Q2 2022 Tuesday Morning Corp Earnings Call
Greetings and welcome to Tuesday morning.
Q2 fiscal 2022 earnings conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host.
Jennifer Robinson, Chief Financial Officer Tuesday morning.
Over to you.
Good morning, I would like to welcome you to the Tuesday morning, second quarter fiscal 2022 earnings call.
Joining me on the call today is Fred hand, our Chief Executive Officer.
And Marc Katz, our Chief operating officer.
Before we begin todays prepared remarks, I would like to remind you that some of the information presented may contain forward looking statements.
Involve risks and uncertainties.
That could cause actual results to differ materially from those anticipated by these statements.
Information regarding the company's risk factors was included in our press release and in our Form 10-K , and other SEC filings.
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 EBITDA and adjusted EBITDA.
A reconciliation of the non-GAAP financial measures used in this presentation.
The most directly comparable GAAP financial measures may be found in the Investor Relations section of the Tuesday morning website at Tuesday morning Dotcom.
I will now turn the call over to Fred.
Thank you Jennifer good morning, everyone and thank you for joining us for our second quarter fiscal 2022 conference calls.
As noted in our release. This morning, we are pleased with our overall execution and the fact that we were able to achieve positive comparable store sales versus fiscal 2020.
Despite ending with 26% less store inventory.
And being up against 14 promotional events.
My remarks. This morning will focus primarily on the second quarter and the strategic initiatives I discussed on prior calls.
I will then turn the call over to Jennifer who will.
I'll discuss our financial results and outlook in more detail.
First with respect to sales during the second quarter.
Comp sales increase was driven entirely by our merchandising strategy focused on driving higher average unit retail categories.
We began second quarter, which store inventories down 42% versus fiscal 2020.
By delivering fresh receipts to our stores consistently throughout the quarter, we were able to end the season with store inventories down 26%, which was in line with our plan.
In addition, the freshness of our inventories was at all time highs.
We measure this based on the percent of our store inventories that are made up of the current modest receipts.
We believe this was a key contributor to our significant improvement in inventory turnover for the quarter.
Our seasonal merchandize had strong sell through rates with 91% sold through before taking a markdown.
For the first time, we executed a successful gift, giving initiatives, which included special problems.
Neat packaging across families of businesses.
While we were pleased with our first year results.
We have many learnings to be applied for next year.
While we will not develop a habit of talking about monthly sales performance.
Much has been said across the retail sector about sales softness starting in December due to the almost broad areas.
And continuing into January as we lapped last year's stimulus.
We were not immune to this as we were operating in line with our plan through November and started to see softness during December weak too.
It appeared we were coming out of peak on the crowd disruption in January weak too and then various weather related events occurred.
As of now we are projecting mid single digit comp sales growth for the third quarter as compared to fiscal 2021.
Turning next to our stores.
The stores have continued to make great progress on improving execution and simplifying the shopping experience.
From this significant amount of time I spent during the second quarter visiting our stores I was happy with the inventory levels Prada.
Product assortment store presentations and staffing investments that we made during the busiest time of the year.
One thing that continues to impress me is the dedication and quality of our store associates.
It's great to see that our store teams are embracing our transformation.
Telling me that they like having less inventory.
Simplified presentation standards and less task interference.
We have many associates that have been part of the Tuesday morning family for a long time.
And are committed to making their store a great place to shop.
As I mentioned last quarter, we recently rolled out a new customer survey program.
While still early to extrapolate trends the initial feedback has been positive.
And we look forward to receiving more results to provide further insight on ways to continue to improve our shopping experience.
In addition to our focus on four wall execution.
We have begun a thorough review of our real estate footprint.
Approximately 30% of our stores have at lease expiration date in the next 12 months.
We have engaged a third party that focuses on using a comprehensive analytical approach to evaluate our store locations.
Database insight will help ensure we're making the right decisions in either extending existing leases.
Or identifying better real estate within the market for relocation.
This review will also provide our C point strategy for new store growth identifying those locations across the country that provide the best demographics for a successful Tuesday morning location.
Long term I believe the optimal size for Tuesday morning is approximately 10000 square feet gross square feet.
Compared to an average of 12800 that we operate in today.
Is the overwhelming majority of our existing store base as profitable.
We will not necessarily reduce the size of our existing stores.
Instead, we will evaluate our existing base as opportunities allow and focus our long term store growth strategy on 10000 square feet.
As we think to the future growth opportunity for Tuesday morning, and.
It is critical that we improve our supply chain.
This is the final initiative I will discuss today and the one that will take the most time and expertise to develop and execute.
During the second quarter, we engaged a third party who specializes in developing supply chain network strategies to help us identify an optimal distribution network.
This study includes everything from location.
Size and number of distribution centers to the design of the building the coupon strategy to support our entire network and evaluation of startup and ongoing costs for each scenario.
You're reevaluating your one and two distribution Center network.
Determine which would be the best option to support both the growth and storage assumptions through 2028.
This work will incorporate minimizing labor and inbound and outbound transportation costs.
As well as maximizing speed to store.
We expect the initial phase of this project will continue through the third quarter and we look forward to sharing more with you on our next earnings call.
Now before I turn the call over to Jennifer I would like to provide an update on the ongoing supply chain dislocation.
As we mentioned on the prior call. Our initial 2022 plans assumed inbound freight headwinds will begin to improve by the fourth quarter of our fiscal year.
As time has passed given the continued uncertainty we now expect that we will see cost pressures due to the macro supply chain dislocation at least through the 2022 fiscal year.
As Jennifer will review, we have updated our expectations for the remainder of the year given the current impact on our P&L some supply chain headwinds as well as identified cost savings in SG&A, which will partially mitigate the incremental inbound freight costs.
This is the reason why we're still guiding full year adjusted EBITDA to be slightly better than last year.
Despite near term macro headwinds, we also see a lot of opportunity with respect to inventory availability.
As we had hoped to see we've been able to leverage our pack and hold storage locations to take advantage of buying opportunities for highly desirable national brands at great prices as well as late arriving seasonal inventory to be released next year.
We are very confident and inventory availability because the rest of the fiscal year.
And we will continue to focus on the off price merchandising model of purchasing flexibility.
<unk> broad assortments and improvement on inventory turns.
I would now like to turn it over to Jennifer to discuss our financial results.
Thank you Fred and good morning, everyone.
As we previously noted comparability to prior periods it's difficult.
Due to actions the company related to its reorganization under chapter 11.
As well as the impact related to COVID-19.
And the elimination and promotional activity.
Our comparable store sales and inventory specifically.
The second quarter and first six months of fiscal 2020 are the most applicable comparison.
Due to significant impact from COVID-19 that occurred in the first six months.
'twenty one.
The other financial statement line items are compared to the respective periods in fiscal 2020 , one as our store count and associated operational costs have significantly changed since fiscal 2020.
Our store count as of the end of the second quarter and fiscal 2022 with 492 stores.
Paired to 705 stores at the end of the second quarter of 2020.
And 490 stores at the end of the second quarter of fiscal 2021.
Compared to Q2 of 2020.
We delivered comp store sales growth of 1%.
Q2 fiscal 2022.
The comp increase was entirely driven by an increase in AUR.
Which is a direct result of our merchandising strategy previously discussed.
It is important to note that the second quarter 2022 contains no promotional event.
While Q2 2020 contains 14.
We delivered net sales of $251 $4 million.
Impaired to $198 $6 million in Q2 of fiscal 2020 one.
During the second quarter fiscal 2020 to 30, new stores were opened and no stores were closed.
Gross margin was $71 $5 million compared to $60 1 million for the second quarter fiscal 2021.
Gross margin rate in the second quarter of fiscal 2022 declined to 28, 5% compared to 32% in the second quarter of fiscal 2021.
The decrease in gross margin was primarily driven by higher supply chain and transportation costs.
Offset by improved merchandise margins due to lower markdown.
Moving to SG&A as a percentage of net sales.
G&A was 26, 9% compared to 31, 9% in the same period in fiscal 2021.
SG&A was $67 $7 million in Q2, as its called 2022 compared to $63 3 million in the same period in fiscal 2021.
The leverage in SG&A as a percentage itself was primarily related to higher yourself.
Our operating income was $3 $4 million compared to a loss of $4 3 million in Q2 of fiscal 2021 .
Our net income was $1 $9 million or two cents per share for Q2 of fiscal 2022.
This compared to net income of $40 3 million or <unk> 88 per share for the second quarter of fiscal 2021.
Which included a benefit of $48 million related to reorganization items.
Adjusted EBITDA, a non-GAAP measure was $9 3 million for the second quarter of fiscal 2022.
Compared to 800000 for the same period of fiscal.
2021.
Okay.
As we look at the first half of fiscal 2022, our first half comp store sales growth was one 9%.
Paired to the first half of fiscal 2020.
Even with being up against 23 promotional events.
This performance was in line with our financial plan set at the beginning of fiscal 2022.
The favorability himself we discussed during our first quarter earnings call was offset with lower than planned sales in the second quarter.
Due to the softening we saw in December .
Adjusted EBITDA for the first half of fiscal 2022 was $3 $6 million compared to a loss of $5 2 million in the first half of fiscal 2021.
This adjusted EBITDA performance was better than our initial plan due to the timing recognition of supply chain costs.
Partially offset by higher store payroll costs.
Turning now to the balance sheet.
We ended the quarter with an inventory position of $157 million, an increase of 37, 3% compared to the prior year period.
As Fred noted, we started the quarter with comparable store inventories down 42% as compared to the beginning of Q2 2020.
But our ability to continue to deliver fresh inventory to the stores throughout the quarter and proved our store inventory position ending the quarter down 26% as compared to the end of Q2 2020.
We are focused on improving inventory turns and providing ourselves buying flexibility to stay liquid and chase what is working within the season.
As we discussed on last quarter's call reserved inventory, which is comprised of pack and hold well.
And hold and short hold inventory is a key to the off price model.
We were able to take advantage of opportunities this quarter, resulting in a reserve inventory being higher than expected as of the end of the second quarter due to these purchases.
As a result, our reserved inventory is roughly twice as much as we had initially planned when we began the fiscal year.
The biggest component of this inventory as pack and hold.
This is a combination of strategic purchases and of late arriving direct imports both of which are high I am you get.
Given the ongoing supply chain dislocation, we felt very good about the fact that we on these goods now and we'll have no issues delivering these on time over the next 12 months.
We believe that well I mean these goods now detracts from liquidity. It was the right decision and will help drive high I am yourself.
Total liquidity was $62 million, including $58 million under our revolver.
As our fiscal quarter end, we had $18 million in borrowings outstanding under our line of credit compared to no borrowings at the end of Q2 2021 .
The increased outstanding balance was primarily driven by higher inventory levels.
I will now move to our outlook for the remainder of the year.
Going forward, we will be using last year, our fiscal 2021 for all comparisons.
Beginning in Q3, we have lapped all periods with promotional events.
As Fred mentioned, we expect our comp store sales growth for the third quarter to be in the mid single digits.
And we expect the comp sales growth for the last six months of the year to be in the low to mid single digits.
With respect to gross margin.
As a reminder, our supply chain cost, which include inbound and outbound transportation as.
As well as distribution center costs are recognized on our P&L and gross margin as inventory turns.
Therefore, there is a delay and when those costs are incurred and when they flow through the P&L.
In Q2, we invested in additional supply chain costs to drive our store inventories to higher levels and to bring in pack and hold flow and hold and short hold purchases.
In addition, as Fred mentioned, our original plan for fiscal 2022 had assumed inbound freight headwinds would begin to improve by the fourth quarter.
We have now adjusted our outlook to assume these cost pressures will continue at least through the end of fiscal 2022.
Accordingly.
These factors will negatively impact our second half gross margin.
Which we expect to be lower than that recognized in the first half.
We are proactively addressing these continued headwinds by identifying SG&A cost savings in areas, such as labor cost outside professional fees and travel related costs to partially offset the impact of the higher supply chain costs.
These actions have allowed us to maintain our full year guidance of an adjusted EBITDA loss for the year that is slightly improved from fiscal 2021.
Okay.
For the last two quarters, we provided a.
<unk> 12 month average liquidity outlook.
Given that a detailed fiscal 2023 financial plan has not yet been completed we cannot provide that.
Our average monthly liquidity for January through June of fiscal 2022 is estimated at approximately $30 million.
On our Q1 call. We stayed in a 12 month average monthly liquidity projection of $40 million.
If we were to look at the spring average incorporated in that number it was $37 million.
By taking into account, an additional $7 million related to our higher inbound freight costs and higher reserve inventory, we are in line with that projection.
We believe this is more than enough capacity to cover our obligations and meet our plans for the rest of 2022.
I will now turn the call back over to Fred for some concluding remarks Fred.
Thank you Jennifer.
I want to close our prepared remarks by thanking the entire Tuesday morning team.
For their dedication and execution during the holiday season.
The team is working with a sense of urgency on executing on our initiatives to lead Tuesday morning through its transformation to become a world class off price retailer.
In addition, I would like to thank the vendor community for their continued partnership and support.
We will now open the call up for questions.
Yeah.
Thank you very much.
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We have a question from the lineup Hummus Corson from B Ws financial Please go ahead.
Good morning.
First off could you just talk about the merchandise strategy.
As it relates to inventory, how you've been able to source that inventory.
To really execute on this sales strategy if it didn't have it.
Good morning, Amit. Thank you for the question.
The inventory that you.
You know we were able to source our merchant team has done a great job.
Able to really work with the vendor community given all the challenges with the macro supply chain dislocation.
To be able to bring the goods in and.
Yeah.
Part of this is the mix of business that we have and how we're bringing in good shape between direct imports as well as domestic bodies and they've been very agile and reacting to you know what challenges have come up.
The fact that we were able to bring in the freshness that we brought into the quarter was really a huge plus for us and really enabled us to be very much ready for the holiday business.
But you know the ongoing.
That's really our merchant, but working on is really making sure that you're sourcing.
All of the product that they can get their hands on.
Okay.
You know aggressively as efficiently as they can and.
It really proactively working with our supply chain team as well as the vendor community to make sure that we're able to bring the goods.
I don't know if mark with Jennifer if you guys want to add any more color to that.
Yeah, I think it was those wells said, Fred and I think it really is a credit to our merchant team and I know that one of the other things they're doing is they're consistently looking to add new vendors.
Our total mix, so that you're bringing on new vendors as well as well as fantastic existing relationships they have with our existing vendors. So to your point, it's really a credit to them.
Okay and then the other question I had was just from the press release you you had been mentioned that you're pleased with the sales execution could you just describe that a little bit because you you don't really provide much guidance. So what was driving that.
That comment.
Sure absolutely.
No I I spent a lot of time in the stores during the peak weeks of between Thanksgiving and Christmas.
Typically that's what I've done in my career I think that's the best opportunity to engage with not just the customer but also the stores team understand whats working and whats not working.
And really make sure that we learn about the opportunities are probably keeping it gets better.
For the next season.
My trips to the stores were in the four to five of our priority markets for in addition to the Dallas Fort worth market could be visit frequently.
And really looking at anything from assortment from a quality quantity point of view.
Looking at it from.
Our presentation standards were.
And looking at the gifting category as the holiday boutiques you know.
There's always opportunities for improvement and the and the challenge for US is to really make sure that when you look at what's working listened to our customer listened to our store associates.
And really make sure that we put together action that we can collect for the next holiday season.
The other thing that I would just add as you know these trips were made by members also of my senior leadership team because I think it's important for every one of my senior leadership team members.
To be able to spend some time in the stores during the holiday to understand what really works and what the opportunities are.
I felt great about our prep I thought that the store operations, you've done a great job of prepping the stores I felt great about our level of staffing Botswana house being able to take care of our customers maintaining a good clean neat store and providing great service as well as on the back of house being able to process goods through the Florida's fastest.
Possible and getting the merchandise to the floor as quickly as they could.
And looking at the quarter affected Mohamad you know we were on plan through November and then as I noted in my remarks, you know we did experience some softness in December week, two which continued through.
The beginning of January .
The great thing is even if you look at our sell throughs. If you look at all of it.
Very little seasonal carryover, which has positioned us very well going into Q3.
Which is off to a good start although we're dealing still with a little bit of weather issues as I mentioned.
Overall, I would tell you that.
The sentiment that I got from the customer or the stores and what Ive felt and looking at how we were positioned versus the competition.
Great about it.
I was very pleased because I've set up for holiday and I think theres a lot of lessons learned.
We can apply to the next season next holiday season, that's going to come up.
But we can react to but.
But clearly I felt that we were going in the right direction. Our merchants did a great job of securing product our supply chain team did a herculean effort of getting record setting shipments to the stores.
Nine weeks in a row, which was really terrific and our store teams are they were very well prepared and did a great job of managing the customer traffic and providing the service. Those are the reasons why I would tell you that I'm pleased with the execution in Q2.
Okay, Great and then it is inventory the driving factor as to why you're confident in that.
Our mid single digit comp growth this quarter.
Is it just the refresh that's happening with the inventory quality or is it the price points.
It's a combination of both and I would tell you that we feel good about the content.
Clearly as we've mentioned.
You mentioned in the past and we will continue to do you know if we see an increase in the average unit retail product.
We're focused on bringing in quality brands at great values as well as differentiating items versus our competition, but you know that those are the key factors that I think is going to continue to drive.
The incremental sales the other thing just to keep in mind for Q2 or Q3, rather you know we're up against the weather in February that really impacted the southern part of the states, particularly Texas, Oklahoma and the surrounding states. So that that's something that we also have baked into our numbers.
It's an opportunity for Q2, but clearly the majority of it is just direction and what we've experienced some but we're working out with our inventory.
Yeah, and the only thing I would add onto that is that for the first time and we mentioned this we actually ended fall in line with our inventory plan, we had been running so much under for so the fact that we were able to get that inventory plan and at the end of flow really set us up for our beginning of season for spring.
The other thing I would add is that freshness. Our freshness continues to be kind of at all time highs. So it's a it's very fresh inventories and make us feel real good about it.
Okay, and then last question for Jennifer could you just talk about some of the puts and takes between the EBA dog food.
For guidance and the gross margins declining second half of the year.
Sure absolutely. So as we had mentioned in our prepared remarks in Q2, we did make some investments and additional supply chain costs to drive higher store inventory and also to bring in pack and hold put on hold in short hold purchase sense.
So given that our supply chain costs are recognized in our P&L as inventory turns a large amount of those costs will negatively impact our gross margin during the second half of the year.
And in addition to that our initial plans as Fred mentioned for fiscal 2022 had assumed that our inbound freight costs would start to improve in Q4.
As time has passed and the uncertainty has continued we no longer believe that that is going to be the case.
And so that is approximately $4 million of incremental transportation cost that we added to Q4, which compresses gross margin as well.
We did do a thorough scrub of all of our SG&A area towards the back half of the year to partially mitigate over half of these incremental transportation cost and the savings came from all areas of the company from the stores organization to marketing corporate along with companywide travel.
It's so common it's the combination of all of those things that resulted in us being able to reiterate our adjusted EBITDA Guide, while also expecting a lower gross margin in the spring versus the fall.
Okay, great. Thank you.
Thanks, Amit.
Thank you.
Thank you ladies and gentlemen, this concludes our Q&A session I'd like to turn the call back to the management for closing remarks.
The two gentlemen.
Thank you for joining us today. We appreciate your continued support and look forward to speaking to you at our next earnings call.
Good day everyone.
Thank you very much ladies and gentlemen. This concludes today's conference you may now disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Yeah.
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Yeah.