in 43 states as of June 30, 2013. Our stores have periodic advertised events that occur in each month.

        We sell first quality, upscale home furnishings, housewares, gifts and other related items. We do not sell seconds, irregulars, refurbished or factory rejects. Our merchandise primarily consists of lamps, rugs, furniture, kitchen accessories, small electronics, gourmet housewares, linens, luggage, bedroom and bathroom accessories, toys, pet products, stationary and silk plants as well as crystal, collectibles, silver serving pieces, children's apparel and accessories. We specialize in well-recognized, first quality, brand name merchandise, which has included Viking and Calphalon cookware, Breville, KitchenAid and Cuisinart appliances, Peacock Alley and Sferra linens, Michael Kors bath towels, Travel Pro luggage, Reed and Barton flatware, Lenox and Denby tabletop, Waterford and Riedel crystal, Steinbach and Hummel collectibles, Madame Alexander dolls, Royal Doulton and Wedgwood china and giftware, Couristan rugs and many others.

        We believe that our well recognized, first quality brand name merchandise and value-based pricing have enabled us to establish and maintain strong customer loyalty. We differ from other discount retailers in that we do not stock continuing lines of merchandise. Because we offer a continuity of merchandise categories with ever-changing individual product offerings, we provide our customers a higher proportion of new merchandise items than general merchandisers. We are continually looking to add new complementary merchandise categories that appeal to our customers. Our customers, who are predominantly women from middle to upper-income households, are brand savvy, value-conscious customers seeking quality products at discount pricing. While we offer our customers consistent merchandise categories, each monthly event features limited quantities of new and appealing products within these categories, creating a "treasure hunt" atmosphere in our stores.

        We believe that our customers are attracted to our stores not by location, but because of our limited quantities of first quality, brand name merchandise which we offer at attractive prices. Our stores operate in secondary locations of major suburban markets, such as strip malls, near our middle and upper-income customers. We are generally able to obtain favorable lease terms because of our flexibility regarding site selection and our "no frills" format, allowing us to use a wide variety of space configurations.

--------

Basically, the company sells items that are more want than need based in a treasure hunt / estate sale atmosphere to women who enjoy the thrill of getting a good deal.  Unfortunately for Tuesday Morning, the number of locations to get a good deal have grown dramatically over the last 7 years – Gilt Group, Groupon, Overstock, Big Lots, etc. In addition, there are now more choices for retailers who want to liquidate excess goods so it has become more difficult for them to get the same quality of merchandise.  This can be seen in their results:

 

 

 

 

     

1998

1999

2000

2001

2002

2003

2004

2005

Net Sales

   

   396,095

   488,866

   586,867

   642,398

   728,846

   822,646

   897,841

   931,827

Gross Profit

 

   139,058

   176,760

   196,900

   220,695

   267,529

   309,549

   341,218

   357,281

EBIT

   

     44,086

     65,587

     62,837

     68,576

     85,719

     99,391

   104,091

     96,545

Earnings

   

        2,186

     25,211

     24,747

     30,944

     44,081

     53,661

     62,617

     60,959

                     

Gross Margin

 

35.1%

36.2%

33.6%

34.4%

36.7%

37.6%

38.0%

38.3%

EBIT Margin

 

11.1%

13.4%

10.7%

10.7%

11.8%

12.1%

11.6%

10.4%

Tax Rate

   

38.4%

37.8%

37.3%

38.2%

38.7%

36.9%

38.5%

36.5%

Y/Y Sales Increase

 

23%

20%

9%

13%

13%

9%

4%

SSS

     

13.3%

8.8%

-0.3%

4.3%

2.9%

-1.7%

-4.0%

Average Sales per store

        1,319

        1,416

        1,402

        1,456

        1,481

        1,429

        1,330

 Inventory Turnover

            2.1

            2.0

            2.4

            3.0

            3.2

            2.8

            2.5

 

 

 

 

     

2006

2007

2008

2009

2010

2011

2012

2013

 

Net Sales

   

   911,107

   924,199

   885,281

   801,722

   828,265

   821,150

   812,782

   838,314

 

Gross Profit

 

   342,513

   345,318

   322,703

   296,137

   313,995

   313,316

   308,864

   259,438

 

EBIT

   

     58,453

     48,686

     24,851

        2,435

     20,145

     18,043

        7,437

   (56,495)

 

Earnings

   

     36,429

     30,071

     14,498

           (44)

     10,748

        9,579

        3,913

   (56,376)

 

                     

 

Gross Margin

 

37.6%

37.4%

36.5%

36.9%

37.9%

38.2%

38.0%

30.9%

 

EBIT Margin

 

6.4%

5.3%

2.8%

0.3%

2.4%

2.2%

0.9%

-6.7%

 

Tax Rate

   

36.4%

36.2%

34.5%

36.2%

35.5%

38.4%

27.6%

11.1%

 

Y/Y Sales Increase

-2%

1%

-4%

-9%

3%

-1%

-1%

3%

 

SSS

   

-7.9%

-5.6%

-7.6%

-12.5%

2.2%

-1.2%

-3.1%

-3.9%

 

Average Sales per store

        1,193

        1,176

        1,076

939

972

972

950

        1,000

 Inventory Turnover

            2.2

            2.2

            2.0

            2.1

            2.0

            1.9

            1.9

            2.2

 

 

In case that is difficult to read, the important take aways are

1)      Between 1998 and 2005 Tuesday had EBIT margins between 10.4% and 13.4% and generally decent same store sales growth. 

2)      Starting in 2006 EBIT margins declined and then troughed in a range between 0.3% and 2.8% setting aside the -6.7% in the last year. They also had negative same store sales comps.  (Note: Tuesday shifted its year end from Dec 31 to June 30 in 2007)

 

Background

Steve Becker filed a 13-D in TUES on June 6, 2012.  He got appointed to the board on July 2, 2012 and became chairman on Sept 19, 2012.  They have turned over most of the management team at least once since then including the COO on Oct 22, 2012, 2 CMOs one on Nov 13, 2012 and one on April 3, 2013, two CEOs by March 2013 and the CAO and CFO positions by Sept 2013.

Steve did a great job turning around and selling Hot Topic but Tuesday Morning appears to be recalcitrant.  Here are the results since Steve joined the board last Sept:

 

9/30/2012

12/31/2012

3/31/2013

6/30/2013

9/30/2013

 Net Sales

    172,795

       285,312

    178,073

    202,134

    183,678

 Gross Profit

       64,906

         61,601

       66,157

       66,774

       63,427

 EBIT

    (10,884)

       (22,593)

    (11,734)

    (11,284)

    (12,467)

 Earnings

       (6,961)

       (21,466)

    (12,366)

    (15,583)

    (12,009)

           

Gross Margin

37.6%

21.6%

37.2%

33.0%

34.5%

EBIT Margin

-6.3%

-7.9%

-6.6%

-5.6%

-6.8%

Tax Rate

38.1%

11.8%

-0.9%

-0.2%

5.9%

SSS

1.7%

5.6%

2.8%

4.6%

9.1%

Average Sales per store

         

Ticket

4.7%

5.3%

1.4%

-1.6%

-4.3%

Traffic

-3.0%

0.3%

1.4%

6.2%

 

Transactions

       

13.4%

 

They have been able to get their same stores sales up, but only at the expense of gross margins and ultimately operating margins.

During this time the stock has run from 5 to 14.  Steve has responded by selling more than half of his shares since August – not exactly a sign that the most knowledgeable insider (and the one that the market is counting on) thinks this is going to be an easy turnaround that will lead to a sale a la Hot Topic.

Valuation

Shares Out

 

              43

Price / Share

 

        13.50

Equity Value

 

           582

       

Cash

   

              13

Debt

   

               -  

Net Debt

   

           (13)

       

Firm Value

 

           568

 

Enterprise Value / Revenues

          0.67

 

 

 

The company has negative EBITDA.

 

In a best case scenario, I think over the next 3 years they can grow their same store sales by 30% and get their operating margins back up to 8%.  We are in a much more competitive world for treasure seekers than we were 8 years ago and I’m doubtful they can even manage to get margins back up to 8%.  That would lead to 1,104 mm in sales and $1.25 in earnings (assuming a 35% tax rate).  If the stock traded at Big Lot’s earnings multiple (13.5x) that would imply a $17 stock price in 2016.

In a more realistic successful turnaround scenario, I think they can get same store sales up 10% and have operating margins improve to 5%.  That would lead to $0.61 in earnings which at Big Lot’s earnings multiple would imply an $8.27 stock price.

If the turnaround is only able to get their margins back to where they’ve been over the past 5 years, the stock could revert back to the $4 level.  $850 mm in sales at 3% EBIT margins implies $0.29 in earnings which could lead to the $4 downside case.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Becker continuing to sell his holdings leading to the people who followed him choosing to sell theirs
Margins not improving at the rate that the market expects
    show   sort by    
      Back to top