TUESDAY MORNING CORPORATION
We encourage you to read this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") in conjunction with the
corresponding section included in our Annual Report on Form 10-K for the year
ended June 30, 2021 .
Background
We are one of the original off-price retailers and a leading destination for
unique home and lifestyle goods, selling high-quality products at prices
generally below those found in boutique, specialty and department stores,
catalogs and on-line retailers. Our customers come to us for an ever-changing,
exceptional assortment of brand names at great prices. Our strong value
proposition has established a loyal customer base, who we engage regularly with
social media, email, direct mail and digital media.
The COVID-19 pandemic has had an adverse effect on our business operations,
store traffic, employee availability, financial conditions, results of
operations, liquidity and cash flow. On March 25, 2020 , we temporarily closed
all of our 687 stores nationwide, severely reducing revenues and resulting in
significant operating losses and the elimination of substantially all operating
cash flow. As allowed by state and local jurisdictions, 685 of our stores
gradually reopened as of the end of June 2020 and two stores were permanently
closed during the quarter. In accordance with our bankruptcy Plan of
Reorganization, described below, we completed the permanent closure of 197
stores in the first quarter of 2021 and the closure of our Phoenix distribution
center in the second quarter of 2021. In addition, as part of our restructuring,
we secured financing to pay the creditors in accordance with the plan of
reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further
geographic spread and duration of the ongoing pandemic, the timing and extent of
recovery in traffic and consumer spending in our stores, the extent and duration
of ongoing impacts to domestic and international supply chains and the related
impacts on the flow, availability and cost of products, the production and
administration of effective medical treatments and vaccines, and the actions
that may be taken by various governmental authorities and other third parties in
response to the pandemic.
Emergence from Chapter 11 Bankruptcy Proceedings
• In
Bankruptcy Code. During the pendency of the Chapter 11 Cases, we continued
to operate our businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court .
• In early
we commenced the process to close 132 store locations in a first wave of
store closings. By the end of
permanently closed. In mid-July, 2020, we closed an additional 65 stores
following negotiations with our landlords and those store closures were
completed in
2021. In addition, we also closed our
second quarter of fiscal 2021.
• On
Plan of Reorganization. On
precedent to the Plan of Reorganization were satisfied and we legally
emerged from bankruptcy, resolving all material conditions precedent
listed in the Plan of Reorganization. However, the closing of the Rights
Offering was considered a critical component to the execution of our
confirmed Plan of Reorganization, therefore, we continued to apply therequirements of ASC 852 - Reorganizations until that transaction closed on
on
transactions contemplated by the Plan of Reorganization. See Notes 1, 2,
3, 7 and 8 to the consolidated financial statements in our Annual Report
on Form 10-K for the fiscal year ended
• In
contemplated by the Plan of Reorganization with a
Offering that expired in February, 2021. Eligible holders of our common
stock subscribed to purchase approximately
million of shares. The Company closed on the Rights Offering and in
February, 2021, recorded proceeds of
non-cash charge of approximately
of the company's common stock issued to the
and 11 to the consolidated financial statements in our Annual Report on
Form 10-K for the fiscal year ended
• On
(the "Final Decree") closing the Chapter 11 cases of the Company and its
subsidiaries. While the Company emerged from bankruptcy proceedings on
December 31, 2020 , the Chapter 11 Cases remained opened pending finalresolution of all claims of general unsecured creditors. The Company was
able to resolve all of these claims for approximately
than the amounts reserved and retained in an escrow account. Upon entry of
the Final Decree, the approximately $14 million remaining in the escrow
account was returned to the Company to make a repayment on its ABL credit
facility and the Chapter 11 Cases are now final.
Key Metrics for the Quarter Ended
Key operating metrics for continuing operations for the three months ended
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• Net sales were
compared to
• Gross margin was 28.8%, compared to 31.6% for the same period last year.
• Selling, general and administrative expenses ("SG&A") decreased $1.8
million or 2.9% to $60.3 million , from $62.1 million for the same period
last year. As a percentage of sales, SG&A was 34.1% compared to 38.1%
for the same period last year.
• Restructuring, impairment and abandonment charges were
compared to
• Reorganization items, net were a loss of
benefit of
• Our net loss was $14.7 million , or diluted net loss per share of $0.17
compared to a net income for the same period last year of $18.6 million ,
or diluted earnings per share of $0.41 .
• As shown under the heading "Non-GAAP Financials Measures" below, EBITDA
was a negative $9.5 million compared to a positive $25.5 million for the
same period last year. Adjusted EBITDA was negative $5.7 million
compared to a negative $6.0 million for the same period last year,
Key balance sheet and liquidity metrics for the three months ended
• Cash and cash equivalents at
million at
restricted cash were primarily driven by payments for bankruptcy court
approved petition claims, legal and professional fees and payments to the
Company's vendors for inventory. See Note 2 to our unaudited consolidated
financial statements herein for additional information.
• As of September 30, 2021 , total liquidity, defined as cash and cash
equivalents plus $39.7 million availability for borrowing under our New
ABL Facility, was $44.2 million . In addition, we had $22.4 million of
borrowings outstanding under our New ABL Facility and $13.8 million of
letters of credit outstanding.
• Inventory levels increased
million at
on a comparable store basis, increased approximately 49.7% when compared
to
challenges were due in part to the closure of much of our merchant and
supply chain operations during the height of the spring 2020 COVID
outbreak as well as pandemic-related disruptions to the supply chain. We
expect inventory levels to increase throughout the fall and expect supply
chain costs to remain elevated due to higher freight costs and other
supply chain conditions.
Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
Store Openings/Closings
Three Months Ended Three Months Ended Fiscal Year
September 30, September 30, Ended
2021 2020 June 30, 2021
Open at beginning of period 490 685 685
Opened - 2 2
Closed (1 ) (197 ) (197 )
Open at end of period 489 490 490
New stores are included in the same store sales calculation starting with the
sixteenth month following the date of the store opening. A store that relocates
within the same geographic market or modifies its available retail space is
generally considered the same store for purposes of this computation. Stores
that are closed are included in the computation of comparable store sales until
the month of closure.
Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and
most of our operating income generated in the quarter ending
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There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended
Net sales for the quarter endedSeptember 30, 2021 were$176.9 million , an increase of 9.5%, compared to$161.6 million for the same period last year, primarily driven by an increase in comparable store sales of 26.2%, partially offset by the completion of our permanent store closing plans approved through bankruptcy proceedings of 197 stores during the quarter endedSeptember 30, 2020 . The increase in comparable store sales was due to a 12.9% increase in average ticket and an 11.8% increase in customer transactions. Non-comparable store sales decreased by a total of$22.0 million primarily due to the permanent closure of 197 stores since the first quarter of fiscal 2021. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. Gross margin for the quarter endedSeptember 30, 2021 was$51.0 million , a decrease of 0.1% compared to$51.1 million for the same period last year. As a percentage of net sales, gross margin decreased to 28.8% in the first quarter fiscal 2022 compared with 31.6% in the first quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the quarter endedSeptember 30, 2021 . SG&A decreased$1.8 million to$60.3 million in the quarter endedSeptember 30, 2021 , compared to$62.1 million in the same period last year. As a percentage of net sales, SG&A decreased 430 basis points to 34.1% for the quarter endedSeptember 30, 2021 , compared to 38.4% in the quarter endedSeptember 30, 2020 . The decrease was due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the filing of the Chapter 11 Cases, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Restructuring, impairment and abandonment charges were$2.4 million during the three months endedSeptember 30, 2021 , compared to$5.5 million during the quarter endedSeptember 30, 2020 . During the quarter endedSeptember 30, 2021 , adjustments include a software impairment charge of$2.1 million as well as$0.3 million in employee retention cost. During the quarter endedSeptember 30, 2020 , adjustments include restructuring, impairment and abandonment charges of$4.8 million primarily related to in our permanent store andPhoenix, Arizona distribution center closing plans as well as$0.7 million in severance and employee retention cost. Decisions regarding store closures and thePhoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of thePhoenix distribution center was not completed until the second quarter of fiscal 2021. Our operating loss was$11.7 million for the quarter endedSeptember 30, 2021 as compared to an operating loss of$16.5 million for the quarter endedSeptember 30, 2020 , an improvement of$4.8 million . The operating loss in the current year was primarily the result of the lower SG&A costs and restructuring, impairment and abandonment charges as discussed above. Interest expense decreased$1.1 million to$1.7 million for the three months endedSeptember 30, 2021 compared to$2.8 million in the same period last year. Interest expense for the three months endedSeptember 30, 2021 was primarily due to the interest and amortization of financing fees incurred on our New ABL facility and accrued interest on our Term loan. Interest expense for the three months endedSeptember 30, 2020 was due to amortization of financing fees incurred for the DIP financing. See Note 3 to our unaudited consolidated financial statements herein for additional information. Reorganization items, net were$1.3 million for the quarter endedSeptember 30, 2021 compared to a net benefit of$37.6 million in the quarter endedSeptember 30, 2020 , related to$1.1 million loss of claims related cost and$0.2 million of professional and legal fees related to our reorganization. The net benefit of$37.6 million in the quarter endedSeptember 30, 2020 , was due to a net gain of$47.5 million resulting from store lease terminations under our permanent closure plan partially offset by$9.8 million in professional and legal fees related to our reorganization. Income tax benefit for the quarter endedSeptember 30, 2021 was$0.05 million compared to$0.24 million in the quarter endedSeptember 30, 2020 . The effective tax rates for the first quarter 2021 and 2020 were 0.3% and (1.3%), respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized. Our net loss for the quarter endedSeptember 30, 2021 was$14.6 million , or diluted net loss per share of$0.17 compared to a net income for the quarter endedSeptember 30, 2020 of$18.6 million , or diluted net earnings per share of$0.41 . Non-GAAP Financial Measures We define EBITDA as net income or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as, alternatives to cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to 21 -------------------------------------------------------------------------------- evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors' ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.
The following table reconciles net income/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
Three Months Ended
September 30,
2021 2020
Net income/(loss) (GAAP) $ (14,603 ) $ 18,624
Depreciation and amortization 3,397 4,384
Interest expense, net 1,716 2,753
Income tax benefit (49 ) (236 )
EBITDA (non-GAAP) $ (9,539 ) $ 25,525
Share based compensation expense (1) 1,173 582
Restructuring, impairment and abandonment charges (2) 2,430
5,489
Reorganization items, net (3) 1,292 (37,624 ) Other (4) (1,017 ) - Adjusted EBITDA (non-GAAP)$ (5,661 ) $ (6,028 ) (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. (2) For the three months endedSeptember 30, 2021 , adjustments included restructuring, impairment and abandonment charges related to software impairment charges and employee retention cost. For the three months endedSeptember 30, 2020 , adjustments include restructuring, impairment and abandonment charges primarily related to our permanent store andPhoenix, Arizona distribution center closing plans as well as severance and employee retention cost. Decisions regarding store closures and thePhoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of thePhoenix distribution center was not completed until the second quarter of fiscal 2021. See note 2 to our unaudited consolidated financial statements herein for further discussion (3) For the three months endedSeptember 30, 2021 , adjustments included claims related cost as well as professional and legal fees related to our reorganization. For the three months endedSeptember 30, 2020 , adjustments included a gain resulting from store lease termination under our permanent closure plan offset by professional and lease fees related to our reorganization. See note 2 to our unaudited consolidated financial statements herein for further discussion
(4) For the three months ended
Liquidity and Capital Resources
Cash Flows for the Period Ended
Cash Flows from Operating Activities
In the first quarter of fiscal 2022, cash used in operating activities was$33.2 million , compared to cash provided by operating activities of$15.2 million in the same period last year. Net cash used in operations in the first quarter of 2022 was primarily driven by the inventory purchases and payments for bankruptcy court approved pre-petition claims, legal and professional fees. Net cash provided by operating activities in the first quarter of 2021 was primarily the result of a lower cash use for inventory due to lower purchases partially offset by higher cash use in accounts payable. Additionally,July 2020 rents were paid at the end ofJune 2020 , in the fourth quarter of fiscal 2020, favorably impacting cash flows from operations in the first quarter of fiscal 2021. Prepayment of rents in the first quarter of fiscal 2021 for the second quarter decreased significantly.
Cash Flows from Investing Activities
Net cash used in investing activities for the first quarter of fiscal 2022 of$1.8 million related primarily to capital expenditures in enhancements to our store fleet and new stores, as well as investments in technology. Net cash provided by investing activities for the 22
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first quarter of fiscal 2021 of
Cash Flows from Financing Activities
Net cash provided by financing activities of$10.8 million for first quarter of fiscal 2022 related primarily to net borrowings under our New ABL Facility. Net cash used in financing activities of$0.5 million related primarily to$0.5 million for the prior year period related primarily to the payments of financing fees paid for our DIP finance agreements.
Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under an asset-based, senior secured revolving credit facility.
OnDecember 31, 2020 , as contemplated by our Plan of Reorganization, the Company and its subsidiaries entered into a Credit Agreement (the "New ABL Credit Agreement") withJPMorgan Chase Bank, N.A .,Wells Fargo Bank, N.A. andBank of America, N.A . that provides for a revolving credit facility in an aggregate amount of$110.0 million (the "New ABL Facility"). The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The New ABL Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio if borrowing availability falls below certain minimum levels, after the first anniversary of the agreement. For additional information regarding the New ABL Facility, see Note 3 to our unaudited consolidated financial statements herein. Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date ofDecember 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind. Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at prepayment price equal to the greater of (1) the original principal amount of the Term Loan plus accrued interest thereon, and (2) 125% of the original principal amount of the Term Loan. The Term Loan is subject to mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As ofSeptember 30, 2021 , the outstanding principal balance of the Term Loan was$27.4 million , net of debt issuance costs. For additional information regarding the Term Loan, see Note 3 to our unaudited consolidated financial statements herein.
Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
As ofSeptember 30, 2021 , we had$22.4 million of borrowings outstanding under our New ABL Facility and,$13.8 million of letters of credit outstanding. Taking into account$10.0 million of borrowing capacity that is unavailable untilDecember 31, 2021 , we have borrowing availability of$39.7 million under our New ABL Facility, as ofSeptember 30, 2021 .
Liquidity, defined as cash and cash equivalents plus the
We incurred capital expenditures, net of construction allowances received from landlords, of approximately$1.4 million in the first quarter of fiscal 2022. Capital expenditures are anticipated to be$9.1 million total for fiscal year 2022. The amounts include the expected costs to open approximately eight stores, costs to enhance our store fleet, investment in technology as well as ourDallas distribution center. We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the our New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock. Under the terms of our New ABL Credit Agreement, we must maintain certain minimum levels of borrowing availability, and under the Term Loan any amounts paid for these purposes may not exceed$2 million .
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of
There have been no material changes to our contractual obligations as discussed
in our Annual Report on Form 10-K for the fiscal year ended
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Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim consolidated financial statements, which have been prepared pursuant to the rules and regulations of theSEC . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates.
Other than as described in Note 1 of our unaudited consolidated financial
statements herein, as of
Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the first quarter of fiscal 2022 were 3.5% of sales compared to 4.1% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory atSeptember 30, 2021 would result in a decline in gross margin and diluted loss per share for the first quarter of fiscal 2022 of$0.9 million and$0.01 , respectively. For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 .
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements herein for a summary of recent accounting pronouncements.
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