Wal-Mart and Big Lots Step Back: Tuesday Morning Is the Belle of the Ball

What a difference a year can make. And this hasn't been an easy year for retailers, especially large-box retailers like Big Lots (NYSE: BIG  ) , and Wal-Mart (NYSE: WMT  ) . Big Lots posted an 8th quarter of decline in same store sales, and both Wal-Mart and Target ended 2013 with a 0.4% decline in same store sales.

Small-box retailers had a better year and one company in particular is poised for a strong 2014. I wrote several articles about Tuesday Morning's (NASDAQ: TUES  ) odd behavior last quarter. As you can see from the chart below, the company had phenomenal 1-yr price returns throughout 2013, even though earnings were growing increasingly negative.

TUES Chart

TUES data by YCharts

One reason for the disconnect was a $41 million writedown which led to depressed margins. The good news about a writedown, however, is that it gets rid of old or unproductive inventory. Perhaps this is what investors were counting on.

Another reason for the stock price was new management. R. Michael Rouleau started in August, and he is the fourth CEO Tuesday Morning has had in three years. Jeffery Boyer, the President, was brought on by Rouleau -- the two worked together at Michaels, the craft supply store, almost a decade ago. On the Q2 earnings call Rouleau provided a quick refresher:

Just a little over 3 months ago, we committed to a set of turnaround initiatives that were very significant and would start to move the company through the turnaround and would also be in place in preparation for the holiday season.

The turnaround initiatives Rouleau is referring to are:

  • Merchandising --  rebuild customer trust through brand
  • Purchasing -- buy less quantity of a broader assortment
  • Markdowns -- a broader array of merchandise reduces obsolescence and the need for deep discounts
  • Marketing --  increase traffic and customer awareness through promotional activity

These strategies are already paying off as earnings for Tuesday Morning go from negative to positive.

  • Q2 in 2012 saw 5.6% comparable sales growth, 4.5% net sales growth, and negative $21 million earnings.
  • Q2 in 2013 saw 3.1% comparable sales growth, .2% net sales growth, and a positive $17 million earnings.

Tuesday Morning's big makeover
While Wal-Mart's solution is a focus on a small-store format -- the company will be opening 270 to 300 small stores this year -- Big Lots is banking on food and a new furniture financing program to boost traffic and sales. Tuesday Morning took a different approach by focusing on appearance:

We cleaned up the mess in our stores and then we made significant changes to upgrade and clarify our assortments. Those improvements were highly visible to customers visiting our stores...

said Rouleau in the Q2 earnings call. Even the circulars have a new look:

We committed to improving the look and execution of our circulars, our website and our weekly emails. They have all been changed for the better and they are all much more impactful and effective than in the past

Source: Tuesday Morning Homepage

In fact, the company is starting a process of transitioning all stores to a standardization process that will help to improve efficiency and funnel best practices throughout the organization. "One way, the best way versus 819 different ways which we have in the past," Rouleau says.

Rouleau also talks about the three metrics he uses to gauge the company's success in implementing these initiatives:

Number one, our quarterly comp store sales results; number two, our inventory turnover and current condition of our inventory; and three, our overall financial condition.

All three of these metrics are directly related to the four strategies as outlined above. A broader selection brings more customers, which increases inventory turnover and sales growth.

Perhaps the most salient measure of progress is the measure of same store sales for the company's core-categories. Rouleau pointed out on the call that while same store sales were up 3.1% in the second quarter, there's an expectation of higher growth in the future:

If you exclude the non-core categories that we exited last year, and this is a very important point, our ongoing core categories drove a comp store sales increase of 7%.

Takeaway
These are very promising results for Tuesday Morning. Same store sales were already high last quarter, but that growth was due to large mark-downs, which put the company in negative earnings territory. Even though the stock was surging, it was not aligned with earnings -- and the disconnect made the risk for the average investor too high. This quarter, however, saw both positive same store sales growth and an increase in bottom line profitability.

In less than a year, and with minimal investment, the new management team has transformed Tuesday Morning from a cluttered mess into a runway model. Investors and analysts will be looking to next quarter to see if this quarter was a fluke or a retail Cinderella story.

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