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A New Day May Be Dawning At Tuesday Morning

|Includes: Tuesday Morning Corp. (TUES)

THIS IS A REPRINT OF A POST THAT INITIALLY APPEARED ON FORBES.COM

Tuesday Morning ($TUES) is a struggling firm that appeared on the contrarian-oriented "Crazy Retail" screen I presented on May 20th. This merchant has problems, which is why it made the screen in the first place; I was looking for messed-up operators reasoning that with retailing facing such dramatic sector-wide pressure, I prefer companies run by those who are more likely to be desperate and hungry rather than proud of accomplishments logged in the good-old but likely gone forever days. Some firms on my screen will likely stay bad. But I think $TUES can have a better tomorrow.

A Great Concept

I have no interest in betting on plain-vanilla brick-and-mortar retailing. E-commerce, already huge, is only going to get more dominant as an entire generation of infants, toddlers and the not-yet-conceived mature never having known shopping without internet. For traditional stores to make it going forward, there will have to be bona fide reasons, above and beyond just-plain buying things, to get customers to let their computers and devices go into sleep mode.

$TUES isn't afraid of this new world. In fact, it doubled down on it in 2013 by terminating its on-line selling and going all-brick-all-mortar-all-the-time. That takes stupidity or guts and looking at what this outfit does, I'm betting on guts.

The quick-bullet-point description of $TUES is the selling of closeout upscale merchandise.

No big deal. We've seen outlet stores. We know what they are. But to get a sense of this firm's stature, consider its 1974 origin, which tracers back to the Tuesday morning (literally) garage sales staged by Lloyd Ross in a rented Dallas warehouse. The typical garage sale aims to blow out junk accumulated by a household over years or generations, usually in anticipation of moving or a general housecleaning. Ross' sales were different. He bought and resold upscale items (think of him as an eBay merchant before the advent of eBay).

These garage sales with a difference became popular and attracted a loyal following. It was a thing to do. It was fun. It was an event. It was a treasure hunt. By 1979, Ross ditched the warehouse in favor of his first permanent store and in 1984 he took his fledgling company public. But even then, it wasn't just another retailer. The event-oriented culture remained dominant and the stores were completely closed for meaningful non-peak portions of the year. Open periods were seen as events.

Today, it's more corporate in many respects. There are a lot more stores and they are now open full time. But the treasure hunt remains at the concept's core. Going shopping at $TUES is not a necessity. It's not an errand. It's an outing, an adventure, a form of entertainment. Having a fine dinner is entertaining. Seeing a movie is entertaining. And as QVC, et. al, and Groupon ($GRPN) remind the world, getting a deal on something cool is entertaining. You don't absolutely positively have to turn off your device and get out of the house to find deals. But as when we go to a increasingly plush multiplex preferably with reclining seats and maybe even 3D, some things are better outside the home. And getting out, in and of itself, never loses its appeal. That belief - the joys of getting the heck out of the house even when you don't absolutely positively have to - is what allowed $TUES to ditch its e-commerce

So $TUES checks an important contrarian-retail box for me; a concept that retains its legs even now and likely beyond. The inventory policy is upscale goods and broad-and-shallow stocking, which means you can't count on good stuff being there forever or being replenished when sold out so if you want it, log off of Amazon.com or even eBay.com, get off your couch or deckchair, and get to the store.

Comparing $TUES to other deal-type firms, QVC et. al give you a treasure hunt, but keep you sofa-bound, and the $TUES deal don't put you into verbal wrestling matches with personnel at places you don't really want to patronize who act as if they were hoping buyers of those Groupons, people who'll never really become recurring customers, would have lost them without redeeming. So let's face it: When it comes to the joy of the deal, $TUES is a good concept.

Execution: Do It Or Else

So, you may wonder, why is a retailer with a compelling concept on a contrarian screen rather than one based on momentum? It's the E-word, Execution.

Treasure hunts won't produce profits if the right merchandise isn't in the right aisles in the right stores at the right times and available at the right prices and backed by the right kind of customer service. $TUES had gotten sloppy at a lot of this and its numbers, not surprisingly, suffered.

Bad execution may well have wasted this company's potential to the point of corporate oblivion, but there's been something of a revolution at the top. Skipping all the gory details, suffice it to say that the C.E.O. as of September 2015 is Stephen Becker, whose Becker Drapkin hedge fund acquired a 6.6% stake in $TUES and took control of the Board back in June 2012.

Ding, ding, ding!

That's an alarm ringing in my head: As an observer of Sears ($SHLD) and Eddie Lampert, its hedge-fund-manager-turned-self-proclaimed-retailing-savior, I'm unimpressed with the imbalance between bold rhetoric and rotten results. Is hedge-fund manager really something I anyone would want to see on the resume of a retail-company CEO? But in fairness to Becker, it's not as if he was in a hurry to occupy the corner office on day one: He brought in others including a more experienced hand ran $TUES for two years until his retirement. And in the latest conference call, Becker made much of his recent fleshing out of his senior management team with people who do have the right resumes, he let them talk on the call, and what they said made sense.

A huge priority at present is getting a new Phoenix distribution center up and running. As of year ago, it was behind schedule and over budget, but now it's looking on track for opening in the first half of fiscal 2017. Inventory systems are being overhauled. The company's store portfolio is being refined with some closures, some new openings and some overhauls. Layouts within stores are being overhauled with discounted items in the back and seasonal merchandise up front. None of these things are earth shattering. In fact, for well-run retailers, this is standard stuff. It's not for nothing that Becker muscled his way into corporate governance and fired the then-incumbent CEO.

The Numbers

After some rough spells before and during the time of governance-revolt, sales growth has been on a modest up-trend. The company had a huge comp-store sales gain in the last quarter but that's due to some unusual issues that won't recur. And watch out for upcoming expenses relating to finishing the job at the Phoenix distribution center. So we do have to keep our near-term earnings expectations under control. More important, the company seems to be pointed generally in the right direction. It's currently profitable on a Net income basis and on the basis of Cash from Operations. It's debt free.

While the numbers are far short of what it would take for $TUES to be cited in security-analysis textbooks as an example of great fundamentals, it's also far, far above what might be as an example of corporate distress. In other words, $TUES has the breathing room it needs to get its operation into proper shape.

The stock's P/E is inflated by factors not representative of underlying economic health, the sort of earnings figure Graham and Dodd say should not be used in an analysis. So let's skip that.

Price to Sales is just about equal to the industry median. That can be good or bad depending on our expectations for sales growth and margins. The gross margin is already decent (though I'm sure $TUES, like every other retailer on this and all other planets, would like to think it can get higher). Operating margin, the one more heavily influenced by fixed costs, is above trough levels but still not where it needs to be. It should improve as sales grow and as the operational overhaul efforts are completed and take hold. Sales growth, meanwhile, should be at least at or above the industry norm as the new and improved $TUES gets going.

Obviously, since I'm justifying the price/sales ratio on the basis of expectations rather than accomplished reality, I can't suggest the stock is a good value per se. Let's say it's one that must grow into and beyond its current valuation. I think it has a decent chance of doing that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.