Tuesday Morning (TUES) is a closeout retailer of home goods and furnishings, lawn and garden furniture, and unique seasonal merchandise. Founded in 1975 and made public nearly a decade later, Tuesday Morning has a long history in the massive discount retailer market. Tuesday Morning's financial performance has been on the decline for several years, but due to the substantial turnaround efforts of newly appointed CEO and retail industry veteran Michael Rouleau, shares are turning sharply higher. Year to date, shares of Tuesday Morning have gained 114% and I maintain that the company is just getting started. While my friends on the short side may point to declining sales per ticket and a supposedly outdated business model, I will point out several catalysts that I see driving long-term share growth for the company.
Distribution Channels and Merchandise Pricing
Rouleau has been busy with a number of common sense solutions to problems that have been ailing Tuesday Morning for the last few years. While I won't list them all, I will point to two extremely important factors to consider that will drive long-term recovery and share growth. First, let's look at Tuesday Morning's distribution channels. Tuesday Morning owns substantial real estate in the D.C. area but has not been utilizing those resources as efficiently as possible. The D.C. changes are important as they will contribute to increasing margins as a result of distribution cost savings.
D.C. efficiencies will also provide Tuesday Morning stores with more consistent and fresher merchandising, which will be critical to their second-most notable change: sharper merchandise pricing. Tuesday Morning has a long history of low inventory turn due to a prolonged markdown process. Rather than holding inventory for eight to nine months while continually marking the merchandise down, Rouleau is taking a sharper pricing strategy. This includes introducing products at a lower price point to begin with, which will then create higher inventory turn. The faster the inventory can turn, the higher same-store sales will be. You can see the early effects of the D.C. realignment and pricing strategies in the increased inventory turn seen in the Q1 earnings report.
Store Layouts and Location
Rouleau is not only focused on the simple, industry-proven practices like placing closeout merchandise in the back of the stores -- a simple, no-cost (but effective) layout improvement -- but also has suspended the opening of any new stores until a layout design has been solidified, as noted in the FQ1 2014 conference call. To quote Rouleau: "Why open more of the same?" I couldn't agree more. The store remodel will give Tuesday Morning the image it needs to attract a broader portion of the market they serve. Tuesday Morning stores will have a more consistent larger store size, better retail locations, and a more modern and inviting store presentation. Opening more of the same broken stores won't do anything to re-brand the franchise. Upper management not only understands this, but is acting on it.
Tuesday Morning is in the right market at the right time. No longer is it a point of pride among the retail shoppers of the world to proclaim how much they spent on a product, but rather how little. The explosion of stores such as T.J. Maxx, Marshalls, and Ross demonstrates the need in the market for brand-name products at reduced prices. Much like bundled cable, non-value-oriented retailers will soon fall by the wayside. Tuesday Morning has long served the value-minded shopper and will continue to do so in a more modern, profitable, and focused way.
Another critical point to the Tuesday Morning turnaround is the merchandise offering. Rouleau has brought in a team of buyers with incredible experience and relationships in landing name brand products that are familiar to shoppers. He has also narrowed the scope of merchandise offerings. I remember the first time I walked into a Tuesday Morning some seven or eight years ago and noticed the availability of shoes. It struck me as odd. I couldn't figure out exactly what I should be looking to buy: an area rug or a pair of Birkenstocks? It's important to note that the value retail market is crowded and the best way to differentiate yourself is to narrow the focus on what you supply. Rouleau has implemented a merchandising strategy that I believe will allow Tuesday Morning to flourish even in the perceived shadow of the T.J. Maxx and HomeGoods stores of the world.
The Bottom Line
Two things will drive the stock price in the near and long term, and the good news for Tuesday Morning investors is that both are all but certain to happen. The first is increasing margins on goods sold. The opportunity Tuesday Morning has sitting in front of it with its distribution centers will be the key that unlocks the value in every piece of merchandise the company sells. Management understands this and is working toward that low-hanging fruit.
The second will be the continuing increase in same-store sales. For the last two quarters, Tuesday Morning stores have experienced increased same-store sales year over year. The trend will continue as Rouleau's real estate improvement plan leads to larger more uniform stores in better locations, and consumers know what to expect from their local Tuesday Morning both from a pricing and merchandising perspective.
The market has looked very favorably on Tuesday Morning's turnaround, with the stock surging 23% when Rouleau laid out his detailed plan during Q4 2013. As the turnaround gains traction and Tuesday Morning moves into the second half of its current fiscal year, I expect the equity to find support at the $20 range. With margins continuing to expand as a result of distribution center work and same-store sales increase, the market will find the same value in this stock as Tuesday Morning customers find in their stores.