I'm always wary when a company's earnings release trumpets revenue growth above all else, as Tuesday Morning (NASDAQ:TUES) did in its earnings release last night. However, there is no cause for alarm, because the company actually did quite fine on the earnings front, as well, once you back out the charge for a change in lease accounting, which many retailers have been required to make.
With the charges backed out, discount retailer Tuesday Morning grew the bottom line at 10%, which just happens to be the same level as the trumpeted top-line growth. This is all the more impressive considering that the retail environment has been pretty murky of late. Even fellow discounter TJX (NYSE:TJX) -- operator of TJ Maxx, Marshalls, and Home Goods, to name a few -- has had a lumpy go of it so far in its first quarter, with comps relatively flat against strong gains last year.
That said, discount retailers should continue to fare better than their full-price brethren if the economy weakens. We all still need stuff, and there are always those things we don't need but still want, so we'll just be more selective regarding what we purchase and how much we pay for it. That plays into the hands of discounters like Tuesday Morning, TJX, and even Wal-Mart (NYSE:WMT).
If you own shares of Tuesday Morning, relax. The company's "treasure hunt" style of retailing seems to be steaming right along, and there's still plenty of room for new store openings. Management seems to be even-handed in allocating captial to expansion. The company has seen a gradual rise in its cash conversion cycle, though, and that bears watching.
Finally, let's not forget the company's excellent return on invested capital, which was pegged at 22% (and increasing) not too long ago by fellow Fool James Early. At that point, James estimated Tuesday Morning's weighted average cost of capital at around 10%, give or take a couple of percentage points. The large spread between the two is what makes Tuesday Morning a strong producer of capital that can be used for future growth and other purposes. Just for kicks, I decided to run through and estimate Tuesday Morning's cost of capital myself and, lo and behold, I came in at just over 11%. With that in mind, the sun should shine on Tuesday Morning just about every day for a while.
For more Foolish reading on discount retailers, check these out:
- 2 Small Caps You Can Understand
- Rich Mall, Poor Mall
- 5 Stocks With Oustanding Returns
- Tripping the Lease Fantastic
Fool contributor Nathan Parmelee has no financial interest in any of the companies mentioned.
