TUESDAY MORNING CORPORATION The following discussion and analysis should be read in conjunction with and our consolidated financial statements and related notes thereto included in Part IV, Item 15(a) in this Annual Report on Form 10K.
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, 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
The extent to which the COVID-19 pandemic impacts our business, results of operations, cash flows and financial condition will depend on future developments, including future surges in incidences of COVID-19 and the severity of any such resurgence, the rate and efficacy of vaccinations against COVID-19, the length of time that impacts from the COVID-19 pandemic continue, how fast economies will fully recover from the COVID-19 pandemic, the timing and extent of further impacts on 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, and availability and cost of products.
Refinancing Transactions
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Since the Company's emergence from bankruptcy in
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On
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Subsequent to
For additional information regarding the New ABL Credit Agreement and the Term Loan Credit Agreement, see Notes 3 and 12 to our consolidated financial statements.
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Over the last three months, the Company also has engaged in an extensive process
to obtain additional financing to support the Company's capital needs. On
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The Convertible Debt is convertible into shares of the Company's common stock at
a conversion price of
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In accordance with the terms of the Note Purchase Agreement, the SPV designated
each of
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As a result of the Private Placement, a change of control of the Company occurred, which is triggering event for Section 382 of the Internal Revenue Code, its impact on the realization of positive tax attributes will be evaluated immediately. It is expected to result in likely restrictions on the Company's ability to use its net operating losses and certain other tax
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attributes in future periods.
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In connection with the Private Placement, certain amendments were made to the New ABL Credit Agreement and the Term Loan Credit Agreement to permit the Private Placement.
For additional information regarding the Private Placement, see Note 12 to our consolidated financial statements.
Key Metrics for Fiscal 2022
Key operating metrics for continuing operations for the year ended
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Net sales for fiscal 2022 were
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Gross margin for fiscal 2022 was 25.6%, compared to 29.8% for fiscal 2021.
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Selling, general and administrative expenses for fiscal 2022 decreased
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Restructuring, impairment, and abandonment charges were
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Reorganization items were a net cost of
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Our net loss for fiscal 2022 was
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As shown under the heading "Non-GAAP Financials Measures" below, EBITDA was
negative
Key balance sheet and liquidity metrics for the year ended
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Cash and cash equivalents at
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As of
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Inventory levels at
Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
Fiscal Years Ended
July 2, June 30, June 30,
2022 2021 2020
Open at beginning of period 490 685 714
Opened 3 2 1
Closed (4 ) (197 ) (30 )
Open at end of the period 489 490 685
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Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data, expressed as a percentage of net sales. There can be no
assurance that the trends in sales or operating results will continue in the
future.
Fiscal Years Ended
July 2, June 30, June 30,
2022 2021 2020
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 74.4 70.2 67.4
Gross margin 25.6 % 29.8 % 32.6 %
Selling, general and administrative 32.1 35.3 37.8
expenses
Restructuring, impairment, and 0.3 1.6 13.0 abandonment charges Operating loss (6.8 %) (7.1 %) (18.2 %) Interest expense (1.0 ) (1.2 ) (0.4 ) Reorganization items, net (0.1 ) 8.7 (0.4 ) Other income 0.1 0.0 0.0 Income tax provision 0.0 0.0 0.0 Net earnings (loss) (7.8 %) 0.4 % (19.0 %)
See Note 2 in the Notes to Consolidated Financial Statements herein for a discussion of restructuring, impairment, and abandonment charges, as well as reorganization items.
2022 Compared with 2021
Net sales for fiscal 2022 were
Gross margin for fiscal 2022 was
Selling, general and administrative expenses ("SG&A") decreased
Restructuring, impairment, and abandonment charges were
Our operating loss was
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Interest expense decreased
Reorganization items were a net expense of
Income tax expense for fiscal 2022 was
Our net loss for fiscal 2022 was
Fiscal Year Ended
For a discussion of fiscal 2021 results of operations as compared to fiscal 2020
results of operations, please refer to Part II, Item 7, Management's Discussion
of Financial Condition and Results of Operations in our Annual Report on Form
10-K for the fiscal year ended
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 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 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 earnings (loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
Fiscal Years Ended
July 2, June 30,
2022 2021
Net earnings (loss) (GAAP) $ (59,003 ) $ 2,982
Depreciation and amortization 13,388 15,412
Interest expense, net 7,177 8,169
Income tax expense 73 291
EBITDA (non-GAAP) $ (38,365 ) $ 26,854
Share based compensation expense (1) 5,881 2,054
Restructuring, impairment and abandonment charges (2) 2,462 10,834 Reorganization items, net (3)
961 (60,015 )
Other (4) (1,477 ) -
Adjusted EBITDA (non-GAAP) $ (30,538 ) $ (20,273 ) 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.
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2)
For the year endedJuly 2, 2022 , adjustments include restructuring and abandonment costs primarily related to a software impairment charge of$2.0 million and$0.5 million in employee retention costs. For the year endedJune 30, 2021 , adjustments include restructuring and abandonment costs primarily related to$3.6 million to executive severance and employee retention cost, intangible impairment charge of a$1.6 million as well as abandonment cost of$5.6 million related to the permanent closure of our stores and thePhoenix distribution center. 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. 3) For the year endedJuly 2, 2022 , reorganization items net charges is$1.0 million from claims-related costs including professional and legal fees. For the year endedJune 30, 2021 , adjustments include a net$66.2 million gain due to the leases for store locations related to our permanent closure plan, as well as the lease for ourPhoenix distribution center, which were rejected and the related lease liabilities were reduced to the amount of estimated claims allowable by theBankruptcy Court (See note 1) as well as a$49.6 million gain due to the execution of a sale-leaseback agreement during the second quarter of 2021 on our owned real estate as part of our Plan of Reorganization (see note 1 and note 8). These were partially offset by reorganization costs primarily related to$34.6 million in professional & legal fees related to our reorganization as well as$20.0 million in non-cash charges related to the execution of our Rights Offering (see Note 1 and 7). 4) For the year endedJuly 2, 2022 , adjustments included non-cash benefit recognized related to cash settled awards in our long-term incentive plan, as well as gain on refinancing of the Post-Emergence ABL Facility (see Note 3).
Liquidity and Capital Resources
Cash Flows from Operating Activities
In fiscal 2022, cash used in operating activities was
Cash flows from Investing Activities
Net cash used in investing activities for the year ended
Cash Flows from Financing Activities
Net cash provided by financing activities of
Capital Resources and Plan of Operation and Funding
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. During the pendency of
our bankruptcy proceedings, we financed our operations with funds generated from
operating activities and available cash and cash equivalents, and also had in
place debtor-in-possession financing arrangements. We made no borrowings under
our debtor-in-possession financing arrangements, and both were terminated on
Since the Company's emergence from bankruptcy in
As described above, the Company entered into the New ABL Credit Agreement in
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As described above, the Company made an early borrowing of
Going forward, and after giving effect to the proceeds of the Private Placement, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility. For a discussion of material cash requirements, see "Contractual Obligations" below.
Our liquidity may continue to be impacted going forward by factors such as higher supply chain costs resulting from higher freight costs and other supply chain conditions, and reduced store traffic and sales as a result of general economic and inflationary conditions.
Capital expenditures are anticipated to be
We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the New ABL Credit Agreement and the Term Loan and the Convertible Debt, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock. Under the terms of the New ABL Credit Agreement and Term Loan, we must maintain certain minimum levels of borrowing availability, and do not anticipate any cash flows would be available for dividend payments.
Debt Covenants
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. Pursuant to the New ABL Credit
Agreement, the Borrower and its subsidiaries must maintain borrowing
availability under the New ABL Facility at least equal to the greater of (i)
At
Impact of Inflation
Global inflation has increased significantly over the past year. In
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our audited year end 2022 consolidated financial
statements, which have been prepared pursuant to the rules and regulations of
the
Impairment of Long-Lived Assets-We evaluate long-lived assets, principally property and equipment, and intangible assets, as well as lease right-of-use ("ROU") assets, for indicators of impairment whenever events or changes in circumstances indicate their carrying values may not be recoverable. Management's judgments regarding the existence of impairment indicators are based on market conditions and financial performance. Indicators of impairment may also include the planned closure of a store or facility, among others.
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Impairment is indicated when the sum of the estimated future cash flows, on an undiscounted basis, is less than the asset's (asset group's) carrying amount. Then, when the fair value of the estimated future cash flows, on a discounted basis, is less than carrying amount, an impairment charge is recorded. The testing of an asset group for recoverability involves assumptions regarding the future cash flows of the asset group, the growth rate of those cash flows, and the remaining useful life over which an asset group is expected to generate cash flows. In the event we determine an asset group is not recoverable, the measurement of an estimated impairment loss involves a number of management judgments, including the selection of an appropriate discount rate, as well as various unobservable inputs incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Key market participant assumptions used for purposes of determining the fair value of our long-lived assets, including lease ROU assets, in connection with the fiscal 2021 impairment discussed above included market rent assumptions and the discount rate.
If actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material. Additionally, we can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in our operating results or assumptions.
Asset impairment and abandonment charges totaled
Our property and equipment, combined with our operating lease ROU assets totaled
Inventory- Our inventories consist of finished goods and are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. We have a perpetual inventory system that tracks on-hand inventory and inventory sold at a stock-keeping unit ("SKU") level. Inventory is relieved and cost of goods sold is recorded based on the current calculated cost of the item sold. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are charged to cost of sales as the related inventory is sold. The retail inventory method, which is used by a number of our competitors, involves management estimates with regard to items such as markdowns. Such estimates may significantly impact the ending inventory valuation at cost as well as the amount of gross margin recognized.
Our stores conduct annual physical inventories, staggered during the second half of the fiscal year. During periods in which physical inventory observations do not occur, we utilize an estimate for recording inventory shrink based on the historical results of our previous physical inventories. We have loss prevention and inventory controls programs that we believe minimize shrink. The estimated shrink rate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventory results yield a different result. Although inventory shrink rates have not fluctuated significantly in recent years, if the actual rate were to differ from our estimates, then an adjustment to inventory shrink would be required.
Markdowns-We utilize markdowns to promote the effective and timely sale of merchandise which allows us to consistently provide new merchandise to our customers. We also utilize markdowns coupled with promotional events to drive traffic and stimulate sales. Markdowns may be temporary or permanent. Temporary markdowns are for a designated period of time with markdowns recorded to cost of sales based on quantities sold during the period. Permanent markdowns and damaged goods are recorded to inventory and charged to cost of sales immediately based on the total quantities on hand at the time of the markdown. Markdowns and damages were 4.2% in fiscal 2022 and were 4.3% in fiscal 2021. Markdowns may vary throughout the quarter or year in timing.
The effect of a 0.5% markdown in the value of our inventory at
Leases- Upon the adoption of Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" starting in fiscal 2020, we determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments, and the ROU assets represent our right to use the underlying assets for the respective lease terms.
The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.
Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease.
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Insurance and SelfInsurance Reserves-We use a combination of insurance and
selfinsurance plans to provide for the potential liabilities associated with
workers' compensation, general liability, property insurance, director and
officers' liability insurance, vehicle liability and employee health care
benefits. Our stop loss limits per claim are
The insurance liabilities we record are primarily influenced by the frequency
and severity of claims and include a reserve for claims incurred but not yet
reported. Our estimated reserves may be materially different from our future
actual claim costs, and, when required adjustments to our estimated reserves are
identified, the liability will be adjusted accordingly in that period. Our
selfinsurance reserves for workers' compensation, general liability and medical
were
We recognize insurance expenses based on the date of an occurrence of a loss
including the actual and estimated ultimate costs of our claims. Claims paid
reduce our reserves and our current period insurance expense is adjusted for the
difference in prior period recorded reserves and actual payments. Current period
insurance expenses also include the amortization of our premiums paid to our
insurance carriers. Expenses for workers' compensation, general liability and
medical insurance were
Income taxes- We account for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets and
liabilities are recorded in our consolidated balance sheets. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets
unless it is more likely than not that such assets will be realized. In
assessing the need for a valuation allowance, all available evidence is
considered including past operating results, future reversals of taxable
temporary differences, estimates of future income and tax planning strategies.
We have elected to utilize the "with and without" method for purposes of
determining when excess tax benefits will be realized. We are subject to income
tax in many jurisdictions, including
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of
Contractual Obligations
We have 489 stores with total rent expense of
Contractually required payments for maintenance, insurance and taxes on our
leased properties are estimated as a percentage of rent based on historical
trends. These amounts can vary based on multiple factors including inflation,
macroeconomic conditions, various local tax rates and appraised values of our
rental properties. The operating lease obligations include the lease obligations
of our corporate office and
We do not consider most merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order.
On
On
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a
maturity date of
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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 of
On
Though our self-insurance reserves represent an estimate of our future obligation and not a contractual payment obligation, we have disclosed our self-insurance reserves under "Critical Accounting Policies and Estimates - Insurance and Self-Insurance Reserves."
Seasonality
Our business is subject to seasonality, with a higher level of our net sales and
operating income generated during the quarter ending
Recent Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements.
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