Tuesday Morning: Whether To Buy The Cannons
Summary
- As of December 31, 2019, Tuesday Morning had $1 million of net cash on its balance sheet.
- In early February, Delta Value Group, led by Ken Traub, filed a Schedule 13D, disclosing an 8% stake, with a cost basis of $1.53.
- Today, the company filed an awkward 8-K, disclosing language that they may not survive the fall out from Covid-19 and that they drew down their entire revolver ($91 million).
- At under $0.50 per share, I think you buy the panic, as this doesn't add up.
Although, I had every intention of taking the day off from writing, as I have been burning up my keyboard, over the past three few weeks, in the wee hours of the morning. I usually wake up around 3am or 4am, and do my best writing and thinking then. Today, I actually slept in, and woke up at 4am, but decided instead to watch the season one episodes of the great show, Cheers, on Netflix, and then do my three mile run in the pouring rain (I live in the burbs of Boston). As an aside, the rain was invigorating, as nothing stirs the soul like the majestic beauty of the woods and nature, while you are getting soaked so badly that your sneakers need a crew to bail buckets of water from them, to prevent the ship from sinking. Anyway, I am not writing to bore you about my run, instead, I have been called to duty, as a real time, and interesting situation has arisen, in nano-cap land. Because nano-cap land is the Wild West, these situations are more exciting.
Therefore, I sprang into action, changed into my superman suit, in a nearby phone booth, and I write to discuss Tuesday Morning (TUES).
Tuesday Morning is an off price retailer based on Dallas, TX. This is a turnaround that never turned. The business has muddled along, and every now and again, they put together a good quarter. However, management has woefully underachieved and the management team has been mostly sizzle, and frankly, we need to send out a search party for the steak.
For your reference, I have written up Tuesday Morning, way back on September 5, 2018. Readers that want context, and the back story, can quickly get up to speed from that piece.
Fast forward to early February 2020, when Tuesday Morning posted their Q2 2020 financial results. They were so-so, but please note that as of December 31, 2019, the company's balance sheet had $4.9 million of cash and only $3.6 million drawn on its revolver.
If you read TUES' 10-Q (see page 12), we learn that the company had a five year senior secured revolving credit facility that matures on January 29, 2024. Per the 10-Q: they had availability of $91.4 million, net of the $3.6 million outstanding and $8.8 million reserved for pledges, in the form of LCs.
At December 31, 2019, we had $3.6 million outstanding under the Revolving Credit Facility, $8.8 million of outstanding letters of credit and availability of $91.4 million.
On February 13, 2020, Delta Value Group Investment Partnership, L.P., managed by Ken Traub, filed a Schedule 13D, where he disclosed an 8% stake. He disclosed an average purchase price of $1.53 per share. It was also reported that Mr. Traub was considering making a push for the business to be sold.
Timing is everything and Covid-19 was brewing well offshore. A few week later, that storm system gathered into a CAT 5, and it landed on shore, in many major U.S. cities.
On March 26th, it was reported that Tuesday Morning was closing its stores and the company elected to draw down $55 million on its revolver.
Besides the terrible headlines about deaths, closed stores, and 30 million jobless claims, over the past five weeks, we didn't get an update from Tuesday Morning.
Lo and behold, this morning, the company filed an awkwardly worded 8-K (see here), that said the company had $91 million drawn on its revolver.
More alarmingly and this reads like a red herring, they said without additional financing, it is unclear if the company could survive.
Although the Company is gradually reopening stores where allowed, the Company needs additional time to prepare and review the Quarterly Report due to circumstances related to COVID-19, including the temporary shutdown of all of the Company's stores and related disruptions to the Company's business and operations, and the uncertainty as to the extent and duration of the disruption caused by COVID-19. In response to COVID-19, the Company has furloughed the majority of its employees, made targeted reductions in discretionary operating expenses, and eliminated substantially all capital expenditures.
As of March 31, 2020, the Company had approximately $91 million outstanding under its line of credit. The Company is also actively exploring financing options. Without appropriate financing it remains unclear whether the Company has or can obtain sufficient liquidity to withstand the COVID-19 disruptions.
The market saw this and panicked. Investors got nervous and ran for the exit.
The stock is currently down 35% in heavy trading, with north of 4.7 million shares changing hands.
So, the sixty four thousand dollar question investors need to assess is:
Is this a buying opportunity or is this the kiss of death?
For reference, during Q3 2019, Tuesday Morning generated $211 million of revenue. On an annualized basis, TUES reported $1 billion of annual revenue.
So although, I get it that the company is experiencing incredible disruption due to forced store closures, and associated costs. The company hasn't lost $91 million. Moreover, this is an off-price retailer that doesn't have perishable inventory. Yes, there is seasonality to its business due to weather, but we aren't talking about a restaurant forced to throw out one months' worth of rotted food due to closures.
Moreover, the company owns a very valuable Dallas Distribution Center.
Per the company's 10-K, they own valuable real estate in Dallas.
We own a 104,675 square foot building which houses our corporate office in Dallas, Texas. Our Dallas distribution center utilizes approximately 1.2 million square feet, all of which is owned. During fiscal 2015, we executed a lease for approximately 0.6 million square feet related to our additional distribution center in Phoenix, Arizona which started operations in the fourth quarter of fiscal 2016.
We lease from unaffiliated third parties four parcels of land of approximately 538,250 square feet, for parking and trailer storage.
Now I get it that this real estate is secured against the revolver, but they also own inventory that is pledged against that revolver.
Could the company have lost $5 million, or even $10 million to pay employees and other expense before they furloughed them? Perhaps, but not $91 million.
So I find it remarkable and utterly irresponsible that this management team issued this vague and under handed 8-K.
Given Ken Traub's 8% stake and involvement, there is no way that he won't fight this tooth and nail. Moreover, I would argue that he might push for an outright sale. The current management has proven out of their depth (at best) and borderline incompetent (at worst).
As for me, I am buying the dip. This is a real world example of the difficult decision you have to make if want to traverse the rugged terrain, as a deep value investor. If anyone tells you that it is easy, they haven't entered the arena. It is all about making hard decision and weighing different outcomes, in the heat of the battle, and with limited information. You have to synthesize and think on your toes. In this situation, when I play back the series of event, like a poker player, reviewing the series of cards, and players' bets, I think management is either covering their behinds (from a legal standpoint) or playing hardball. Either way, the stock is compelling sub $0.50 per share. And again, Mr. Traub may be just the man to force this management team to exit stage left.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are long TUES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (114)
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I have been hot lately (AR, RRC, RTW, etc.). Haven't got nix up on something in a few weeks : )
HQ is worth $10M P/T
Distribution center is worth $50M P/T (2018 VIC article)
Operating lease assets are worth 25 percent of their listed amount, and the liability side is 75 percent (allowance for some negotiation between landlords and tenant). The weighted average remaining lease is 6.2 years, so TUES has limited flexibility here.
Furniture, fixtures, leasehold improvements, machinery and equipment, and computer software is worth 35 percent of their depreciated amounts (6/30/19 10-K)
Net operating losses are $95M, but I assume worthless in a BKAt $0.44, this is the same as paying $21M for the whole company.But since adjusted net assets are worth $(45)M in a liquidation, there's no balance sheet margin of safety here. You're putting all of your faith in management's ability to revitalize the income statement.However, TUES has suffered three consecutive fiscal years' worth of losses. The 3-year average ending 6/30/19 is $(22)M. Free cash flow during this period was also negative.Now, we have Covid-19, so the outlook is even bleaker. If you can't make money during boom times, how will you make money in the next few years. Almost overnight, 30 million Americans have lost their jobs. If in the next 12 months revenue declines 10 percent from FY19, and the gross profit margin and SG&A is the same, then EBIT is $(46)M.Bottom line: You pay $21M to buy every share of TUES, your balance sheet is worth $(45)M in a liquidation, and you may lose $(46)M in the next 12 months. This seems like a value trap.
