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Monday Morning Blues For Tuesday Morning (TUES)
Will this struggling company end up as a falling knife or legitimate turnaround? That's the question in the forefront of every value investor's mind when they are looking at a company trying to turn itself around. You get it wrong, and you end up with an Enron. You get it right, and you end up with a Chrysler Motors (circa 1998, of course).
One of the riskier sectors to pick turnarounds in is retailing. Barriers to entry are virtually nonexistent, and once sales begin to decline, the decline can turn into the slipperiest of downward slopes. Just ask former shareholders of Grant's, Woolworth, or Gaylord's.
Reversal of Fortune
But fortunes can, and do, reverse. Consider the current good fortunes of J.C. Penney (NYSE: JCP) and Sears Holdings (Nasdaq: SHLD). Once considered anachronistic dinosaurs, these former old-line department stores are once again thriving.
This leads us to Tuesday Morning (Nasdaq: TUES), a close-out shop of upscale home furnishings; bathroom, bedroom and kitchen accessories; and gifts. The company operates 795 stores in 47 states. Store sizes generally range from 6,000 to 15,000 square feet and average approximately 9,200 square feet. Chief competitors include Pier One (NYSE: PIR) and Cost Plus (Nasdaq: CPWM).
Like the Penney and Sears of yesteryear, Tuesday Morning is suffering through a rough patch. In 2006, the company reported net sales of $911.1 million, a 2% drop from 2005's $931.8. Earnings fared even worse, posting at $36.4 million, or 87 cents per share, compared to $61.0 million, or $1.46 per share, in 2005.
False Start
Unfortunately, early 2007 is getting off to a sluggish start. First-quarter results showed a huge drop in earnings and a small increase in overall sales. Net income for the quarter was $1.0 million, or three cents per share, compared to $6.5 million, or 16 cents per diluted, in 2005. Net sales were $189.2 million compared to $187.8 million in 2006, an increase of 0.7%. But the increase was due to $11.4 million in sales from non-comparable stores offset by a decrease of 5.4% in comparable store sales.
So is Tuesday Morning on that terminally slippery slope? I don't think so. A major part of its problems are due to problems in the housing sector, which, though seemingly intractable, aren't permanent. Tuesday Morning sells a lot of stuff - Calphalon cookware, Krups, KitchenAid, Cuisinart appliances, Sferra and Donna Karan bath towels - that people want when they permanently move from point A to point B. However, at the moment, a lot fewer people are permanently moving from point A to point B.
Better Days Ahead
Still, management managed to offer reassuring guidance for 2007, stating net sales should be in the $975-to-$985-million range (though comparable store sales are projected to be flat to negative 2.0%). Earning per share is projected to be in the 85-cent-to-90-cent range.
Fortunately the company is conservatively financed: Long-term debt is nil and the current ratio is about 2.5. In addition, its gross margin of 39% and net profit margin of 7.5% compare favorably to the industry average.
Dividends also help, and the board recently declared a quarterly dividend of 20 cents per share, which, based on a current price of $13 and change, gives Tuesday Morning shareholders a 6% annual yield. The dividend appears safe given the company's balance-sheet strength and cash-generating ability.
While hardly a moonshot, Tuesday Morning is an unlikely retail implosion. As long as it continues to meet management guidance, I think it will make a decent investment for patient, long-term investors.
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One of the riskier sectors to pick turnarounds in is retailing. Barriers to entry are virtually nonexistent, and once sales begin to decline, the decline can turn into the slipperiest of downward slopes. Just ask former shareholders of Grant's, Woolworth, or Gaylord's.
Reversal of Fortune
But fortunes can, and do, reverse. Consider the current good fortunes of J.C. Penney (NYSE: JCP) and Sears Holdings (Nasdaq: SHLD). Once considered anachronistic dinosaurs, these former old-line department stores are once again thriving.
This leads us to Tuesday Morning (Nasdaq: TUES), a close-out shop of upscale home furnishings; bathroom, bedroom and kitchen accessories; and gifts. The company operates 795 stores in 47 states. Store sizes generally range from 6,000 to 15,000 square feet and average approximately 9,200 square feet. Chief competitors include Pier One (NYSE: PIR) and Cost Plus (Nasdaq: CPWM).
Like the Penney and Sears of yesteryear, Tuesday Morning is suffering through a rough patch. In 2006, the company reported net sales of $911.1 million, a 2% drop from 2005's $931.8. Earnings fared even worse, posting at $36.4 million, or 87 cents per share, compared to $61.0 million, or $1.46 per share, in 2005.
Unfortunately, early 2007 is getting off to a sluggish start. First-quarter results showed a huge drop in earnings and a small increase in overall sales. Net income for the quarter was $1.0 million, or three cents per share, compared to $6.5 million, or 16 cents per diluted, in 2005. Net sales were $189.2 million compared to $187.8 million in 2006, an increase of 0.7%. But the increase was due to $11.4 million in sales from non-comparable stores offset by a decrease of 5.4% in comparable store sales.
So is Tuesday Morning on that terminally slippery slope? I don't think so. A major part of its problems are due to problems in the housing sector, which, though seemingly intractable, aren't permanent. Tuesday Morning sells a lot of stuff - Calphalon cookware, Krups, KitchenAid, Cuisinart appliances, Sferra and Donna Karan bath towels - that people want when they permanently move from point A to point B. However, at the moment, a lot fewer people are permanently moving from point A to point B.
Better Days Ahead
Still, management managed to offer reassuring guidance for 2007, stating net sales should be in the $975-to-$985-million range (though comparable store sales are projected to be flat to negative 2.0%). Earning per share is projected to be in the 85-cent-to-90-cent range.
Fortunately the company is conservatively financed: Long-term debt is nil and the current ratio is about 2.5. In addition, its gross margin of 39% and net profit margin of 7.5% compare favorably to the industry average.
Dividends also help, and the board recently declared a quarterly dividend of 20 cents per share, which, based on a current price of $13 and change, gives Tuesday Morning shareholders a 6% annual yield. The dividend appears safe given the company's balance-sheet strength and cash-generating ability.
While hardly a moonshot, Tuesday Morning is an unlikely retail implosion. As long as it continues to meet management guidance, I think it will make a decent investment for patient, long-term investors.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Stephen Brown
Stephen P. Brown is a Chartered Financial Analyst, former equity analyst, investor, and freelance financial writer living in Brighton, Colorado. His work has been published in Barron's, CFA Magazine, Wealth Manager Magazine and The Denver Post.
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