Tuesday Morning Corporation (NASDAQ:TUES) Q1 2018 Earnings Conference Call November 2, 2017 9:00 AM ET
Steven Becker - CEO
Stacie Shirley - CFO
Jeffrey Van Sinderen - B. Riley
Alex Silverman - AWM Investments
Ethan Steinberg - SG Capital
Good day, ladies and gentlemen, and welcome to the Tuesday Morning Corporation First Quarter 2018 Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to turn the conference call over to Stacie Shirley, Chief Financial Officer. Please go ahead.
Thank you, operator, and good morning, everyone. I'd like to welcome you all to the Tuesday Morning Corporation's First Quarter Fiscal 2018 Earnings Conference Call. Joining me on the call today is Chief Executive Officer, Steven Becker.
If you have not received the copy today's earnings release, you may obtain one by visiting the Investor Relations section of the Tuesday Morning web site at, 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 as a forward-looking statements. Information regarding the company's risk factors was included in our press release and is also included in our filings with the SEC. Any forward-looking statements made during this call speak only as of the date of this call. Today's presentation will also include certain non-GAAP financial measures, including adjusted EBITDA. A reconciliation of the non-GAAP financial measures used in this presentation to the most directly comparable GAAP financial measures can be found in the Investor Relations section of the Tuesday Morning web site at, tuesdaymorning.com.
Steve will provide an overview of the results and strategy, and I will follow with a review of our financial results before we open the call to questions.
I'll now turn the call over to Steve.
Thank you, Stacy, and thank you everyone for joining us this morning for our first quarter call. We delivered positive comp growth of 3.6%, in line with our guidance and against a 5.1% comp in Q1 last year. This 3.6% comp was inclusive of the impact of the hurricanes that affected our stores in Texas, Florida and neighboring states. We estimate that the storms cost us about one point of comp for the quarter. While all of our stores have since reopened, our thoughts remain with those who are continuing to deal with the aftermath of these disasters.
We have made significant improvements across our organization, and we continuously grade opportunity ahead for Tuesday Morning. Our real estate strategy continues to deliver excellent results. Last year's supply chain issues are behind us, and we are operating effectively.
We continue to deliver consistent improvement in IMU. We're managing our balance sheet effectively, including a significant inventory reduction in our DCs. We launched our new marketing initiative, and are starting to tell new and existing customers about the Tuesday Morning story and our passion for the deal.
Let me now provide an update on our strategic priorities, beginning with supply chain. Both distribution centers are operating effectively. With the issues we encountered in fiscal 2017 behind us, we're able to see the benefits of our Phoenix distribution center. We believe there are greater cost efficiencies to be realized, as we continue to identify additional process and system opportunities in both distribution centers. The Phoenix distribution center has exceeded our expectations for productivity this season and post-peak, we plan to begin servicing more stores out of this facility.
We're also continuing to make progress against our inventory and working capital initiatives. During the quarter, we delivered a more balanced flow of product to our warehouses and stores. We continue to focus on improving our overall turn and managing our weeks of supply at the store level.
During the quarter, our overall turn improved to 2.4 times versus 2.3 times last year. We know that a constant flow of receipts drives our loyal customers and improving our turn in the freshness of our store inventory is a major focus. We currently have a greater percentage of store inventory aged three months or less, than we've had at any time in the past two years.
Turning to our real estate initiative. Our stores relocated over the last 12 months performed well this quarter, comping up 70%. While the performance of our relocations will fluctuate over time, the 45 stores in this cohort performed particularly well, benefiting from a variety of factors, including increased square footage, which helped to drive the upside to our historical average.
Additionally, the current flux in the commercial real estate environment is creating increasingly attractive opportunities. As has been our practice, if we cannot find the right location for a relocation, we'll execute a short-term renewal of an expiring lease. Thus, over time, our pool of relocation candidates has grown, and we're able to be highly selective in the projects we choose to pursue. We continue to see a multiyear opportunity to improve over store portfolio.
This year, we will see leases come up for renewal in approximately 25% of our store base. We're actively evaluating every lease that comes through renewal and pursuing opportunities to renegotiate rents, where appropriate. We're on track to relocate 45 stores, open 15 stores, close 15 stores and expand eight stores this year.
We recently launched a new creative and brand messaging centered around our passion for the deal. You'll see new signage in our stores and our additional properties and e-mail campaigns reflect a new look and feel of the brand. We spend the majority of our ad budget on our monthly sales events. Partnering with our new ad agency, we're working to optimize our ad spend, and highlight the everyday value proposition customers find at Tuesday Morning. We think the new creative looks great, and we're pleased with the high engagement we receive, as we continue to capture more and more e-mails.
On the merchandising side, it's a favorable environment with plenty of compelling closeout deals. We have expanded our portfolio of vendor relationships and added some important new brands to our offering this quarter. We're pleased with the quality of the values and especially the consistent and timely offering the stores are receiving. As we head into the heart of the holiday season, we're pleased with the assortment and expect it to resonate with our customers. And finally, we remain focused on cost control. We're doing more with less and watching our costs carefully.
In summary, the year is off to a good start. We're making progress against our strategic initiatives. Our supply chain is running effectively, our stores are receiving constant fresh flow of branding goods at incredible values, and our marketing message is working to attract new and existing customers to Tuesday Morning.
We feel confident in our initiatives, and we believe we are on track to deliver against our goal for this year, including comp growth in the range of 2% to 5%, and a significant improvement in EBITDA. There is substantial opportunity for meaningful improvements in productivity and profitability at Tuesday Morning. We're on the path to delivering that improvement, which we believe will generate strong shareholder returns over time.
With that, I'll turn the call over to Stacie, to review our performance and outlook in more detail. Stacie?
Thank you, Steve. In the first quarter, net sales were $218.8 million, up approximately 3.2% from Q1 last year, despite having 14 fewer stores in our store base. As Steve mentioned, comp sales increased 3.6%, on top of the 5.1% increase in Q1 last year, our most challenging comparison for the year.
We estimate that the hurricanes in late August and September, negatively impacted our comp by about 100 basis points, as 25% of our store base is affected -- is located in the affected region. This negative impact was largely offset by a planned promotional shift from early October to late September. Comp transactions increased 2.9% and average ticket increased 0.6%.
Stores relocated over the last 12 months contributed approximately 410 basis points to comp sales in the quarter, driven primarily by better real estate and larger average store footprint. Gross profit increased by $700,000 to $78 million versus last year. Gross margin for the first quarter was 35.6% compared to last year's gross margin of 36.5%.
As expected, the majority of the remaining overhang of the previously capitalized costs related to the supply chain issues we experienced in fiscal 2017, were recognized in our first quarter. We estimate the impact from the elevated non-cash costs was an approximate 140 basis point decrease to our gross margin in the first quarter. Partially offsetting this increase in cost was a continued improvement in initial merchandise markup, along with a significant favorable shift in markdown timing as compared to the prior year period.
SG&A expenses were $89.9 million for the first quarter versus last year's expenses of $86.6 million. As a percentage of net sales, SG&A was 41.1% versus 40.9% in the same period last year. The 20 basis point increase in rate was driven primarily by higher rent and depreciation, in connection with our strategy to improve store real estate.
Also contributing to the increase in SG&A in the current quarter were the incremental costs related to the stockholder nominations, as discussed in our recently filed proxy statement, which negatively impacted SG&A as a percentage of net sales by approximately 20 basis points. Partially offsetting these increased costs were reductions in certain other corporate and field expenses, as we've begun to see the benefit of the headcount rationalization and restructuring that we executed in the fourth quarter of fiscal 2017.
Of note, our labor costs, as well as our legal and professional fees, decreased in both dollars and as a percentage of net sales in the current year quarter from the prior year quarter.
Our operating loss for the first quarter was $12 million compared to an operating loss of $9.2 million for the first quarter of fiscal 2017. We estimate that our first quarter results were adversely impacted by the recognition within gross margin, of the previously capitalized supply chain and freight costs of approximately 140 basis points or $3 million, driven significantly by the elevated costs resulting from the supply chain issues that we encountered last year.
We reported a net loss of $12.3 million or $0.28 per share compared to last year's net loss of $8.9 million or $0.20 per share for the first quarter. Also, adjusted EBITDA was negative $4.1 million compared to negative $2.4 million for the first quarter of fiscal 2017, primarily driven by the change in net loss year-over-year. For further details on the remaining reconciling items, please refer to our earnings release for the reconciliation of adjusted EBITDA.
Turning now to the balance sheet. Cash and cash equivalents were $11 million as of the end of the quarter, compared to $6.2 million at the same time last year, with total liquidity of $92 million, including approximately $81 million available on our revolver. As expected, our revolver borrowings increased to fund our holiday inventory level. As of quarter-end, we had $43 million in borrowings outstanding under our line of credit. We remain very confident in our overall liquidity position and continue to be disciplined with working capital management.
We ended the quarter with inventory at $283.9 million, a 12.3% decrease from a year ago. The decrease in inventory was driven primarily by lower levels in our distribution centers and in transit inventory. For the quarter, we invested $9.7 million of CapEx on a net basis, the majority of which was focused on our real estate initiative. During the quarter, we opened four stores, relocated 12 stores, expanded five stores and closed seven.
Turning now to our outlook for fiscal 2018. To reiterate Steve's comments, we still expect our fiscal 2018 comp sales performance to be in the range of 2% to 5%. With regards to gross margin, as I mentioned earlier, the vast majority of the residual headwind of the elevated supply chain costs were recognized in this first quarter.
For our second quarter, our gross margins will be negatively impacted by the shipping markdowns from Q1 to Q2. However, we don't expect the year-over-year gross margin decline to be as significant as it was in Q1. And we continue to expect substantial gross margin improvement in the range of approximately 250 to 300 basis points in the second half of the year. As we mentioned on our last call, we also expect to leverage SG&A for the year.
We believe that we are on track to deliver significant improvement in our fiscal 2018 EBITDA. Lastly, our outlook for our capital spend continues to be in the range of $25 million to $30 million for the year.
For Q2, we expect to continue to focus our CapEx budget on our real estate initiatives. We have completed all activity for this calendar year, opening four stores, relocating 14 stores, expanding two stores and closing one store during the second quarter.
As we've said before, we plan to self-fund our capital expenditures through working capital improvements and EBITDA growth. And outside of our seasonal working capital needs, we expect to end the year with our debt relatively flat with fiscal 2017 year end.
Now with that, we'll open the call up for any questions.
[Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley FBR. Your line is open.
Jeffrey Van Sinderen
Hi, good morning. Great to see the improvement at supply chain and the solid comp performance, especially when you adjust for the hurricane impact. Steve, maybe you can just talk or Stacie, you could go through it I guess, just maybe you have the metrics in front of you. But can you give us the sales per foot metric in the quarter, if you have that versus the same quarter last year? And maybe you can just speak to where you are now in sales per square foot, and what level you think is realistic to target over the next year or so?
You know Jeff, we don't have that in front of us. We can pull it up and get back to you offline. But we don't have that for the call.
Jeffrey Van Sinderen
Okay. Okay. So let's move to gross margin, which I think you said still expected to improve 200 to 300 basis points in the second half, or I guess for the fiscal year. How much upside to gross margin do you think that there is beyond that? I guess, I'm just trying to get a sense of whether you think it's feasible to layer on maybe another 200 or 300 basis points of gross margin improvement next year, and then maybe you could just touch on what might need to happen for that to materialize?
So we do believe that there's continued opportunity as we continue to operate more and more efficiently through the supply chain, that is probably our biggest opportunity and continuing to gain IMU improvement. At this point, we haven't given any further guidance outside of this fiscal year. If there's anything you want to --?
Yes. I would just say, obviously, I think we're getting more effective at managing our markdowns. I think we're getting more effective at managing our damages. There were a lot of damages associated with the issues that we had with the supply chain last year. Obviously, we had a lot of markdowns associated with the issue we had with the supply chain. And I think the normalization of supply chain provides a lot of opportunities over time, and we have initiatives focused on each of the pieces of gross margin. So while we haven't given guidance, I think internally, the combination of IMU, markdowns, damages, further improvement in supply chain are all opportunities for us.
Jeffrey Van Sinderen
Okay, good. And you had a really good strong comp performance in your relocated stores. Maybe you can just touch on the recent comp trend at your legacy or non-relocated stores? And I guess, should we expect that to improve for the remainder of this year? I guess, just trying to get a sense of maybe what sort of comp level you think is feasible for the legacy stores to run for the foreseeable future, now that you have better merchandise content, better flow, better inventory management, etcetera, hopefully driving better turns at those stores and maybe speak, I guess, how you get to driving those stores to a stronger comp?
Sure. So when we look at the comp for the quarter. You know, as we disclosed the relocated stores did very, very well, right? A 410 basis point improvement. There's kind of three buckets of our stores; relocated stores, our legacy-based stores, and then the stores that relocated two years plus. And so the base stores, we look inside, there's a pretty wide disparity of the performance of those stores. Those top -- kind of top third stores did very, very well or inventoried very well. And then conversely, the bottom third, not as well and the inventory against the performance wasn't as great.
And then you have another section or the other bucket, which were the stores that have been relocated 12 months or more. And those stores performed negatively to the comp, which is typical for us, because we're anniversarying the glow period, which was a huge comp in that first year. And so we think there's opportunity with that as well some of the base stores.
Yes, Jeff. I would add to that. I mean, obviously, to start out and talk about the cohort for this quarter perform extremely well. They did have somewhat larger square footage growth than we've had in past quarters. I think their growth averaged about kind of mid-50%.
At the same time, I think, part of the reason they're performing well, is we've just been at this for a while. We have a large pool of opportunities, and we're highly selective and we frankly, have just figured out what works. And I think that, there's a lot to be said for that, and I think -- I'm personally confident that you're going to continue to see really exciting relocation opportunities over the next few years, as this pool has just grown, and therefore, we can be really choosy.
The second piece that Stacie talked about are kind of the mew relos that are in the second year, and again, they have a very strong glow. We -- obviously, the first year they're heavily inventoried and then we bring that inventory down a little bit, and that affects their sales. So those contributed about a negative 100 basis points in the quarter.
And then the base was about flat, and I would say within the base, there's a real disparity in performance and that's something we're heavily focused on, and that disparity performance largely correlates to inventory level. So we think that there's a big opportunity for us to get better, and how we allocate and how we inventory those stores. And frankly, some of those issues relate to what happened last year. So remember that we had supply chain issues last year, and therefore, we allocate back to regular price sales. So if the store was down in inventories last year. It may not have had the right price sales to get the correct allocations. So as you can imagine, when you have issues like that, there's somewhat of a hangover and to some extent, we're still working through that.
But I think internally, there's a lot of optimism around that because, we obviously, can see that there's a significant percentage of that base that's really strong. And we know what the recipe is and the question is getting the right inventory levels and the right assortment base, to mimic the same results.
And just I think you asked -- I think the second question there was longer term kind of what are you doing? Obviously, we believe freshness is key to the stores. We're very focused on improving the turn. I am enthusiastic about the fact that this quarter, we had the highest percentage of inventory that's less than three months old than we've had in the stores in the last couple of years. We think a big part of getting those stores to perform is, very consistent flow of fresh inventory.
We're enthusiastic about the buys that we're making. We're enthusiastic about the price points in the brands, and then, I would say, we're really kicking in on the marketing effort. As you know, we've been spending a lot of time collecting e-mails at the store level, we're just about to kickoff, literally in the early next couple of weeks, a bunch of digital campaigns as well as some holiday radio, etcetera.
So I really think that telling the message and getting a new group of customers to experience our stores is a big part of the growth there. And everything that we're doing is about how we drive more volume through our store base. We know that for this model to really work and become as profitable as we think it can be, it's all about growing volume through our existing store base. So all of our initiatives are focused on that.
Jeffrey Van Sinderen
Okay, that's helpful. And then one more, if I could. Just maybe any sense you could give us on -- I think you said roughly 25% on the store base coming up for lease renewal this year -- this fiscal year. Any sense you can give us there of what bucket in terms of performance that group falls in? Is there any skewing towards under performers, skewing towards better performers or is it just kind of mix and nothing really to take away?
I would say that there's not a lot to take away. However, within that -- what's coming up for lease, there's a percentage of stores that we had a short-term renewal on, for various reasons. So I would say that, our posture in real estate has changed a little bit. Anyone who spends time driving around the country will see that there are a lot of vacancies out there, and I think that we are starting to press a lot harder on stores where the co-tenancy has changed, and perhaps, the center doesn't look quite what it looked like a couple of years ago, and we're going to be pretty aggressive about seeking rent reductions where we think it's appropriate.
So generally speaking, as stores come up, it tends to be a fairly consistent representation of the whole chain. But there's a little bit of a difference, because a percentage of those stores that are coming up are stores that -- where we just did a short-term relo, because we didn't have the opportunity that we wanted to relocate, say a year ago or two years ago.
Jeffrey Van Sinderen
Okay, good to hear. That's fine. We can take the rest offline. Thanks for taking my questions, and best of luck for holiday.
Thanks Jeff. Appreciate it.
Thanks Jeff. Appreciate it.
[Operator Instructions] Our next question comes from Alex Silverman with AWM Investments. Your line is open.
Hey, good morning.
Just want to confirm, you guys said that you thought you could be cash flow breakeven after CapEx, based on growth and EBITDA?
So what we've been saying is that we're going to live within our means. And so, we're going to fund our capital expenditure initiatives through a combination of EBITDA and working capital improvement.
Okay. And to be fair, it doesn't sound like there's a whole lot of working capital improvement left to do in the back half of the year?
Yes, I think that's fair. I mean, the big opportunity obviously was, we were -- for the last couple of years, the practice here has been to hold a lot of inventory at the DC. And I think one of the things that we're very proud of internally is, we're operating on a first-in or first-out basis, and we've dramatically reduced the amount of inventory that's held at the distribution centers.
And I think this quarter one of the large accomplishments is that our distribution centers are really operating as a distribution center should be, which is, the product arrives, it's processed and it goes out of the door; instead of it being warehoused. So I think your statement is a correct one. I don't think there is significant additional opportunity to reduce working capital.
We saw a lot of that improvement starting in Q4 with our -- with the DCs. So we'd already kind of captured some of it, beginning at that point.
Okay. And then one last question. Would you guys think strategically about taking over a large number of spaces, should a tenant in one of -- in some of these strip centers shut down?
I would say that, it is -- in the past it's happened where we have taken over a bunch of hasting space or a split sports authority or any number of other large tenants that went out. But it really happens on a one-off basis. It's not -- we frankly have looked at portfolios from time to time, but it's never something that we've acted upon. Though, there have been years where I would say, a handful or more of our relocations happened to have been with the same former tenant.
Got it. Great. Thank you very much guys.
Thank you. Your next question comes from Ethan Sandler with SG Capital. Your line is open.
Hi guys. Thanks for taking the call. Nice job. Couple of things, SG&A, how should we be thinking about that as far as dollars? First the $89 million, and also as a percentage of sales over time?
So we have said that we expect to leverage, and I see some leverage this year, as we move through the remainder of the year. We haven't really given any guidance outside of this year. But certainly, as we continue to operate more cost effectively through our supply chain, as well as leveraging the top line performance, it's something we're very focused on. We went through the exercise in the latter part of last fiscal year, to take out some expenses and we started to see the impact of that this quarter; got masked from some other things. On a pure dollar basis, we began to see the benefit of that this quarter.
Okay. And of the 25% of the leases that are up in fiscal 2018, how many were up in fiscal 2017, as a percentage?
Probably not. Vastly different analogy.
Yes, a little -- it's a little bit different than that. The number grows a little bit each year, as we exercise short-term renewals. But we can get back to you with the number offline. But I don't think it's -- I think it's a little bit less than that.
Okay. And I guess, I'm wondering it -- 400 basis point benefit to comps that the relocated stores had in the quarter, is that reasonable to think about that for the year? Or based on that percentage of leases up and the composition of them, do you think that, that could be higher or likely lower?
I mean, look, I think it was a strong quarter. I think that the other factor in there is that -- remember that, that's a subset of stores and that subset of stores may not geographically mirror the rest of the chain. So you might have had a few fewer stores in that subset than that were affected by the weather.
So it's going to bounce around. It was obviously strong performance. But I think that, that's exceptionally strong performance and I'd love to see it similar to that. But I wouldn't necessarily expect it.
Got it. And then just the opportunity to press harder on rent reductions. Do you think that'll be noticeable or can you just talk -- try to put some numbers around that? Or where we might see that or when we might start to see that in the P&L?
That's early days. I think, ultimately, it will be a meaningful opportunity, but it's not even -- those are early conversations, where we've just notified some landlords that we don't intend to review and we'll see where those conversations go. And when we have something further to talk about it, we'll share it. We've been through a very long expansion cycle, and you know, as you can see in the world of commercial real estate, I suspect that there's going to be plenty of opportunity to come. But we're just too early to speak to it.
Got it. Okay, great. Thanks guys.
And I'm showing no further questions. I would now like to turn the call back to Steve Becker for any further comments.
Thank you. Let me wrap up and just reiterate our enthusiasm for Tuesday Morning. We're well positioned to execute against our goals for the year. We're ready for the all-important holiday selling season from a marketing merchandising and supply chain standpoint, and I want to thank all of our teams for their tireless dedication to executing against our key initiatives. Thank you, and have a great day.
Thanks for all of your participation in today's conference. This concludes today's program, you may all disconnect. Have a great day.