Over the past year Tuesday Morning (NASDAQ: TUES ) has gone through a remarkable transformation. On May 8 we will get to see if it can maintain its growth or if last quarter was a fluke.
Big Lots (NYSE: BIG ) is the largest closeout retailer in the country, which makes it the big sister to Tuesday Morning. Both companies have similar business models, but Tuesday Morning is showing signs of progress whereas Big Lots just had its eighth consecutive quarter of declining same-store sales growth. There's a good chance that the company's earnings will be negative because of the late Easter holiday, but that's not necessarily a bad thing. Look for same-store sales growth improvement, an increase in average ticket, and an increase in inventory turnover as signs of continued progress and long-term growth.
$42 million write down leads to more productive inventory
The retail marketplace has grown increasingly competitive as retailers vie for customer loyalty in an attempt to grow their same-store sales. Big Lots recently announced an increase in its food assortment as well as a full scale roll-out of a rent-to-own financing program as ways to compete with other discount retailers. The challenge for retail CEO's is growing their companies' sales without margin losses, which is exactly what Tuesday Morning was doing before R. Michael Rouleau joined the company as CEO last year. The company had a phenomenal same-store sales growth rate at the time, but it wasn't because of customer loyalty--it was because of heavy markdowns that hurt its earnings.
Last year, Rouleau announced a series of turnaround initiatives aimed specifically at reducing markdown activity as a way to boost margins. The first thing Tuesday Morning did under Rouleau's leadership was record a $41.8 million write down to get rid of unproductive inventory. He also committed to providing a broader assortment of inventory for customers in order to minimize obsolesce and future write-off activity. As a result, 80% of the company's inventory was under six months old at the end of the year versus 33% in the prior year.
Still, there's a good chance that Tuesday Morning's earnings will be negative this quarter. Easter fell in April this year, so those holiday sales will be pushed into the third quarter. Additionally, the company has a three-year track record of positive earnings in the second quarter and negative earnings in the third and fourth quarters.
Margin is a function of price and inventory turns
Even with the introduction of a new rent-to-own financing program, Big Lots expects same-store sales to come in flat this year. On the last earnings call, however, Tuesday Morning explained that same-store sales were up despite a competitive earnings season. On the last earnings call, the company announced same-store sales growth of 3.1% in the second quarter, and if you exclude the non-core categories that the company exited last year, the increase was 7%. So, look for an increase in same-store sales along with an increase in the average ticket -- the combination will prove that the company has grown its market share without sacrificing margin.
Also look for an improvement in inventory turnover, which signals that customers like the new product assortment. On a trailing 12-month basis, turnover climbed to 2.5 times last quarter from 2.1 times in the prior year, which is nearly a 20% improvement.
Over the past year Tuesday Morning has become the belle of the ball. Analysts believe the stock is worth $17.50, a 30% upside to the current price. In order to meet this target, however, the company's earnings must continue to grow.
Looking back at the company's earnings over the years, the second quarter has been consistently positive but the third quarter has been negative, which makes this a big quarter for Rouleau; positive earnings in the second quarter is one thing, but positive earnings in the third quarter would clearly signal that Tuesday Morning's success last quarter was more than just an anomaly -- it's here to stay. If earnings aren't positive, however, it doesn't mean the company isn't making progress; positive same-store sales, an increase in average ticket, and an increase in inventory turnover are all signs that Rouleau's initiatives are working and they are adding long-term value to the company.
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