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TM

TUESDAY MORNING CORP/DE (TUEMQ)·Q3 2022 Earnings Summary

Executive Summary

  • Q3 FY2022 delivered modest top-line growth but significant margin compression: net sales rose to $159.6M (+4.1% YoY), while gross margin rate fell 700bps to 24.4% on elevated supply chain and freight costs; EPS was ($0.21) vs ($0.55) YoY .
  • Management revised FY2022 outlook: Q4 comps now expected to decline 3–5% and FY2022 adjusted EBITDA loss guided to $26–$29M; the change reflects March softness, macro inflation, and higher markdowns to clean inventory into year-end .
  • Liquidity improved via refinancing: new $110M ABL plus $10M FILO, 100bps lower ABL rate, $5M term loan reduction and forgiveness of ~$1M accrued interest; quarter-end liquidity was ~$35M ($8.5M cash; $26.6M ABL availability) .
  • Strategic focus intensified on distribution network redesign (initial 2-DC plan indicates attractive IRR), real estate analytics with potential long-term store growth to ~700 locations, and systems alignment to a unified calendar .

What Went Well and What Went Wrong

What Went Well

  • Comparable store sales +0.6%; growth driven by higher average unit retail categories, despite March traffic headwinds .
  • Debt transaction improved liquidity and lowered financing costs; 100bps ABL rate reduction, $5M term loan cut, and springing maturity to 2027 after term loan is addressed .
  • Initial DC network study suggests a two-DC (West/East) footprint reduces redundant miles and offers attractive IRR; real estate analytics indicate long-term growth potential to ~700 stores .

What Went Wrong

  • Gross margin rate fell to 24.4% (from 31.4% YoY), materially impacted by capitalized supply chain/freight costs (~390bps or ~$6M) and elevated Q4 markdowns to exit clean .
  • Operating loss widened sequentially: Q3 operating loss of $16.4M vs Q2 operating income of $3.4M, reflecting margin pressure and March softness .
  • Guidance reset: Q4 comps lowered to -3% to -5% and FY adjusted EBITDA loss widened to $26–$29M due to macro uncertainty and consumer weakness .

Financial Results

Quarterly progression (sequential)

MetricQ1 FY2022 (Sep 30, 2021)Q2 FY2022 (Dec 31, 2021)Q3 FY2022 (Apr 2, 2022)
Net Sales ($USD Millions)$176.9 $251.4 $159.6
Gross Margin ($USD Millions)$51.0 $71.5 $38.9
Gross Margin (%)28.8% 28.5% 24.4%
SG&A ($USD Millions)$60.3 $67.7 $55.6
Operating Income (Loss) ($USD Millions)($11.7) $3.4 ($16.4)
Net Income (Loss) ($USD Millions)($14.6) $1.9 ($18.2)
EPS (Basic, $)($0.17) $0.02 ($0.21)

YoY comparison (Q3)

MetricQ3 FY2021Q3 FY2022
Net Sales ($USD Millions)$153.3 $159.6
Gross Margin ($USD Millions)$48.2 $38.9
Gross Margin (%)31.4% 24.4%
SG&A ($USD Millions)$59.2 $55.6
Operating Income (Loss) ($USD Millions)($12.0) ($16.4)
Net Income (Loss) ($USD Millions)($37.1) ($18.2)
EPS (Basic, $)($0.55) ($0.21)

KPIs and Balance Sheet

KPIQ1 FY2022Q2 FY2022Q3 FY2022
Store Count489 492 490
Comparable Store Sales (%)+3.2% vs Q1 FY2020 +1.0% vs Q2 FY2020 +0.6% vs Q3 FY2021
Inventories ($USD Millions)$174.1 $157.1 $176.6
Cash & Cash Equivalents ($USD Millions)$4.6 $4.3 $8.5
Revolver Borrowings Outstanding ($USD Millions)$22.4 $17.9 $54.1
ABL Availability ($USD Millions)$39.7 $58.0 $26.6

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Comparable Store SalesQ3 FY2022Mid-single-digit growth vs Q3 FY2021 N/A (actual reported Q3 +0.6%) N/A
Comparable Store SalesQ4 FY2022Second half comps low to mid-single-digit growth vs H2 FY2021 Q4 comps down 3% to 5% vs Q4 FY2021 Lowered
Gross Margin TrendH2 FY2022Expected decline vs H1 due to supply chain costs Continued pressure; Q4 increased markdowns to exit clean Maintained with added markdowns
Adjusted EBITDAFY2022Loss slightly improved from FY2021 Loss between $26M–$29M Lowered
LiquidityFY2022Sufficient to cover obligations and plans Continues to expect sufficient liquidity for next 12 months Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Supply chain/freight costsExpected to persist through FY2022; H2 gross margin to decline 390bps gross margin headwind ($6M) recognized; continued pressure Worsening impact recognized
Macro headwinds (inflation/geopolitics)Softer December/January due to Omicron/weather; lapping stimulus March traffic slowdown from Ukraine disruption and inflation (gas) Negative macro intensified
Merchandising/value strategyFresh inventory and higher AUR driving comps Off-price buying conditions “abundant” with aggressive pricing, broader assortments Opportunity turning positive
Distribution networkInitiated DC network study; evaluating 1 vs 2 DCs Initial findings favor 2 DCs with attractive IRR; Dallas DCs operating through June 2024 Advancing
Real estate/store footprintData-driven review; optimal new stores ~10,000 sq ft Partnered with master brokers; long-term potential ~700 stores; 174 FY2023 lease expirations Advancing
Customer experienceNew survey rolled out; early positive feedback 20,000 responses; satisfaction 900bps above retail average; service standout Improving
PromotionsElimination of promotional events referenced No promotions; permanent markdowns used to clear aged goods Maintained discipline

Management Commentary

  • “We completed a debt transaction that resulted in sufficient liquidity to support us at least through the next 12 months… reduced our ABL borrowing rate by approximately 100 basis points, [and] a reduction of $5 million on our term loan.”
  • “Times like these historically have been a positive for off-price… inventory availability becomes abundant… our experienced off-price team [can] take advantage of the opportunity.”
  • “The initial findings indicate that a 2-DC network with the West Coast and East Coast presence would eliminate a significant amount of redundant miles… suggesting an attractive internal rate of return.”
  • “Our comparable store sales increase through February was in line with our expectations… March was very difficult due to the disruption in Europe and incremental inflationary pressures.”
  • “The current environment is conducive to off-price buying… product we’ve been offered is priced as aggressively as we have seen in the last 2 years.”

Q&A Highlights

  • March softness driven primarily by external macro factors (Ukraine war, inflation), not merchandising; traffic slowed in week 2 of March, improving into Q4 with no promotions .
  • Credit facility details: replaced ABL/FILO with ~100bps lower ABL rate, extended maturity (springing to 2027), $5M term loan repayment, ~$1M interest forgiveness, ~$7M incremental liquidity, FILO ~$10M at ~7% .
  • Inventory approach: store inventories reduced to match traffic; reserve/DC inventory used to capture attractive buys; permanent markdowns (not promo events) to clear aged goods .
  • SG&A offsets identified to mitigate freight cost pressure (~$4M added to Q4 freight); preserving adjusted EBITDA guide .

Estimates Context

  • We attempted to retrieve Wall Street consensus (S&P Global) for Q3 FY2022 EPS and revenue; S&P Global mapping was unavailable for TUEMQ, so consensus estimates could not be obtained. As a result, no beat/miss analysis vs consensus is presented. [GetEstimates attempt failed]

Key Takeaways for Investors

  • Margin pressure is the core issue: despite modest sales growth, gross margin contraction (supply chain/freight and higher markdowns) drove a sharp sequential decline from Q2 profitability to Q3 losses; expect continued pressure in Q4 .
  • Guidance reset is a near-term negative catalyst: Q4 comp sales cut to -3% to -5% and FY adjusted EBITDA loss widened to $26–$29M; risk of additional markdowns to normalize inventory into year-end .
  • Liquidity and refinancing reduce solvency risk: the new ABL/FILO package lowers interest expense, extends runway, and added ~$7M liquidity; quarter-end cash/availability totaled ~$35M .
  • Strategic initiatives could re-rate medium term: DC redesign (2-DC plan), real estate analytics, and systems alignment aim to reduce transportation costs, improve speed-to-store, and optimize footprint (long-term 700 stores) .
  • Off-price cycle tailwinds emerging: vendor oversupply and aggressive pricing expand buying opportunities; management emphasizes value, broader assortments, and improved customer experience .
  • Execution watch-points: pace of inventory cleanup, freight-cost normalization, and ability to hold line on promotions while driving traffic will determine margin recovery .
  • Trading implications: near term cautious given guidance cut and margin headwinds; any evidence of freight cost normalization or successful DC/real estate milestones could be catalysts to reassess the medium-term thesis .