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Tuesday Morning (NASDAQ:TUES)

Q4 2013 Earnings Call

August 20, 2013 5:00 pm ET

Executives

Jennifer Sanders

Stephanie Bowman - Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Treasurer

R. Michael Rouleau - Chief Executive Officer and Director

Analysts

Mark K. Montagna - Avondale Partners, LLC, Research Division

Justin Ruiss - Sidoti & Company, LLC

Cristan Blackman

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Tuesday Morning Corporation's Fiscal Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Jennifer Sanders. Ma'am, the floor is yours.

Jennifer Sanders

Thank you, operator, and good afternoon, everyone. I'd like to welcome you all to the Tuesday Morning Corporation's Fiscal Fourth Quarter 2013 Earnings Conference Call. On today's call are Michael Rouleau, the Chief Executive Officer; and Stephanie Bowman, the Executive Vice President and Chief Financial Officer. If you've not yet received a copy of today's earnings release, you may obtain one by visiting the Investor Relations section of the Tuesday Morning website at www.tuesdaymorning.com.

Before we begin today's discussion, I would like to make you all aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements.

Information regarding the company's risk factors was included in our press release and is also included in the company's filings with the SEC. Reconciliation information related to non-GAAP financial measures discussed on this call may be found in the company's fourth quarter earnings release and on the company's website under Investor Information.

We will start the call with Stephanie Bowman's financial review of the quarter. Michael Rouleau will then talk about what's happening at Tuesday Morning. And finally, we'll open up the call for your questions. Stephanie?

Stephanie Bowman

Good afternoon, and thanks everyone for joining our call today. Earlier today, the company reported net sales for the fourth quarter ended June 30, 2013, of $202.1 million, a 2.9% increase from $196.4 million for the same period last year. For the fiscal year, net sales totaled $838.3 million, an increase of 3.1% from $812.8 million for the period ended June 30, 2012.

Comparable store sales for the fourth quarter increased 4.6%, comprised of an increase in customer traffic of 6.2%, offset by a decrease in average transaction of 1.6%. Comparable store sales for the fiscal year ended June 30, 2013, increased 3.9%, comprised of an increase in customer traffic of 1.4% and an increase in average transaction of 2.5%.

Including nonrecurring charges, which I will discuss in a moment, the company reported a net loss for the fourth quarter of $15.6 million, or $0.37 per share, and $56.4 million, or $1.33 per share, for the fiscal year ended June 30, 2013. During the fourth quarter, the company incurred $10.1 million net of taxes, or $0.24 per share, in nonrecurring charges.

After adjusting for these items, non-GAAP net loss for the fourth quarter was $5.4 million, or $0.13 per share. Non-GAAP net loss for the fourth quarter a year ago was $700,000, or $0.02 per share. We have included in today's press release a table that reconciles GAAP to non-GAAP loss and earnings per share for the fourth quarter and fiscal years 2013 and 2012. We believe that these non-GAAP financial measures provide a better comparison of operating results for the company. Additional details concerning these charges will be included in our 10-K.

Gross margin for the fourth quarter was 33% of sales, compared to last year's gross margin of 37.4%. This rate decline was attributable to higher markdowns on clearance inventory and a flow-through of more buying, distribution and freight costs. Fourth quarter SG&A expense increased 1.4% or $1.1 million over the same period last year. The increase is primarily attributable to $1.5 million in nonrecurring charges related to legal, consulting and recruitment expenses, as well as store reorganization and cleanup costs and charges related to discontinuing our e-commerce operation. As a percent of sales, SG&A was 38.6%, versus 39.2% in the same period last year.

For the fourth quarter, we recorded a tax benefit on only those losses which could be carried back to offset previous year's income. No tax benefit has been or will be provided on additional losses. However, such losses can be carried forward to offset future profits, and a tax benefit will be recorded when such profits occur.

We ended the quarter with inventory down $54 million to $212 million, from $266 million a year ago, a significant 20% drop. On a per-store basis, inventory declined 17.9% from the same period last year, most of it attributable to the major merchandise clearance effort we are winding down now. We do not expect to repeat this major effort in the future. We expect inventories to be under last year for the balance of this calendar year and going into next spring.

We continue to benefit from a strong balance sheet. Cash and cash equivalents were $28.9 million at June 30, 2013, with no cash borrowings outstanding under our line of credit and availability on the line of $103.6 million. During the fourth quarter, we invested $1.3 million in capital expenditures primarily for store relocations, store maintenance and system improvements, bringing the fiscal year total to $9.6 million.

Now I will turn the call over to Michael Rouleau.

R. Michael Rouleau

Thank you, Stephanie. I hope many of you have seen the press release issued earlier today that concerning the board's decision to transition my Interim CEO role to a permanent one here at Tuesday Morning. I have a pretty good read on the company, and I am thrilled to be here and I look forward to the task at hand.

As you can see from our reported results, we executed some strategic decisions this quarter to further clean up and then position the company to look forward. For example, exiting the e-commerce business, where our best closeout competitors are not on the business, and which has been a very, very small part of our sales. We believe our business is much better suited to in-store shopping of our treasure hunts, like our best competitors do. Our 828 stores are where all the opportunity is for us and for the next several years, that's where we will spend our time.

As a result of these moves and other decisions, I am happy to report that we now have positioned the total organization to look one way, and that way is straight ahead, and that is what I want to talk to you about today. But before I do that, I want to remind you again why I love this opportunity and why I accepted the assignment to be the company's CEO.

First, the company has a very good name to build on and a strong history. People either like us and shop us, they've heard of us and don't shop us or have never heard of us, but we are not perceived negatively. It's either a neutral position or a positive one, and that's very important to our turnaround opportunity.

Second, we got a large store base, which makes us desirable to suppliers. With 828 stores, we're a very desirable outlet for a supplier's excess inventory, and we have a good reputation with them.

We've got a lot of buying experience in our company. We have several buyers who have been with us for 15 years or more, and a former long-term tenured buyer just returned to the company recently. And as a result of his experience and other past relationships, we recently have acquired several more big name brands, like Calphalon, Harry and David and Hickory Farms.

Fourth, we currently have no debt. As Stephanie said earlier, we have a line of credit which we typically tap into in September and pay back in December. We also own real estate of substantial value here in the Dallas area. And while we are acting with a real sense of urgency, the strong balance sheet does give us the flexibility to take the deliberate steps that are necessary to improve the company.

Fifth, value retailing is very exciting to customers today. I feel we're absolutely in the right place at the right time. The issue with the company is that it has just not changed with the times. We need and have already commenced investments in infrastructure that a large, growing chain needs. We also recognize now the need to manage our inventory much more closely and also to greatly improve the store environment and customer experience, all while recapturing our roots as a value retailer.

Shoppers are more value-oriented than ever. There is no reason that I know of that we can't capture this opportunity. I have not discovered one issue here, not one, that I believe cannot be resolved.

And lastly, I'm quite confident that my retail experience over many years and in many different challenging circumstances position me to lead our team to realize the potential that this company has. So going forward, you can look to me to be giving you quarterly updates as to what we're working on and how we are progressing, and I'm going to start with our first update today.

Last meeting, I told you that we had put together a short list, a list of initial initiatives, and I want to quickly remind you not only what they are but also how we did. The first one was manage our cash. When you're in a turnaround, one of the very first things investors and company management should look at is how are you doing with your cash. Well, we watched our cash very carefully, and even with capital expenditures of about $9.5 million, we had approximately $28.9 million in cash in the bank at the end of the fiscal year.

The second was to develop an overall company strategy. We are just about there with the overall master plan. I'm using the same process we used at Target when I was there, and they have done a consistently great job for over the last 50 years, so I know it is effective for them, and I am confident it will be for us also. The overall company direction is what's setting us on our turnaround path.

Third, develop a winning merchandise strategy. We have our merchandise strategy just about fully developed. What we will or will not be in, who we buy it from, how we buy, how we price. We've identified super growth categories, no growth categories. We've very thoroughly checked out what our competitors are doing, et cetera. So we're set with our merchandise strategy. All our buyers are now on board, and we're now pushing forward with the implementation.

Four was clean up our stores. Many of you have visited the stores over the last several months. If so, you'll see that we have made a lot of progress, both selling off distressed merchandise and just the overall cleanup. At the end of the year, we sold off a significant amount of the merchandise we call distressed. We have exited the clothing and shoe business, the poor quality merchandise business, et cetera. And while we have made excellent progress cleaning up our stores in total, as you have probably seen, we have just a little way to go in some of our stores.

Five, implement identified cost savings. In addition, about a year ago, the company, along with a consultant, identified onetime cost savings, and we have pursued every one of them, things like our circular, paper costs, Federal Express savings, supplies, et cetera. In addition, while preparing our fiscal 2014 budget, we did a line item review of every cost center. We pulled out all nonessentials. We rebalanced the team, and we also made a few additions in key areas, and I would have to say that while we are very lean and mean, we are poised to rebuild the company. And I believe we now have very good control over expenses.

Organizational review, review for effectiveness. While we've got some, really, some very good folks here, they're like sprouting up everywhere. We examined every organization. We flatline all of them, less layers, more direct reports, giving us much quicker and effective communication among our teams.

Seven, the quick assessment of our system capabilities. We finalized a short-term consulting arrangement with a leading retail consulting firm, Boston Retail Consulting. And we concluded that while we don't have state-of-the-art systems, for now, we have enough to run the business. Our one shortfall was our store cash registers, which tended to freeze up under stress during the Christmas holidays.

So we have now purchased all-new cash registers for all stores at an approximate cost of $6 million, and we expect to have them operational in all stores no later than the 1st of November, in time for the holiday season. Our store managers love this decision. You go into our stores and talk to them, they love this decision, and I know that our customers will, too.

Corporate culture. We were a silo management company, and for those of you who really don't know what that is, it translates into this: everyone for themselves. Today, I'm happy to say everyone is joined at the hip, and we're all working together as one team.

And lastly, implement key management processes. I talked about 7 key processes that would be a foundation of this company in the future: our seasonal merchandise process; our annual budget process; our physical inventory process; our new relocated and closing store process; our merchandise clearance process; our weekly financial forecast process; and lastly, our ad preparation process. We developed cross-functional teams to attack these challenges, and I can say that we made very good progress on every one of them.

Lastly, we also needed to develop a real estate strategy. The strategy has been completed, and we learn from every real estate meeting that we have. We currently expect our store prototype size to be 12,500 to 15,000 square feet and will be no less than 75 feet wide. In fact, I would like to comment about some of our recent store relocations.

Since the 1st of February, we have relocated 16 stores, 1 in particular just across the parking lot from the old store. And I can say that their comp store increases as a group are substantial, and we believe this is a direct result of our new relocated store process. But what makes this real exciting is the fact that we're not really doing much different than we have in the past; we're just better organized. So we have tremendous opportunity in this area, and yes, the results are very encouraging.

And lastly, develop a marketing strategy. We started and then we realized that we need some professional help to make up ground. So we hired an ad agency 3 weeks ago, and they will help with improving the impact on our circulars, our website and our social media efforts. In a very short period of time, I think we have made excellent progress on all fronts and what I would call our Phase 1 priorities. Many are visible to you today: cleaner stores, a dramatic reduction in the clearance merchandise, new cash registers being installed in our stores, fresh new merchandise arriving daily, et cetera.

Now that we are near completion of, on our initial priorities, we have established priorities for the company through the end of the year. And while I don't want to review them all today, I do want to call out just a few of them, as I will report on our progress at our next call: number one is continue to manage cash, always important; two, continue to improve the management of our inventory and reduce markdowns, extremely important to our profits; three, start the assessment of our distribution network needs; four, create a standardized store layout; five, get ready for a fun, successful Christmas season; and six, continue with the implementation of our merchandise strategy with emphasis on now implementing a wide and shallow purchase strategy versus narrow and deep, which we have had in the past, and this will result in minimizing future markdowns and increasing our gross margin.

So as a result of all this progress, here is what you should see in our stores going into Christmas: clean, busy, well-merchandised stores; a broader assortment with fresh strategy-related merchandise; state-of-the-art cash registers that really move the customer through; better overall merchandise values; a much more effective website and circular; and some standardization across the chain, especially end caps with more strategically placed feature items. I would describe it this way: more Target-like. And lastly, much cleaner inventory right after Christmas.

So now just a final -- a couple final comments. While we certainly expect a few lumps and bumps along the way, we believe the financial cleanup is behind us. We have the experience and good sense of what now needs to be done, and I firmly believe we are on our way. Based on our company direction of continuous improvement, which I just gave you quite a few examples, I believe we can produce consistent year-to-year improvements in our financial results.

Thank you for joining our call today, and now we will open the call to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Mark Montagna with Avondale Partners.

Mark K. Montagna - Avondale Partners, LLC, Research Division

I have a bunch of questions. First, you had quite a few pretty -- some sizeable onetime costs in 2013. Are those behind us, or should we expect some more in 2014?

R. Michael Rouleau

I think my closing comments said that we believe our financial hits are behind us. That was my closing comment.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. I must have missed that. And during the fourth quarter, you had higher buying, distribution and freight costs. Why are those higher in terms of, say, from the buying angle?

Stephanie Bowman

Actually, Mark, they're not higher. As we stated in the press release, there were -- it's the flow-through of those costs to our P&L, due to the change in inventory levels. So when you have a large drop in inventory, it create a flow-through of those costs to the P&L.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then the -- what about when you look at the initial markup on new receipts, how does that compare to, say, a year ago? And then what about the out-the-door merchandise margin on the newer receipts?

R. Michael Rouleau

It's -- we've got to get back to value retailing here. We've had tremendous success of markdowns in the past, as you know. And what we've got to do, and we will do, is we're going to be bringing in products probably more sharply priced going forward. As you know in the past and you've seen in our stores, we bring in an item at a certain price and then we mark it down once, we mark it down twice, we mark it down 3x, we mark it down 4x, then out the door. So the idea would be, why not bring it in at the fourth markdown right off the bat and sell out. So we're going to be sharpening our prices, significantly reducing markdowns. And as a strategy here, we're going to be buying less so we have new fresh merchandise in the store all the time and it's going to sell out. So we're going to be trading off some IMU with all these markdowns that we've had in the past. And I know we can do that because we've been just giving merchandise away for some time now with these excess markdowns, when we could've just priced it sooner going in. But management in the past had a different strategy, and that's not ours.

Mark K. Montagna - Avondale Partners, LLC, Research Division

So it sounds like the merchandise margin could net out to be roughly the same, and chances are, better, considering the merchandise is better.

R. Michael Rouleau

Well, I would say that certainly is the direction.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then you'd said inventory down this year versus 2013. Is that on a per store basis or overall? And then if overall, would that mean that you're planning on closing some stores?

R. Michael Rouleau

Well, our inventory is down, I think, $50-some million from last year, 17% on a store basis. I mean, we got rid of all that clearance merchandise, so we should have less merchandise in the store. And I think you're going to see just a nice little pickup in stock turnover this year.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Yes, I'm talking about the new fiscal year. I thought that -- Stephanie, I thought you said that inventory in the new fiscal year would actually be down versus where the year just ended.

Stephanie Bowman

We expect inventory levels to be at the level we ended at for fiscal '13. So we're going to hold those levels through '14. We're not going to ratchet back up to where we were the prior year, which was the $266 million. We're going to keep it down at the lower level.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then Mike, when you were talking about assessing the distribution network, I'd assume that also means the real estate holdings, with the distribution centers that you have. Is that accurate? And I mean, does it sound like real estate, both the DCs and the headquarters, could all be up for sale potentially?

R. Michael Rouleau

Well, we don't know enough now. But I know there's a lot of opportunities for us to save costs. For example, we bring goods from the Orient into California, ship them to Texas and ship them all the way back to California. So right away, we got some opportunity. So we're going to have to look at all these opportunities, maybe have a good idea of how we might want to run the company in the future to be even more profitable, let's say, than we think we could be. But then there's some low-hanging fruit as a result of this. So we have a professional company in here that's really going through the total DC, the whole network. And we will then be working with them to determine how we want to run the company, because that's one of the issues that come out of the consulting arrangement, how you're going to run the company in the future. So then we can kind of set up a strategy on how we're going to manage the flow of the inventory. So all that is going to be worked on in the next several months. But I mean, there's just -- I can only tell you, there's opportunity all over the place in this.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then as far as most of your stores being off the mall, I'm guessing that those are basically 5-year leases that -- I'm wondering, do you anticipate reviewing all of the stores over the next 5 years?

R. Michael Rouleau

No. We have -- we've reviewed them all now. But we have a lot of stores that are in good condition. We got good volume. We know that wherever we are, we can be a heck of a lot more, just by, just being a better company. So we have some oddball locations, faced the wrong way, whatever they were leased for, I have no idea. But we're cleaning those up and obviously, in the next year or 2, those will all be gone. So we do have a real estate strategy that talks about what kind of -- what we're looking for as a site, et cetera, et cetera, et cetera. And everything going forward, I think is going to be in pretty doggone good shape. I mean, we know what it is we want now, and we know what it is, where we want to be located. If we don't find the right site, then you know what? We'll pass.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. But what about -- will you have to pay fees on breaking leases or anything? Because if you can...

R. Michael Rouleau

No, no, no. Yes, there's no reason that we have to break leases. The truth of the matter is that we get things rolling here, and our -- we'll -- I think we have a good chance to improve sales right across the board. So there's no reason to break a lease. We do have some leases. For example, if we don't make a certain volume level by a certain time, we can get out on some leases, I -- that we were maybe a little concerned about. So we have a lot of options here to manage the real estate, but I think the real estate certainly is not going to be an issue going forward.

Mark K. Montagna - Avondale Partners, LLC, Research Division

And so do you feel that you would have real estate optimized over the next 2 years in terms of relocations? It doesn't sound like you have a lot of relocations or closures to deal with. But you have some of these stores that are 7,000 square feet that you don't really want. So...

R. Michael Rouleau

But some of these stores are making good money, and they're doing some good volume. So we just are going to do our very best with them because they're performing and they're contributing. So we're not going to run around and do this and that. We have a structure. We have a real estate committee. We're reviewing, not only the whole chain, we are now reviewing by market to see if we're strong in a particular market or not, and we're looking at it crossways and sideways and every other way to dissect where we're going. But I mean, I feel real comfortable about where we're going with our real estate.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then last question, then I'll pull out and get back in the queue. Should we see a new set of marketing from the new ad agency by Christmas in terms of circulars? When should we really see their impact?

R. Michael Rouleau

November 1.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And does that -- I assume that includes the circulars?

R. Michael Rouleau

Yes.

Mark K. Montagna - Avondale Partners, LLC, Research Division

You want to fill us in on any of that or wait until...

R. Michael Rouleau

No. You'll see us -- you'll see it when it comes. I mean, it's in the process of being developed. Our website will have a real nice look around the 1st of November also. And I think -- and so it will all be ready about -- I said this, I think, on the last call, maybe I did, maybe I didn't. But I think we could think of the grand opening at Tuesday Morning. And I don't mean we're not stopping now, we're rolling right through there. But I would think of the grand opening of Tuesday Morning probably around November 1. We're not going to have a grand opening, but the registers will be in and this will be in and so forth and so forth. So I'm looking at that as kind of the time to move up, move out. But we're -- but between now and then, we're doing business and appears to be fine.

Operator

[Operator Instructions] Our next question in queue comes from Justin Ruiss with Sidoti.

Justin Ruiss - Sidoti & Company, LLC

So in the prepared remarks, you'd said that you dropped the clothing line and the shoe line from, I guess, all the merchandise offerings. Are we expected to see any other, I guess, lines drop from the offering that you guys have?

R. Michael Rouleau

Not right now, not right now. We've cleaned up just about -- I've cleaned up everything that we want to clean up now, and it's probably all gone or a few pieces left here and there. It's done.

Justin Ruiss - Sidoti & Company, LLC

Okay. And then just with that, with the clearance that happened this year and kind of the margin that was kind of eating at when terms of like the freight costs and what-have-you, with what passed through, should we expect something like that to continue on now that the clearances aren't really, I guess, happening anymore? Should the margin remain at like a level like this? I mean, I don't know if you can speak to that or not.

Stephanie Bowman

We do not expect the margins to remain at a 30% margin. We expect them to be higher than that.

Operator

Our next question comes from Joe Mullins [ph] with -- who is a private investor.

Unknown Attendee

I had a quick question with respect to the real estate strategy and the question is basically is, of the stores that have been relocated or modified to more match the prototype that you discussed, is there -- have you seen a measurable percentage of sales per foot increase? And if so, is there a threshold that you guys are looking at to make that corporate decision on relocations or expansion for those particular stores?

R. Michael Rouleau

It's too early to tell. We've just done -- I mean, I've only been here 3, 4 months, whatever it may be. So I can only tell you that with very little modifications of what we're doing, maybe on a scale of 1 to 10, we're about a 3 in terms of really doing this correct. We're seeing significant increases in those stores, so sales increases. So beyond that, I really can't say much.

Unknown Attendee

And so the strategy for a store that maybe is in a oddball type prototype or an interesting store layout, but the preference would be to take that, if it's marginally performing and modify or open up that store to the prototype as opposed to a relocation or a lease break?

R. Michael Rouleau

Every situation is different. So it's hard to generalize something like that. I mean, we're probably going to say with a few, some stores that are under our -- the desirable 10,500 square feet that we would like. But because they're just performing so well and they might be in a small town somewhere, we're not going to fool with it because it's working. But generally speaking, as we go forward and relocate stores, we're going to try to get in the 12,000, the 15,000 square foot range because we think we -- it'll just work better for us. It's a better shopping experience for the consumer. We can display our merchandise better, et cetera. And I really believe we're going to get a substantial increase in sales, as evidenced by just the few that we've done.

Unknown Attendee

And can you speak to what percentage you expect to either close versus the ones you expect to relocate?

R. Michael Rouleau

No.

Operator

[Operator Instructions] We do have a follow-up question from Mark Montagna.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Michael, a follow-up question. On your past, when you were at Michaels Stores, you were known to meticulously test things. I'm wondering, are you doing the same thing here? Or is this a different business that you really don't need to test as much?

R. Michael Rouleau

Well, we have so many basic things that we got to get in place here that I would say that we're not thinking about testing any right now because we got too many major things that are being repaired. So to me, testing is kind of like you're in Phase 2, when you want to tweak and try a few things. We're not past Phase 1 yet. So we'll get through with Phase 1 and then we'll see, because there are some things that we should try. But it's too big of a -- we're just working on the core issues now, and we're sticking with that. Look, in the early days of Michaels, I'll tell you, we didn't test anything. We were kind of fighting for our life there. So -- but then as we got further on, we tried different things. But you got to be a little further along, and that will be the case here also.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then Michaels, we looked back at a lot of your -- the history there, and it seemed like the fastest inventory turn that was ever hit was 2.2 in 2005. And with Tuesday being a lot less SKU intensive, shouldn't a company like Tuesday Morning be able to turn a heck of a lot greater than 2.2?

R. Michael Rouleau

I would say absolutely yes. I mean, listen, Michaels had 50,000 SKUs. And you can see the turnover never went up too far because we -- so we just had too many SKUs to manage, but you saw the profit, right. The profit went straight up over all the years. And I think we are -- probably our investment in inventory, in terms of what we paid for, increased over the years, but maybe our inventory turnover only increased a little bit. This place here, this company here has -- we have a lot of opportunity for increased turnover. If we don't turn the goods, it's going to end up in the markdown bucket. So we have to increase turn.

Mark K. Montagna - Avondale Partners, LLC, Research Division

How many SKUs do you foresee being at a Tuesday Morning store?

R. Michael Rouleau

Well, I will only say this. I think we have a chance to broaden assortments and beyond that, no comment.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then over the long haul at Tuesday, do you see more upside on gross margin or SG&A, or both?

R. Michael Rouleau

I would not really say much, but I would say this: I see a tremendous sales opportunity here. And then I would also say that if we have a tremendous sales opportunity, we will -- we can leverage G&A tremendously because sales don't cost much more. It just don't really cost that much more to get. So you got a fixed base of expenses, and then you leverage the sales up. So that's what I see here. We have a tremendous sales opportunity.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then, let's see, how many -- you talked about reducing the prices on your merchandise. How many months has it been since you've had the merchandise, overall, at this lower base price, where it looks like it's...

R. Michael Rouleau

We actually we -- I would say we really haven't. We might have done a little of this or a little of that or whatever it may be. But really, we were just working on issues here and problems. So you will see us being a little crisper, I would say, going into the October, November season.

Mark K. Montagna - Avondale Partners, LLC, Research Division

All right. So October, November is when we can see the expected IMU on a go-forward basis?

R. Michael Rouleau

Well, I would say yes, yes. Yes.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. So the entire store. Okay. All right. And then is there -- do you know what the comp leverage point would be for 2014?

R. Michael Rouleau

I don't know what -- what do you mean by that?

Mark K. Montagna - Avondale Partners, LLC, Research Division

What comp would be needed to leverage the occupancy portion of gross margin and also to leverage SG&A spend? Like if SG&A is expected to rise 3%, then you would need, say, a 3% comp to...

R. Michael Rouleau

Sorry, I'd rather not really...

Stephanie Bowman

We'd rather not comment on that, Mark.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then let's see, a lot of these questions have been answered. Let's see, in July, you had a mid-month circular, kind of as a test. I'm wondering how that went. It seems like it was probably a pretty good idea.

R. Michael Rouleau

Yes, sales were pretty good. But beyond that, I can't really say much more about it.

Stephanie Bowman

Yes. We'll report those when we report Q1 -- or we'll report that within our Q1 earnings release.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then on a prior conference call, going back a little ways, I think the goal was stated to try to see inventory turn -- inventory sell-through at an 85% rate by weeks 10 through 12. Do you still stick with that type of...

R. Michael Rouleau

I think it was 75%. It's a goal that we are aspiring to. I mean, that -- I can't remember if that was the number, but certainly, we've got to get better sell-throughs on this merchandise. And it's just a matter of -- we've got a tremendous supply chain team now which we never had before. I'm not even sure they even had any supply chain department. We've got some really good planners. We've got a good buying team, and they're all integrated now. I would expect that we're much more sophisticated than we were maybe even 10 weeks ago. So we are doing a much better job planning by store, and we're expecting our sell-throughs to improve significantly only because we can just plan better. I mean, this is -- anyway, that's the answer to that.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. So just on that topic of planning, I saw that the inventory allocation system was disposed. But I thought, is that the same one that was installed and went live July 2012?

R. Michael Rouleau

Feel like answering that, the inventory allocation system disposed?

Stephanie Bowman

Yes, that's correct.

Mark K. Montagna - Avondale Partners, LLC, Research Division

So it's the same one. So does that mean that you are going to be installing a new merchandise allocation system? And then what about a planning system?

Stephanie Bowman

We are not replacing another allocation system. When we installed the new system, there were still some parts of the old system that was being used. So the write-off of the old did not incur -- occur until late in the year. And there will not be -- currently, there's not a plan to replace the overall merchandising system.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. So you still have the system that was installed in July 2012, the write-down was just on old -- the old...

Stephanie Bowman

On the old, correct.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. What about merchandise planning? Is that a new system? Or how do you do that?

Stephanie Bowman

That is not a new system.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. So you're going to keep with the old one?

Stephanie Bowman

That's right.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And does the old one talk to the new allocation system?

Stephanie Bowman

It does, and there's been some enhancements to the old.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then let's see, customer loyalty program, how is that coming along?

R. Michael Rouleau

I would say we have other priorities now. So while a customer loyalty program, in my opinion, is very important to us, the acquisition of customers, et cetera, it's -- between now and the end of the year, you won't see much change, if any.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. When you say end of the year, you mean end of calendar year?

R. Michael Rouleau

End of the calendar year, yes.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then lastly, is there a level of cash that you're comfortable with, where $150 million or $100 million, where you say, "Okay. I'm where I want to be."

Stephanie Bowman

We are -- like Michael said, we are managing our cash closely, and we expect to see some build in cash. Until we get through full evaluation of our supply chain network and so forth, there will be some uses of cash. So we've not particularly earmarked a set level at this point.

Operator

Our next question in our queue comes from Cris Blackman with Empirical Capital.

Cristan Blackman

Just one question, if I may, or if you would elaborate a little bit on improvement in customer traffic during the quarter. I was curious if you could kind of distinguish the difference of that amount that might have come from stores that have been relocated versus your existing stores?

R. Michael Rouleau

I don't know. I'm not sure.

Cristan Blackman

Well, you had this nice increase in customer traffic, and I'm curious if the stores that were relocated accounted for the majority of that improvement in customer traffic or if...

R. Michael Rouleau

No, no.

Stephanie Bowman

No, no.

Cristan Blackman

Or if you can distinguish between the difference in the 2? No?

R. Michael Rouleau

I think honestly, the cleaning up is hard to put a finger on any one thing. We got everyone here in the company working on something. And what happens is when you add, let's say, everyone has improved their area performance by an inch and everyone in the company does it, you end up with 6 feet, and that 6 feet creates a lot of momentum in our stores. And I think our stores are looking a lot cleaner. I think they're easier to shop, and morale within our store employees is up and you go on and on and on with that. And I think more people are just finding our company as a better place to go to than it has been in the past.

Cristan Blackman

And as we start here this first quarter, are you continuing to see that traffic trend as you did in the first quarter? Or is it even improving from that level?

Stephanie Bowman

Cris, we don't comment on the interim months. We will comment on that when we report our first quarter earnings.

Cristan Blackman

Okay. Fair enough. And then on the relocates, if you could just refresh my memory. If you relocate within a certain radius, do you keep that store in the same-store sales base? Or how do you handle that?

Stephanie Bowman

Yes, it's in the -- if it's relocated within the same trade area.

Cristan Blackman

Okay. So every store that was relocated is...

Stephanie Bowman

It is in the comp base.

Operator

[Operator Instructions] Presenters, at this time, there appears to be no additional questioners in the queue. I'd like to turn the program back over to Michael Rouleau for any additional or closing remarks.

R. Michael Rouleau

Well, thanks all of you for joining us this afternoon, and I look forward to our next update. Thank you.

Operator

Thank you, sir, and thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.

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