Credit Suisse Starts Coverage on Tuesday Morning with an Outperform

For 3 years Tuesday Morning  (NASDAQ: TUES  ) was trading at around $5 per share. Then a new CEO was hired in 2012 and 18 months later the stock is hovering around $15. The question is, what is Tuesday Morning doing to create this growth, and can the new management team carry this momentum into 2014? Credit Suisse Group seems to think so.

In late November Credit Suisse Group  (NYSE: CS  ) began coverage of Tuesday Morning (NASDAQ: TUES  ) and called it an "outperform" with a target of $17.00. . As you can see from the graph below, the stock price has been steadily growing over the past year.

TUES EPS Diluted (TTM) Chart

TUES EPS Diluted (TTM) data by YCharts

Big Lots (NYSE: BIG  ) has a trailing P/E of 11, versus 16 for Target (NYSE: TGT  ) and 15 for Wal-Mart Stores (NYSE: WMT  ) . Based on an average trailing P/E ratio of 14, Tuesday Morning needs an EPS of approximately $1 to trade in-line with peers at its current price, which is a problem because the earnings for the company are negative. Tuesday Morning is the blue line at the bottom on the graph below -- the one that looks like a non-profit.

TUES EPS Diluted (TTM) Chart

TUES EPS Diluted (TTM) data by YCharts

What is Tuesday Morning
Operating in over 800 stores, Tuesday Morning sells discount, surplus inventory at lower prices than department stores. It is the little sister to Big Lots from a business model perspective, which may explain why both companies reported negative earnings growth in the most recent quarter. However, Tuesday Morning is slightly different from its peer -- its sales volume is growing while Big Lots' sales are declining. In fact, Tuesday Morning has one of the highest same-store sales growth rates among its peers at 9.1%. The obvious challenge for the company is turning that sales growth into positive earnings.

The expectation
What investors were led to believe is that the company's earnings would recover in the third quarter of 2013 -- keep in mind, Tuesday Morning's fiscal year ends in June. The inventory from the writedown should be sold and gross margin should be improving, but it's not. Still, Tuesday Morning's stock price continues to climb higher.

Among the company's Q4 highlights was a 0.9% increase in gross profit dollars over last year. The more meaningful metric is whether or not gross profit went up as a percent of total sales, and the answer to that question is no. Gross profit as a percentage of sales actually went down by 0.8% to 37.2%.

Two reasons for stock price growth: a new management team and a plan
So, what's fueling the stock price? Management. CEO Michael Rouleau is the fourth chief executive in two years. Jeffrey Boyer, Executive Vice President, Chief Administrative Officer, and Chief Financial Officer was brought on later by Rouleau -- both had worked together at Michaels, a retail crafts supplier. "As many of you know, I had worked hand-in-glove with Michael a few years back and we had great success together," said Boyer on the most recent earnings call. He's referring to the success the two had turning Michaels around almost a decade ago. 

The second reason the market likes this stock is because the CEO has a clear and easy to understand plan of action. Unlike Big Lots and Target, Tuesday Morning has outlined a strategy uniquely designed to fix the company's largest issue -- paying too much for inventory. With a $41 million writedown last year, that's exactly what needed to happen.

The Foolish bottom line
Naturally, investors want to know how a retail company with 140% stock growth has negative earnings. No matter what the company does, its sales growth gets better and better, while its earnings deteriorate. The company had negative earnings in 2012, but analysts shrugged it off as the after-effect of a $41 million inventory writedown in the second quarter. As more investors jump on the bandwagon, more questions will emerge regarding the whereabouts of a thing called profit.

What's the Fool watching in 2014?
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