Q2 2020 Earnings Call
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I'd like to hand, the conference over to your Speaker today, 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 second quarter fiscal 2020 earnings Conference call.
Joining me on the call today's Chief Executive Officer, Steven Becker implement cat.
Acting chief merchant.
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 Tuesday morning Dot Com.
Before we begin today's discussion I would like to make you're all aware. There's some of the information presented today may contain forward looking statements and involve risks and uncertainties that could cause actual results may differ materially from those implied in forward looking statement.
Information regarding the company's risk factors was included in our press release and is also included in our filings with the FCC.
Any forward looking statements made during this call speak only as of today this call.
Today's presentation will also include certain non-GAAP financial measures, including either EBITDA and adjusted EBITDA.
Conciliation of the non cat non-GAAP financial measures used in his presentation. The most directly comparable GAAP financial measures can be found any investor relations section of the Tuesday morning website at Tuesday morning, Dotcom, I'll now turn call over to see.
Good morning, and thank you everyone for joining us for a second quarter call.
Stinks you mentioned, we're pleased to have our new acting chief merchant Palmetto, joining us on the call today.
To begin with a review of our second quarter results and then Paul will discuss the work has been doing with the merchant teams and the progress there making against our initiatives as well some additional observations regarding the holiday season.
It's just been well reported the holiday period was challenging for retail because everyone contended with shorten calendar and the resulting heightened promotional cadence it drove despite the tough environment, we deliver transaction growth of almost 1% for the quarter. We've continued to see positive results from the work we've done with our real estate portfolio or digital marketing efforts and our product assortment this transaction increase.
However, did not fully offset the decline in basket, we experienced which resulted in a decrease in total comp store sales of 3% for the second quarter.
Our seasonal performance, especially our holiday product in assortment did not perform to our expectations and impacted both our topline and pressured our gross margin results as Mark Downs increased year over year, we've identified opportunity to improve our seasonal assortment, which Paul will touch on shortly importantly, we're pleased to end the December quarter with our store level inventory balances down a proxy.
Only 10% versus last year, which improves our flexibility and ability to chase, we're well positioned as we head into spring.
As we discussed on our last call we've made tremendous progress in our merchant organization over the past six months.
We've added over 10 experienced off price merchants repositioned a number roles within our team as well as examine how we resource the team all with the goal and giving our merchants the resources they need to be more effective in the market.
We're focused on being liquid and opportunistic in a very exciting environment for offerings goods, we're committed to improving our turn in freshness. In early January we began the rollout of our new markdown system, which allows us to begin taking performance based markdowns restore scanners. This is an exciting step forward and we expected to help drive more profitable business anymore compelling shopping experience.
The percentage of Closeouts on a receipt flow has grown meaningfully.
Did additional new vendor relationships and we believe that our values have improved our new merchant leadership has positioned us to chase, we continue to grow pack and hold opportunistically and our teams continue to be in the market much more than in the past in short. We believe we are on our way now would be good time for me to pass the call over to fall to discuss the work in more detail fall.
Thank you Steve I'm pleased to be here with you. This morning, I'm excited to be a part of the Tuesday morning team.
As Steve mentioned in prior calls I began consulting with Tuesday morning, a few days a month starting back in April this year of last year.
I like to spend a moment on that if I may.
Initially the role is to advise and recommend to the merchandise team things that would help them bring them back to the heritage of being a world class off price retailers.
In September my role was expanded increase both my scope and time and we started to evaluate the planning process and structure compared to other models I've been involved with in the off price channel.
In December Stephen I agree to expand the role even further to a more of an execution rule and I'm now committed to Tuesday morning on a full time basis as a leader of the merchandising planning and allocation team.
Additionally, I've made a significant personal investment in Tuesday morning common stock.
I've been down this path a few times before in my career and I'm confident that with the people systems and processes that we are putting in place we're setting Tuesday morning up for success in the off price channel.
Over the last several months, we've begun to make a lot of product lot of progress hiring three new off price merchant leaders, all with a tremendous amount of experience from the major off price retailers. We've also hired seven new buyers from the off for up from off price as well.
These talented additions join a strong existing Tuesday morning team that has great company as well as industry knowledge.
The divisional merchandise managers have initiated many important changes regarding on how we approach the vendor community. How we spent time in the market how often we competitively shop.
We've developed a new merchandising vision and strategy as well as helping to identify business opportunities at Tuesday morning relative to their experience without the retails in this channel.
The team has been able to open up more than 300, new vendor partnerships in the last six months as well as create strategies with underdeveloped resources that have a tremendous amount of growth opportunity.
Our strategy as a merchant team has to be riveted on value.
Which is to us not just price, but also desirability quality from great brands all delivered at the right time.
The focus in the planting area is to be fluid and flexible in order to take advantage of market conditions.
Our mission is to build smart thoughtful plans and then operate with flexibility at the department and category level based on being able to find the right values for the Tuesday morning customer.
With bill processes and put them in place that will ensure we stay liquid and not just fill open to buy as evidenced by our quarter ending inventory position, which we're very pleased with.
This will allow us to take advantage of the bountiful opportunities that exist in the marketplace today.
We are committed to reducing that the quantity of our inventory improving the freshness and increasing our turns this will be done by improving the value as much in prior as well as allocating our resources to training businesses and being more diligent and shifting dollars away from underperforming categories.
On the allocation front.
We will be utilizing pack and hold and flow and hold more aggressively and strategically.
Bakken hold will allow us to take advantage of great deals at great values, while making sure we maintain scarcity at the store level.
Flowing oil will allow us to reduce the depth of style at store level to also create more scarcity and a sense of urgency for the customer which will allow us to improve our turns and frequency of shop.
We continued to grow our transactions and as we build brands and great values, we expect the basket to grow as well.
Before I turn it back to Steve I do want to weigh in on our holiday performance. Many of these initiatives discussed are in their infancy.
I am confident given my experience in the channel the Tuesday morning will be well positioned to capitalize on the growth opportunities in this channel once these initiatives take root.
We have done a lot of analysis on our performance and spent a lot of time in our stores as well as those of the competition.
We have identified key business drivers for next holiday that will dramatically change, how we compete and what we offer a valued customer.
We ended the quarter in a lean inventory position with significant open to buy an ample flexibility. This will allow us to be nimble and make real time decisions to capitalize on the rapidly changing opportunities in the market as well as react to the ever changing needs and wants of our customer and chase Accordingly I.
I am excited by the many changes throughout the organization and I'm looking forward to see and the impact of these initiatives on our team and on our customer.
With that ill now hand, it back to Steve Thanks, Paul.
Before I turn the call over to Stacy to review our financial results in more detail I want to take a moment to update you on latest developments with our real estate and distribution strategy.
All of our noncore DC real estate is progressing and will provide an update as soon as practical our DC retrofit work is also coming along with the planning stage largely complete and the initial physical work beginning in the DC.
Plants on track, we remain focused on ensuring we have capacity to support our merchandising priorities. Additionally, we continue to successfully renegotiate leases and Opportunistically close stores.
This was the first quarter in many years, where rent expense declined year over year. We're pleased with the progress we're making on the lease renegotiation front and with 175 leases coming due over the next 12 months, we expect to continue to make headway, reducing our real estate expenses.
As we outlined in our press release were undergoing a transformation transformational period led by Paul or new acting head of merchandising and a seasoned off price veteran as she discussed we're in the process of executing changes across the merchant organization from talent to buying processes and procedures, adding new brands and expanding vendor relationships.
All this will enable us to operate as a true up price are and will drive our success going forward as we execute.
Prior guidance with that said, we've continued to drive positive transaction growth heading into the second half of our fiscal year and expect adjusted EBITDA to be positive for the full fiscal year, although down to last year.
We remain focused on improving our inventory turns and continuing to being a liquid position to be nimble to react and chase opportunistically.
In summary, while our financial performance was falling below expectations for the first half of the year, we're making progress in advancing initiatives to transform Tuesday morning, and returned the company to its off price roots in the past 12 months, we've completely reorganize the merchant team, we pause leadership haven't still more offerings disciplines throughout the organization at the same time, we continue to make headway, reducing our costs.
Whether it be in real estate or in the work we're doing on the distribution retrofit.
While transformation such as ours take time, we're confident in the opportunity ahead for Tuesday morning, and believe we're taking the right steps for future growth now, let me turn the call over to Stacy.
Steve net sales were $324.4 million down 4.1 person from Q2 last year in comp sales decreased 3% on top of last year's positive 1.9% comp performance.
We ended the quarter with 705 stores, which is a reduction of 15 stores from last year.
Transactions increased 2.7%, while average ticket decreased 3.7%.
Gross profit was $105.8 million versus 116.7 million last year gross margin decreased 190 basis points to 32.6% compared to last year's gross margin of 35 years.
The gross margin rate decline was primarily driven by higher markdowns year over year due to the challenging performance of our seasonal assortment.
Performance base.
Let's see more strategic and how we execute markdowns, we believe overtime, how the positive impact on our sales and gross margin.
Additionally, as expected, although our supply chain expenses were lower on an incurred basis. This quarter on a recognized basis they were higher over the prior year period.
SGN expenses were 94.7 million for the second quarter compared to last years.
Hundred point 4 million.
As a percentage of net sales SGN, a leveraged 50 basis points to 29.2% compared to 29.7% last year.
The improvement in FCD was driven primarily by a reduction in incentive compensation and retention costs as well as lower marketing spend.
These decreases were partially offset by an increase in store labor.
I had mentioned last quarter that as a result of both the net impact of the actions we have taken with opening and closing stores and importantly, the positive rent renegotiations that our rent expense was flattening out year over year.
As Steve mentioned I'm pleased to say that in Q2 rent expense decline year over year, and we would expect that trend to continue.
Operating profit for the quarter was 11.1 million compared to operating profit of 16.3 million in the second quarter of last year.
We reported net income of 10.9 million or 24 cents per share compared to the second quarter last year. When we reported net income of 16 million or 35 cents per share.
Lastly, EBITDA was 17.7 million compared to 23.3 million last year.
And adjusted EBITDA was $18.5 million compared to 24.4 million in the second quarter last year.
Our year to date performance highlights please refer to this mornings press release.
Turning now to the balance sheet.
Cash and cash equivalents for 4.9 million at the ended the quarter compared to 6.1 million at the end of the second quarter of last year I.
Our total liquidity was 96 million, which includes approximately 91 million available on our revolver.
As a corner in we had 3.6 million in borrowings outstanding under our line of credit compared to 5 million last year.
We ended the quarter with our inventory in good position at 204 million, which is a decrease of 10% from a year ago and our overall inventory turns were flat compared to last years 2.7 turn.
For the second quarter, we invested 3.4 million of Capex on a net basis.
For the year, we now expect total capex to be approximately 23 to 26 million with the year over year increase related to the retrofit of or Dallas, DC as well as an increase in investments and information technology.
Partially offset by lower spend on stores.
For the second half of the fiscal year. We also expect opened two new stores relocate five stores and closed 18 stores, bringing our final store count at the into fiscal 2020 to 689.
I'll now turn the call back over to Steve for concluding remarks.
Thank you Stacy.
Before we open the call the questions I would like to take a moment to thank all of our teams for their hard work. We're fortunate to have a tremendously dedicated team of professionals to Tuesday morning, We're very focused on returning this company to its off price roots. Many of our initiatives are in their early stages. We call now on board on full time basis and all the steps we're taking on the merchandising front, we believe we're positioning ourselves.
Well.
With that we'll turn the call over to questions operator.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound Keith.
Please standby will be compiled acuity roster.
And our first question comes from Jeff Van Sinderen with B. Riley. Please proceed with your question.
Yeah.
Hi, Good morning, everyone. Steve question for you just omni.
The seasonal merchandise that didn't work are there specific call outs, the or was it fairly broad.
All you want to handle that.
Yes, good morning, Jeff.
It was fairly brought in a sense that the values just weren't there on the seasonal product.
Really the pricing was a little bit off and honestly just the quality wasn't where we expected it to be.
The good news is we are getting ahead of it for next year, we have a new team in place and feel that that will now be an opportunity for next year.
Yeah, I would just add to that we've already done a significant amount of pack and hold for next season, and I think that as our seasonal assortments have more pack and hold and them, they're obviously going to have better values to some extent you see that in the spring of this year and you'll definitely each season going forward, you're going to see more of that which is really a big opportunity for us that we weren't taking advantage of in the past.
Okay, and Paul by the way I, just want to say welcome to the role of CMO.
And come up a couple of questions around that.
I know you talked about some things in your prepared comments and Steve just mentioned again above the you both mentioned I think both.
The merchant team.
Has been upgraded buyers upgraded.
We have a lot more folks there with with true off price backgrounds could you go more into what you feel are the most important things you've accomplished so far at Tuesday, and then I've a follow up to that.
Sure.
Thanks for the congratulations Jeff I would say that it's important that we brought in additional town from the outside but I would also state that there's lot of talented people that existed in this building.
And I think really the things that we've tried to accomplish is really get them back to what they did well in the past, which is really be an off price retailers in some of those things that we've accomplished so far although in the early innings is really changed the process of the way they approach everything right. So it's it's the workload. It's the the time in the March.
Good it's being in stores being in competition, and and really trying to get them from a work simplification operational things just out in the market more in front of the vendor community more.
Okay, and then sort of as a follow up to some other things you just touched on for holiday next year more pack and hold that you've already done for next year.
Can you speak more about the major merchandising moves you're targeting maybe touch on on those within the context of the opportunities you see for Tuesday morning, how your tackling those opportunities and any timeframe you can give us associated with those just trying to get a sense of how you think about the because you think the business can be run differently.
Yeah, I mean, I think overall the focus really is going to be on value and we're going to be reverted to that value and Jeff just to be clear values not price only it's for us, it's having better brands in the mix better quality.
Desirability of the product in timing. So all those things is it's going to be our 100% undivided focus.
The goal then is to open up more vendors, which we've accomplished already we've had a substantial amount well over 300, so far in the last six months, which will give us more leverage in negotiation as well as and most importantly give our customer more choices.
At the same time, we've looked at things relative to the competition both from all of our past experiences, but also just comp shopping and we've identified key areas, where we're very underdeveloped and we're putting additional resources there and those additional resources could mean receipts, but it's also people we're looking at areas in the scope of responsibility and does.
Fighting those on where we feel theres opportunity relative to the competition.
Jeff I would add to that you think about what Paul is focused on inventory has been a big one I mean, we're really very focused on turn in freshness. So when you think about you know as difficult as the second quarter was we ended with 10% lower store inventory than we had last year, which really puts us in a very different position. If you think about where we were this time last year we were.
Much less liquid we are much more bought forward and now we have huge open to buy a lot of liquidity and flexibility and that all speaks to the way you know a traditional off price or would run their model you want to be very liquid in the marketplace and especially in a marketplace like the one we have now I mean, it just continues to be a world where the vendor community needs other resources to move.
Product that they were traditionally moving through other channels that no longer exists in the way they did in the past and Jeff If I may add one more point to that one of the biggest first learnings I had when I came in here was really two things one was the loyalty of this customer Tuesday morning, very loyal customer.
Maybe more importantly are just as importantly, as the support from the vendor community.
Really they really support Tuesday morning important part.
They are their business model and in some cases, it had lapsed relationships that were a while ago.
We are now bring it back and reevaluating and really looking to expand.
So the I think the vendor community has been incredibly supportive.
And Jeff one this is state you one thing I would add to the comments about inventory as we continue to be very focused on that productivity. There's obviously, some working capital efficiencies to begin there and as we move through the balance of this fiscal year. We would we would expect that our balances with continued to be down year over year. So I'm just wanted to add up.
Okay.
Okay. So so we should expect comp inventory down year over year, and hopefully or comp rate.
Actually should be better than the comp inventory right correct.
Not made any comments about guidance in that regard.
Okay and.
And then Paul just.
Turning back to your experience in Tuesday, and I guess kind of how you view Tuesday morning.
Versus competitors, what do you think or the barriers to performing.
With results that are closer to some of the larger competitors out there.
Yes.
I think if I look back and kind of compare it to other experiences that.
In the public arena, our private arena.
Whether.
I look at it we're on a similar path to what I've been on before with other other retailers.
You know again, good strong customer base good vendor support I think really just getting the processes in place.
Which I think we've made great strides over the last few months to get those in place and then executing the playbook.
A lot of people in this in this building know the playbook now, it's just stand riveted and be inpatient to that playbook.
We know what to do and that's what we're we're executing too.
Okay, great. Thanks for that thanks for taking my questions, we'll let someone else jump in.
Thanks, Jeff.
Thank you.
Any further questions at this time I'll now turn the call back to Steven Becker for any further remarks.
Thank you all thank you for joining US today, we look forward to our next quarter conference call.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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