It's hard to have a real conversation about the retail industry without discussing the value of good management, especially as it relates to Tuesday Morning Corp (NASDAQ: TUES). Kathleen Mason, the previous CEO, was fired in 2012. Four interim CEOs later, the company appointed Michael Rouleau as CEO. Shortly afterward, Rouleau tapped Jeffrey Boyer to be his right hand. This is the same Boyer who helped Rouleau turn Michaels, the art supply store, around almost a decade ago. Fastforward 18 months to today and the stock is up from approximately $5 when Rouleau started to a close of $15.20 on Jan. 2, 2014. The market is betting on Tuesday Morning's new management team, but do they have what it takes to turn sales growth into positive earnings.
It gets even better, or rather stranger -- Tuesday Morning's earnings are not only negative, they're continuing to grow more negative. In the last earnings report, Tuesday Morning announced earnings per share of ($0.17), down from ($0.12) last year. So, what's causing the stock price to go up?
The earnings announcement doesn't provide many clues either -- it talks about mark-downs, new inventory management systems, high comp sales, declining sales, and a host of one-time charges related to severance packages and the like. It doesn't add up. The last resort is the earnings call.
The earnings call that tells all
The call began with everyone patting themselves on the back over comparable store sales growth of 9.1%. The CEO and the CFO were the only two members of management on the call. They discussed the closing of the Internet sales channel, footwear, and apparel. They discussed the $12 million loss in the first quarter compared to the $7 million loss last quarter. They talked about lower initial mark-ups and higher markdowns. Then something new -- Rouleau began to lay out his framework for success, which includes the following:
- Merchandise strategy -- "While operations make it all work, our business is really about the merchandise," said Rouleau. The strategy is focused on quality and rebuilding customer trust through brand selection.
- Purchasing less quantity within a broader assortment -- this is key. It may sound small, but it could lead to a host of changes that help the company better manage its inventory, and some of these changes are outlined below.
- Fewer clearance markdowns -- Purchasing smaller quantities of each item and stocking a broader array of merchandise should lead to less inventory deterioration due to obsolescence. Buying smaller amounts of each item by itself will lead to fewer markdowns, but buying smaller quantities while introducing a broader assortment will provide additional options for customers. This is especially the case for seasonal merchandise. Rouleau explains, "...we bought less of all the seasonal merchandise so we expect less sales on these categories but higher gross margins."
- Marketing -- The company hired a marketing agency to help it coordinate marketing vehicles, which will help increase traffic and customer awareness of promotional activity.
Then the million dollar question, how long will it take for these initiatives to start producing results? According to the CEO it should be sometime in the next few quarters.
The Foolish bottom line -- good leadership is priceless
These may seem like obvious strategies, but discount retailers across the board have been struggling with declining gross margins and decreased customer traffic in 2013. Well, all of them except for Dollar General.
Big Lots (NYSE:BIG), Tuesday Morning's big sister, has been particularly plagued by lower customer traffic. The Big Lots strategy is to focus on category growth -- there is little talk of inventory turnover or customer traffic from management. Target (NYSE:TGT), a higher-end version of Big Lots, could also benefit from these strategies, especially from a marketing perspective. Currently, Target is bringing in customers through markdowns, which is having a deleterious impact on its gross margin.
The challenge, as an investor, is trying to figure out if this Tuesday Morning management team has what it takes to make good on its "turnaround" promises. The current rate of growth for the stock price suggests that the market has all the faith in the world, but Fools know the market's been wrong before.
Fool contributor B Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.