tues-10q_20181231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED December 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO         

Commission File Number 0-19658

 

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

75-2398532

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

6250 LBJ Freeway

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

(972) 387-3562

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at January 29, 2019

Common Stock, par value $0.01 per share

 

46,801,336

 

 

 

 


Table of Contents

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

11

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

19

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

20

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

20

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

20

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

20

 

 

 

 

 

ITEM 5.

 

Other Information

 

20

 

 

 

 

 

ITEM 6.

 

Exhibits

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

December 31, 2018 (unaudited) and June 30, 2018

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

June 30,

 

 

 

2018

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,121

 

 

$

9,510

 

Inventories

 

 

226,903

 

 

 

234,365

 

Prepaid expenses

 

 

5,517

 

 

 

6,301

 

Other current assets

 

 

2,244

 

 

 

1,206

 

Total Current Assets

 

 

240,785

 

 

 

251,382

 

Property and equipment, net

 

 

114,887

 

 

 

121,117

 

Deferred financing costs

 

 

513

 

 

 

671

 

Other assets

 

 

3,143

 

 

 

3,086

 

Total Assets

 

$

359,328

 

 

$

376,256

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

79,438

 

 

$

88,912

 

Accrued liabilities

 

 

56,606

 

 

 

41,765

 

Income taxes payable

 

 

135

 

 

 

66

 

Total Current Liabilities

 

 

136,179

 

 

 

130,743

 

 

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

5,000

 

 

 

38,480

 

Deferred rent

 

 

23,444

 

 

 

22,883

 

Asset retirement obligation  — non-current

 

 

3,002

 

 

 

3,100

 

Other liabilities — non-current

 

 

1,786

 

 

 

796

 

Total Liabilities

 

 

169,411

 

 

 

196,002

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 10,000,000 shares;

    none issued or outstanding

 

 

 

 

 

 

Common stock, par value $0.01 per share, authorized 100,000,000 shares;

48,584,997 shares issued and 46,801,336 shares outstanding at December 31, 2018 and 47,648,958 shares issued and 45,865,297 shares outstanding at June 30, 2018

 

 

469

 

 

 

469

 

Additional paid-in capital

 

 

239,723

 

 

 

237,957

 

Retained deficit

 

 

(43,463

)

 

 

(51,360

)

Less: 1,783,661 common shares in treasury, at cost, at December 31, 2018

   and 1,783,661 common shares in treasury, at cost, at June 30, 2018

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

189,917

 

 

 

180,254

 

Total Liabilities and Stockholders’ Equity

 

$

359,328

 

 

$

376,256

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

3


Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

Six Months Ended

 

 

 

 

December 31,

December 31,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net sales

 

$

338,418

 

 

$

333,807

 

 

$

565,731

 

 

$

552,564

 

 

Cost of sales

 

 

221,673

 

 

 

228,122

 

 

 

366,568

 

 

 

368,929

 

 

Gross profit

 

 

116,745

 

 

 

105,685

 

 

 

199,163

 

 

 

183,635

 

 

Selling, general and administrative expenses

 

 

100,437

 

 

 

97,409

 

 

 

190,442

 

 

 

187,353

 

 

Operating income/(loss)

 

 

16,308

 

 

 

8,276

 

 

 

8,721

 

 

 

(3,718

)

 

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(767

)

 

 

(542

)

 

 

(1,355

)

 

 

(980

)

 

Other income, net

 

 

242

 

 

 

371

 

 

 

432

 

 

 

728

 

 

Other income/(expense), total

 

 

(525

)

 

 

(171

)

 

 

(923

)

 

 

(252

)

 

Income/(loss) before income taxes

 

 

15,783

 

 

 

8,105

 

 

 

7,798

 

 

 

(3,970

)

 

Income tax benefit

 

 

(223

)

 

 

(587

)

 

 

(99

)

 

 

(408

)

 

Net income/(loss)

 

$

16,006

 

 

$

8,692

 

 

$

7,897

 

 

$

(3,562

)

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

 

$

0.19

 

 

$

0.17

 

 

$

(0.08

)

 

Diluted

 

$

0.35

 

 

$

0.19

 

 

$

0.17

 

 

$

(0.08

)

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,733

 

 

 

44,260

 

 

 

44,612

 

 

 

44,173

 

 

Diluted

 

 

44,736

 

 

 

44,263

 

 

 

44,618

 

 

 

44,173

 

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

4


Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

7,897

 

 

$

(3,562

)

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,283

 

 

 

12,724

 

Amortization of financing fees

 

 

158

 

 

 

157

 

Gain on disposal of assets

 

 

(18

)

 

 

(59

)

Gain on sale-leaseback

 

 

 

 

 

(371

)

Share-based compensation

 

 

1,832

 

 

 

1,946

 

Construction allowances from landlords

 

 

598

 

 

 

3,503

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

7,389

 

 

 

1,774

 

Prepaid and other current assets

 

 

(42

)

 

 

(1,391

)

Accounts payable

 

 

(15,244

)

 

 

14,433

 

Accrued liabilities

 

 

15,869

 

 

 

7,488

 

Deferred rent

 

 

(38

)

 

 

2,760

 

Income taxes payable

 

 

73

 

 

 

147

 

Other liabilities — non-current

 

 

957

 

 

 

661

 

Net cash provided by operating activities

 

 

32,714

 

 

 

40,210

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,067

)

 

 

(19,532

)

Purchase of intellectual property

 

 

(273

)

 

 

(13

)

Proceeds from sale of assets

 

 

21

 

 

 

59

 

Net cash used in investing activities

 

 

(8,319

)

 

 

(19,486

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds under revolving credit facility

 

 

86,600

 

 

 

87,800

 

Repayments under revolving credit facility

 

 

(120,080

)

 

 

(118,300

)

Change in cash overdraft

 

 

5,770

 

 

 

13,001

 

Payments on capital leases

 

 

(81

)

 

 

(79

)

Proceeds from exercise of common stock options and stock purchase plan purchases

 

 

7

 

 

 

 

Net cash used in financing activities

 

 

(27,784

)

 

 

(17,578

)

Net increase (decrease) in cash and cash equivalents

 

 

(3,389

)

 

 

3,146

 

Cash and cash equivalents, beginning of period

 

 

9,510

 

 

 

6,263

 

Cash and cash equivalents, end of period

 

$

6,121

 

 

$

9,409

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

5


Tuesday Morning Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.  Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 for our critical accounting policies.

 

 

1.      Basis of presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The consolidated balance sheet at June 30, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The results of operations for the three and six month period ended December 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2019, which we refer to as fiscal 2019.

We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.

The preparation of unaudited interim consolidated financial statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to: inventory valuation under the retail method and estimation of reserves and valuation allowances specifically related to insurance, income taxes and litigation. Actual results could differ materially from these estimates. Our fiscal year ends on June 30 and we operate our business as a single operating segment.

 

2.       Revenue Recognition — Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax.  Payment for our sales is due at the time of sale.  We maintain a reserve for estimated returns, and we use historical customer return behavior to estimate our reserve requirements.  Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), adopted in the first quarter of fiscal 2019 as discussed in Note 14 below, required a change in presentation of the sales return reserve on the balance sheet, which we previously presented net of the estimated value of returned merchandise, but is now being presented on a gross basis.  In the first quarter of fiscal 2019, we recorded an immaterial adjustment to present the reserve on a gross basis, increasing “Accrued Liabilities” and recording the corresponding returns asset, as evaluated for impairment, in “Other Assets,” in the Consolidated Balance Sheet. No impairment of the returns asset was indicated or recorded as of December 31, 2018.  Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or if the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift card breakage is applied over the period of estimated performance and the breakage amounts are included in net sales in the Consolidated Statement of Operations.  Breakage income recognized was $0.2 million in the second quarter of fiscal 2019 and was $0.3 million in the second quarter of fiscal 2018.  Breakage income recognized was $0.3 million for the six months ended December 31, 2018 and was $0.4 million for the six months ended December 31, 2017.  The gift card liability is included in “Accrued Liabilities” in the Consolidated Balance Sheet at December 31, 2018.

 

3.      Share-based incentive plans — Stock Option Awards. We have established the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), which allow for the granting of stock options to directors, officers and key employees of the Company, and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan, but equity awards granted under the 2008 Plan are still outstanding.

 

On November 16, 2016, our stockholders approved amendments to the 2014 Plan to increase the number of shares of the Company’s common stock available for issuance under the 2014 Plan by 2,500,000 shares and to make additional amendments to the 2014 Plan, including (i) reducing the percentage of shares exempt from the minimum vesting requirements under the 2014 Plan, (ii) adding a clawback policy, (iii) generally eliminating the discretion of the Board of Directors to accelerate the vesting of outstanding and unvested awards upon a change of control and (iv) providing that certain shares surrendered in payment of the exercise price of awards or withheld for tax withholding would count against the shares available under the 2014 Plan.

6


 

       Stock options were awarded with a strike price at a fair market value equal to the closing price of our common stock on the date of the grant under the 2008 Plan and the 2014 Plan.

 

   Options granted under the 2008 Plan and the 2014 Plan typically vest over periods of one to four years and expire ten years from the date of grant. Options granted under the 2008 Plan and the 2014 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. The exercise prices of stock options outstanding on December 31, 2018, range between $1.24 per share and $20.91 per share.  The 2008 Plan terminated as to new awards as of September 16, 2014. There were 1.7 million shares available for grant under the 2014 Plan at December 31, 2018.

Restricted Stock Awards—The 2008 Plan and the 2014 Plan authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries.  Equity awards may no longer be granted under the 2008 Plan, but restricted stock awards granted under the 2008 Plan are still outstanding.  Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights.  The 2014 Plan also authorizes the issuance of restricted stock units which, upon vesting, provide for the issuance of an equivalent number of shares of common stock.  Restricted units are not transferable and do not provide voting or dividend rights.  Shares and units are valued at the fair market value of our common stock at the date of award.  Shares and units may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares or units are forfeited.  Under the 2008 Plan and the 2014 Plan, as of December 31, 2018, there were 2,010,518 shares of restricted stock and 230,770 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to four years and a weighted average grant date fair value of $3.52 and $2.24 per share, respectively.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards.  As of December 31, 2018 there were 1,502,762 unvested performance-based restricted stock awards and performance-based stock options outstanding under the 2014 Plan.  

Share-based Compensation Costs.   Share-based compensation costs were recognized as follows (in thousands):

 

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Amortization of share-based compensation during the

   period

$

988

 

 

$

988

 

 

$

1,759

 

 

$

1,831

 

 

Amounts capitalized in ending inventory

 

(332

)

 

 

(363

)

 

 

(617

)

 

 

(723

)

 

Amounts recognized and charged to cost of sales

 

452

 

 

 

546

 

 

 

690

 

 

 

838

 

 

Amounts charged against income for the period before tax

$

1,108

 

 

$

1,171

 

 

$

1,832

 

 

$

1,946

 

 

 

 

 

4.      Commitments and contingencies — we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

 

 

7


5.      Earnings per common share — The following table sets forth the computation of basic and diluted income/(loss) per common share (in thousands, except per share amounts):

 

 

Three Months Ended

December  31,

 

 

Six Months Ended

December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net Income/(loss)

$

16,006

 

 

$

8,692

 

 

$

7,897

 

 

$

(3,562

)

 

Less: Income to participating securities

 

(159

)

 

 

(156

)

 

 

(96

)

 

 

 

 

Net Income/(loss) attributable to common shares

$

15,847

 

 

$

8,536

 

 

$

7,801

 

 

$

(3,562

)

 

Weighted average number of common shares

   outstanding basic

 

44,733

 

 

 

44,260

 

 

 

44,612

 

 

 

44,173

 

 

Effect of dilutive stock equivalents

 

3

 

 

 

3

 

 

 

6

 

 

 

 

 

Weighted average number of common shares

   outstanding diluted

 

44,736

 

 

 

44,263

 

 

 

44,618

 

 

 

44,173

 

 

Net income/(loss) per common share basic

$

0.35

 

 

$

0.19

 

 

$

0.17

 

 

$

(0.08

)

 

Net income/(loss) per common share diluted

$

0.35

 

 

$

0.19

 

 

$

0.17

 

 

$

(0.08

)

 

 

For each of the quarters ended December 31, 2018 and December 31, 2017, options representing the rights to purchase approximately 4.0 million weighted average were not included in the dilutive income per share calculation, because the assumed exercise of such options would have been anti-dilutive.  For the six months ended December 31, 2018, options and awards representing rights to purchase approximately 3.9 million weighted average shares were excluded from the diluted loss per share calculation as we had a net loss for the periods and the assumed exercise of such options and awards would have been anti-dilutive.  For the six months ended December 31, 2017, all options and awards representing rights to purchase shares were excluded from the diluted loss per share calculation as we had a net loss for the period and the assumed exercise of such options and awards would have been anti-dilutive.

 

6.      Revolving credit facility — We are party to a credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million (the “Revolving Credit Facility”) which originally was scheduled to mature on August 18, 2020.  On January 29, 2019, the Revolving Credit Facility was amended to extend the maturity date to January 29, 2024.  The availability of funds under the Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Revolving Credit Facility. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. The Revolving Credit Facility requires that we satisfy a fixed charge coverage ratio at any time that our availability is less than the greater of 10% of our calculated borrowing base or $12.5 million. Our Revolving Credit Facility, in some instances, limits our ability to pay cash dividends and repurchase our common stock. In order for the borrower under the Revolving Credit Facility, our subsidiary, to make a restricted payment to us for the payment of a dividend or a repurchase of shares, we are required to, among other things, maintain availability of 20% of the lesser of our calculated borrowing base or our lenders’ aggregate commitments under the Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment. As of December 31, 2018, we were in compliance with all of the Revolving Credit Facility covenants.  

At December 31, 2018, we had $5.0 million outstanding under the Revolving Credit Facility, $10.1 million of outstanding letters of credit and availability of $93.7 million. Letters of credit under the Revolving Credit Facility are generally for self-insurance purposes. We incur commitment fees of up to 0.25% on the unused portion of the Revolving Credit Facility, payable quarterly. Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin), subject to a floor of one month LIBOR plus an applicable margin in the case of loans based on the prime rate.  Interest expense for the second quarter of the current fiscal year from the Revolving Credit Facility of $0.8 million was comprised of interest of $0.6 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the second quarter of the prior fiscal year from the Revolving Credit Facility of $0.5 million was comprised of interest of $0.3 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the six months ended December 31, 2018 of $1.4 million was comprised of interest of $1.0 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million. Interest expense for the six months ended December 31, 2017 of $1.0 million was comprised of interest of $0.6 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million.

The fair value of the Company’s debt approximated its carrying amount as of December 31, 2018.

 

7.      Depreciation — Accumulated depreciation of owned property and equipment at December 31, 2018 and June 30, 2018 was $168.0 million and $157.0 million, respectively.

 

 

8


8.      Income taxes — The Company or one of its subsidiaries files income tax returns in the U.S. federal, state and local taxing jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to state and local income tax examinations for years through fiscal 2013.  The Internal Revenue Service has concluded an examination of the Company for years ending on or before June 30, 2010.

 

The effective tax rates for the quarters ended December 31, 2018 and December 31, 2017 were (1.4%) and (7.2%), respectively. The effective tax rates for the six months ended December 31, 2018 and December 31, 2017 were (1.3%) and 10.3%, respectively. The income tax benefit in the prior year included a favorable tax impact of approximately $0.5 million resulting from the release of a valuation allowance on deferred taxes due to enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”).  A full valuation allowance is currently recorded against substantially all of the Company’s other deferred tax assets. A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) results from the effects of the valuation allowance.

 

We have completed our accounting for the impact of the enactment of the TCJA, within the one year measurement period ending December 22, 2018, as required under the rules issued by the SEC.  In the second fiscal quarter of 2018, we applied the provisions of the newly enacted TCJA, resulting in an approximate $0.5 million income tax benefit connected with future refunds of alternative minimum tax credits no longer requiring a valuation allowance.  In the third fiscal quarter of 2018, we recognized a $0.1 million additional benefit related to this matter. The impact of the new tax law, including the remeasurement of our deferred taxes at the new corporate tax rate, did not have a material impact on our deferred taxes as substantially all of our other deferred tax assets have corresponding valuation allowances.  The Company currently expects the effect of the TCJA to have a nominal impact on its annual effective tax rate, given its cumulative loss position and the related valuation allowance.

 

 

9.      Cash and cash equivalents — Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value.  At December 31, 2018 and June 30, 2018, credit card receivables from third party consumer credit card providers were $3.6 million and $7.9 million, respectively.  Such receivables are generally collected within one week of the balance sheet date.

 

 

10.      Intellectual property — Our intellectual property primarily consists of indefinite lived trademarks. We evaluate annually whether the trademarks continue to have an indefinite life. Trademarks and other intellectual property are reviewed for impairment annually in the fourth fiscal quarter, and may be reviewed more frequently if indicators of impairment are present. As of December 31, 2018, the carrying value of the intellectual property, which included indefinite-lived trademarks, was $1.3 million, and no impairment was identified or recorded.

 

11.     Cease use liability — Amounts in “Accrued liabilities” in the Consolidated Balance Sheet at December 31, 2018 include the current portions of accruals for the net present value of future minimum lease payments, net of estimated sublease income, attributable to closed stores with remaining lease obligations. The cease use liability at December 31, 2018 was $18 thousand, and was all classified as short-term. The cease use liability at June 30, 2018 was $77 thousand, and was all classified as short-term. Expenses related to store closings are included in “Selling, general and administrative expenses” in the Consolidated Statements of Operations.

 

12.    Sale-leaseback —During the fourth quarter of fiscal 2016, we entered into a sale-leaseback transaction to sell two buildings and land utilized in our Dallas distribution center operations, which we did not consider part of our long-term distribution network, and leased back these facilities through December 2017. We subsequently exercised our option to extend the related lease through March 2018, which was accounted for as an operating lease and has now expired. We had no continuing involvement with the properties sold other than a normal leaseback.

 

The consideration received for the sale, as reduced by closing and transaction costs, was $8.8 million, and the net book value of properties sold was $5.2 million, resulting in a $3.6 million gain. The gain recognized in fiscal 2016 was $2.5 million, which included the portion of the gain in excess of the present value of the minimum lease payments for the leaseback, and was included in “Other income” in our Consolidated Statement of Operations.  During fiscal 2017, we recognized $0.7 million of the gain. During the first three months of fiscal 2018, we recognized $0.2 million of the gain. The final $0.2 million gain deferred on the Consolidated Balance Sheet at September 30, 2017 was classified as short-term and was recognized in the second quarter of fiscal 2018.

        

13.  Capital lease — During fiscal 2017, we entered into a 5-year capital lease maturing on January 31, 2022 for equipment and software. At December 31, 2018, the capital lease asset balance was $0.5 million, the current lease liability was $0.2 million and the long-term lease liability was $0.4 million. The capital lease asset is amortized on a straight-line basis. Capital lease amortization was less than $0.1 million in the second quarters of both fiscal 2019 and 2018.

 

14.  Recent accounting pronouncements — In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118),” which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As discussed in Note 8, the Company has completed its analysis of the effects of the TCJA within the measurement period in accordance with SAB 118.

9


 

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which provides guidance on eight specific cash flow issues in regard to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and required adoption on a retrospective basis.  The Company adopted ASU 2016-15 in the first quarter of fiscal 2019. The adoption of this standard did not materially impact our consolidated financial statements and disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which is intended to improve financial reporting in connection with leasing transactions. ASU 2016-02 will require entities (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or finance, while the income statement will reflect lease expense for operating leases and amortization/interest expense for finance leases. Accounting by entities that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, ASU 2016-02 requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provided an additional transition option that allows companies to continue applying the guidance under the current lease standard in the comparative periods presented in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The Company currently plans to elect this transition option.  The Company will adopt this standard in the first quarter of fiscal 2020. While the Company is currently evaluating the provisions of ASU 2016-02, including which practical expedients to apply, to assess the impact on the Company’s consolidated financial statements and disclosures, the primary effect of adopting the new standard will be to record assets and obligations for current operating leases.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), an updated standard on revenue recognition, and has since modified the standard with additional ASUs. The new guidance provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration, or payment, to which the company expects to be entitled in exchange for those goods or services. The Company adopted this standard in the first quarter of fiscal 2019 using the modified retrospective method, and the adoption did not have a material impact on its consolidated financial statements and disclosures.  See Note 2 for further information.

 

 

10


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Business Overview

 

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods.  We are a closeout retailer, 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, digital media and newspaper circulars.

 

During the second quarter of fiscal 2019, we continued to implement our strategy of improving store locations and the in-store experience for our customers, which includes (i) closing less productive stores with limited foot traffic and relocating some of these stores to, or opening new stores in, better locations with footprints that are on average four to six thousand square feet larger, (ii) expanding some existing stores to a larger footprint, and (iii) improving the finishes in these relocated, new and expanded stores.

 

We operated 720 stores in 40 states as of December 31, 2018.  As part of the implementation of our real estate strategy, our store base decreased from 724 stores in 40 states as of December 31, 2017.

 

Net sales for the second quarter of fiscal 2019 were $338.4 million, an increase of 1.4% compared to $333.8 million for the same period last year, primarily due to an increase in sales from comparable stores (stores open at least five quarters, including stores relocated in the same market and renovated stores) of 1.9%. The increase in comparable store sales was due to a 1.1% increase in customer transactions along with a 0.8% increase in average ticket. Sales at stores relocated during the past 12 months increased approximately 46% on average for the second quarter of fiscal 2019 as compared to the same period last year and contributed approximately 170 basis points of comparable store sales growth. Net sales for the first six months of fiscal 2019 were $565.7 million, an increase of $13.1 million, from $552.6 million for the same period last year.  Comparable store sales for the six months ended December 31, 2018 increased by 2.6%, compared to the same period last year, which was due to a 1.4% increase in customer transactions as well as a 1.2% increase in average ticket.  Sales at stores relocated during the past 12 months increased approximately 51% on average for the first six months of fiscal 2019 as compared to the same period last year and contributed approximately 210 basis points of comparable store sales growth.  Sales per square foot for the rolling 12 month period ended December 31, 2018 were $117, an increase from $115 for the rolling 12 month period ended December 31, 2017.

 

Cost of sales, as a percentage of net sales, for the second quarter of fiscal 2019 was 65.5%, compared to 68.3% for the same period last year.  Cost of sales, as a percentage of net sales, for the first six months of fiscal 2019 was 64.8%, compared to 66.8% for the same period last year.

 

For the second quarter of fiscal 2019, selling, general and administrative expenses increased $3.0 million to $100.4 million, from $97.4 million for the same quarter last year. For the first six months of fiscal 2019, selling, general and administrative expenses increased $3.0 million to $190.4 million, from $187.4 million for the same period last year. 

 

Our operating income for the second quarter of fiscal 2019 was $16.3 million compared to operating income of $8.3 million for the same period last year. Our operating income for the six months ended December 31, 2018 was $8.7 million compared to an operating loss of $3.7 million for the same period last year.

 

Our net income for the second quarter of fiscal 2019 was $16.0 million, or $0.35 per share, compared to $8.7 million, or $0.19 per share, for the same period last year. Our net income for the six months ended December 31, 2018 was $7.9 million, or $0.17 per share, compared to a net loss of $3.6 million, or $0.08 per share, for the same period last year.

 

As shown under the heading “Non-GAAP Financial Measures” below, EBITDA for the second quarter of fiscal 2019 was $23.3 million compared to $15.2 million for the same period last year.  Adjusted EBITDA for the second quarter of fiscal 2019 was $24.4 million compared to $16.6 million for the same period last year. EBITDA for the first six months of fiscal 2019 was $22.4 million compared to $9.7 million for the prior year period.  Adjusted EBITDA for the first six months of fiscal 2019 was $24.3 million compared to $12.5 million for the same period last year, as shown below.

 

Inventory levels at December 31, 2018 decreased $7.5 million to $226.9 million from $234.4 million at June 30, 2018. Compared to the same date last year, inventories increased $6.9 million from $220.0 million at December 31, 2017. The increase in inventory as compared to December 31, 2017 was driven primarily by higher store inventory levels.   Inventory turnover for the trailing five quarters as of December 31, 2018 was 2.7 turns, an improvement from the trailing five quarter turnover as of December 31, 2017 of 2.6 turns.

11


 

Cash and cash equivalents at December 31, 2018 decreased $3.4 million to $6.1 million from $9.5 million at June 30, 2018. Compared to the same date last year, cash and cash equivalents decreased $3.3 million from $9.4 million at December 31, 2017.

 

Subsequent to the end of the second quarter of fiscal 2019, on January 29, 2019, we entered into an amendment to extend the maturity date of our asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million (the “Revolving Credit Facility”) that originally was scheduled to mature on August 18, 2020.  The Revolving Credit Facility, as amended, now matures on January 29, 2024.  See “—Liquidity and Capital Resources—Revolving Credit Facility” below.

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 December 31.

There can be no assurance that the trends in sales or operating results will continue in the future.

 

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 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):

 

12


 

Three Months Ended

December 31,

 

 

Six Months Ended

December  31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income/(loss) (GAAP)

$

16,006

 

 

$

8,692

 

 

$

7,897

 

 

$

(3,562

)

Depreciation and amortization

 

6,729

 

 

 

6,516

 

 

 

13,283

 

 

 

12,724

 

Interest expense, net

 

760

 

 

 

530

 

 

 

1,335

 

 

 

965

 

Income tax benefit

 

(223

)

 

 

(587

)

 

 

(99

)

 

 

(408

)

EBITDA (non-GAAP)

$

23,272

 

 

$

15,151

 

 

$

22,416

 

 

$

9,719

 

Share based compensation expense  (1)

 

1,108

 

 

 

1,171

 

 

 

1,832

 

 

 

1,946

 

Cease-use rent expense  (2)

 

7

 

 

 

449

 

 

 

72

 

 

 

794

 

Stockholder nominations related expenses  (3)

 

 

 

 

29

 

 

 

-

 

 

 

408

 

Gain on sale of assets  (4)

 

 

 

 

(186

)

 

 

-

 

 

 

(371

)

Adjusted EBITDA (non-GAAP)

$

24,387

 

 

$

16,614

 

 

$

24,320

 

 

$

12,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)  Adjustment includes accelerated rent expense recognized in relation to closing stores prior to lease termination.  While accelerated rent expense may occur in future periods, the amount and timing of such expenses will vary from period to period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)  Adjustment includes only certain incremental expenses which relate to the stockholder nominations as described in our Preliminary and Definitive Proxy Statements filed with the SEC on September 25, 2017 and October 5, 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4)  Adjustment includes the deferred gain recognized from the sale-leaseback transaction which occurred in the fourth quarter of fiscal 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

Compared to the Three Months Ended December 31, 2017

 

Net sales for the second quarter of fiscal 2019 were $338.4 million, an increase of $4.6 million from $333.8 million in the second quarter of fiscal 2018. Comparable store sales increased 1.9% compared to the second quarter of fiscal 2018. 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. The increase in comparable store sales was comprised of a 1.1% increase in customer transactions along with a 0.8% increase in average ticket. Our sales results in the second quarter of fiscal 2019 as compared to the second quarter of fiscal 2018 were impacted by the shift of a promotional event from the first quarter to the second quarter of fiscal 2019. Although we had one more traditional ad event in the second quarter this year as compared to the prior year period, the total inventory buy and advertising spend supporting these events was less in the current year period as compared to the prior year period, resulting in reduced sales, negatively impacting comparable store sales results for the quarter.  Non-comparable store sales decreased by a total of $1.5 million and resulted in a 50 basis point negative impact on net sales. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. The non-comparable store sales decrease was driven by 15 store closures, partially offset by 11 store openings, which have occurred since the end of the second quarter of fiscal 2018.

 

 

 

Store Openings/Closings

 

 

 

Three Months Ended

December 31,

2018

 

 

Three Months Ended

December 31,

2017

 

 

Fiscal Year Ended

June 30, 2018

 

Stores open at beginning of period

 

 

719

 

 

 

728

 

 

 

731

 

Stores opened during the period

 

 

2

 

 

 

4

 

 

 

15

 

Stores closed during the period

 

 

(1

)

 

 

(8

)

 

 

(20

)

Stores open at end of period

 

 

720

 

 

 

724

 

 

 

726

 

 

 

We ended the second quarter of fiscal 2019 with 720 stores open at December 31, 2018, compared to 724 stores open at December 31, 2017.  We relocated three existing stores during the second quarter of fiscal 2019 and 14 stores in the second quarter of the prior fiscal year. We expanded no stores during the second quarter of fiscal 2019 and expanded 2 stores in the second quarter of the prior fiscal year.

13


Gross profit for the second quarter of fiscal 2019 was $116.7 million, an increase of 10.4% compared to $105.7 million in gross profit for the second quarter of fiscal 2018. Gross profit as a percentage of net sales was 34.5% for the second quarter of fiscal 2019, compared to 31.7% for the second quarter of fiscal 2018The increase in gross margin for the quarter was driven by continued improvements in initial merchandise mark-up, partially resulting from our strategy to reduce reliance on our traditional ad events, reduced markdowns, and lower supply chain costs.  Partially offsetting these improvements were increased freight costs, largely due to transportation cost headwinds along with increased volumes year over year.

Selling, General & Administrative (SG&A) expenses for the second quarter of fiscal 2019 increased 3.1% to $100.4 million, compared to $97.4 million in the same period last year.  As a percentage of net sales, SG&A was 29.7% for the second quarter of fiscal 2019 compared to 29.2% in the same period last year, deleveraging approximately 50 basis points.  This increase in SG&A was driven primarily by higher store rent and depreciation, due in part to our strategy to improve store real estate, along with increased advertising costs, increased incentive compensation and retention costs, and was partially offset by reduced store labor costs, which leveraged as a percentage of net sales.

Our operating income was $16.3 million for the second quarter of fiscal 2019 as compared to $8.3 million during the second quarter of fiscal 2018.

Interest expense increased $0.3 million to $0.8 million in the second quarter of fiscal 2019 compared to $0.5 million in the second quarter of fiscal 2018, as a result of increased borrowings, as well as higher interest rates, on our Revolving Credit Facility during the second quarter of fiscal 2019. Other income was $0.2 million in the second quarter of fiscal 2019 compared to $0.4 million in the second quarter of fiscal 2018.

Income tax benefit for the second quarter of fiscal 2019 was $0.2 million compared to $0.6 million for the same period last year.  The income tax benefit in the prior year included a favorable tax impact of approximately $0.5 million resulting from the release of a valuation allowance on deferred taxes due to enactment of the TCJA. The effective tax rates for the second quarter of fiscal 2019 and fiscal 2018 were (1.4%) and (7.2%), respectively.  We currently expect the effect of the TCJA tax law change to have a nominal impact on our annual effective tax rate, given our cumulative loss position and the related valuation allowance.  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.  A full valuation allowance is currently recorded against substantially all of our other deferred tax assets at December 31, 2018. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance.

 

Six Months Ended December 31, 2018

Compared to the Six Months Ended December 31, 2017

Net sales for the first six months of fiscal 2019 were $565.7 million, an increase of $13.1 million from $552.6.0 million in the same period last year. Comparable store sales increased 2.6% compared to the same period in fiscal 2018. 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. The increase in comparable store sales was comprised of a 1.4% increase in customer transactions and a 1.2% increase in average ticket. Non-comparable store sales decreased by a total of $1.0 million, and resulted in a 20 basis point negative impact on net sales. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. The non-comparable store sales decrease was driven by 30 store closures, partially offset by 19 store openings, which have occurred since the beginning of the prior fiscal year.

 

 

Store Openings/Closings

 

 

 

Six Months Ended

December 31,

2018

 

 

Six Months Ended

December 31,

2017

 

 

Fiscal Year Ended

June 30, 2018

 

Stores open at beginning of period

 

 

726

 

 

 

731

 

 

 

731

 

Stores opened during the period

 

 

4

 

 

 

8

 

 

 

15

 

Stores closed during the period

 

 

(10

)

 

 

(15

)

 

 

(20

)

Stores open at end of period

 

 

720

 

 

 

724

 

 

 

726

 

 

We ended the first six months of fiscal 2019 with 720 stores, compared to 724 stores at the end of the first six months of the prior year.  We relocated 10 existing stores during the first six months of fiscal 2019 and 26 stores in the first six months of the prior fiscal year. We expanded one store during the first six months of fiscal 2019 and seven stores in the first six months of the prior fiscal year.

14


Gross profit for the first six months of fiscal 2019 was $199.2 million, an increase of 8.5% compared to $183.6 million in gross profit for the same period of fiscal 2018. Gross profit as a percentage of net sales was 35.2% for the first six months of fiscal 2019, compared to 33.2% for the same period of fiscal 2018. The increase in gross margin for the six months was driven by continued improvements in initial merchandise mark-up, partially resulting from our strategy to reduce reliance on our traditional ad events, reduced markdowns, and lower supply chain costs.  Partially offsetting these improvements were increased freight costs, largely due to transportation cost headwinds along with increased volumes year over year.

SG&A expenses for the first six months of fiscal 2019 increased 1.6% to $190.4 million, compared to $187.4 million in the same period of fiscal 2018.  As a percentage of net sales, SG&A was 33.7% for the first six months of fiscal 2019 compared to 33.2% in the same period last year. This increase in SG&A was driven primarily by higher store rent and depreciation, due in part to our strategy to improve store real estate, as well as increased incentive compensation and retention costs, and was partially offset by reduced store labor costs, which leveraged as a percentage of net sales.  

Our operating income was $8.7 million for the first six months of fiscal 2019 as compared to an operating loss of $3.7 million during the same period in fiscal 2018.

Interest expense increased $0.4 million to $1.4 million in the first six months of fiscal 2019 compared to $1.0 million in the same period of fiscal 2018, as a result of increased borrowings, as well as higher interest rates on our Revolving Credit Facility, during the first six months of fiscal 2019. Other income was $0.4 million in the first six months of fiscal 2019 compared to $0.7 million in the first six months of fiscal 2018.

Income tax benefit for the first six months of fiscal 2019 was a $0.1 million compared to $0.4 million for the same period last year. The income tax benefit in the prior year included a favorable tax impact of approximately $0.5 million resulting from the release of a valuation allowance on deferred taxes due to enactment of the TCJA. The effective tax rates for the first six months of fiscal 2019 and fiscal 2018 were (1.3%) and 10.3%, respectively. We currently expect the effect of the TCJA tax law change to have a nominal impact on our annual effective tax rate, given our cumulative loss position and the related valuation allowance.  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.  A full valuation allowance is currently recorded against substantially all of our other deferred tax assets at December 31, 2018. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance.

Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended December 31, 2018 was $32.7 million compared to $40.2 million for the six months ended December 31, 2017.  The $32.7 million of cash provided by operating activities for the six months ended December 31, 2018 was primarily due to a decrease in inventory of $7.4 million due to holiday season sales, along with a related decrease in accounts payable of $15.2 million and an increase in accrued liabilities of $15.9 million, and increased non-current liabilities of $1.0 million.  In the first six months of fiscal 2019, we received $0.6 million in construction allowances from landlords related to our real estate improvement strategy.  Also impacting net cash used in operating activities were net income of $7.9 million, adjusted for non-cash items, including depreciation and amortization of $13.4 million, and share based compensation of $1.8 million. There were no significant changes to our vendor payments policy during the six months ended December 31, 2018.

The $40.2 million of cash provided by operating activities for the six months ended December 31, 2017 was primarily due to an increase in accounts payable of $14.4 million due to increased merchandise purchases in the current quarter, and an increase in accrued liabilities of $7.5 million, an increase in deferred rent of $2.8 million, along with a decrease in inventory of $1.7 million, partially offset by increased prepaid and other current assets of $1.4 million.  In the first six months of fiscal 2018, we received $3.5 million in construction allowances from landlords related to our real estate improvement strategy.  Also impacting net cash used in operating activities was a net loss of $3.6 million, adjusted for non-cash items, including depreciation and amortization of $12.9 million, along with share based compensation of $1.9 million.  

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended December 31, 2018 and 2017 related primarily to capital expenditures.  Our capital expenditures are generally associated with store relocations, expansions and new store openings, capital improvements to existing stores, as well as enhancements to our distribution center facilities, equipment, and systems along with improvements related to our corporate office and equipment.  Cash used in investing activities totaled $8.3 million and $19.5 million for the six months ended December 31, 2018 and 2017, respectively, primarily related to our store real estate strategy.

15


We currently expect to incur capital expenditures, net of construction allowances received from landlords, in the range of $12 million to $15 million in fiscal year 2019.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities of $27.8 million for the six months ended December 31, 2018 related to $120.0 million of repayments on our Revolving Credit Facility, offset by borrowings of $86.6 million, partially offset by a $5.8 million cash overdraft provision.  Net cash used in financing activities of $17.6 million for the six months ended December 31, 2017 related to $118.3 million of repayments on our Revolving Credit Facility, offset by borrowings of $87.8 million, partially offset by a $13.0 million cash overdraft provision.

 

Revolving Credit Facility

We are party to a credit agreement providing for an asset-based, five year senior secured revolving credit facility in the amount of up to $180.0 million that originally was scheduled to mature on August 18, 2020.  On January 29, 2019, we entered into an amendment to the Revolving Credit Facility to extend the maturity date to January 29, 2024.  The availability of funds under the Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Revolving Credit Facility. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. The Revolving Credit Facility requires that we satisfy a fixed charge coverage ratio at any time that our availability is less than the greater of 10% of our calculated borrowing base or, $12.5 million. Our Revolving Credit Facility may, in some instances, limit our ability to pay cash dividends and repurchase our common stock. In order for the borrower under the Revolving Credit Facility, our subsidiary, to make a restricted payment to us for the, payment of a dividend or a repurchase of shares, we must, among other things, maintain availability of 20% of the lesser of our calculated borrowing base or our lenders’ aggregate commitments under the Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment.

At December 31, 2018, we had $5.0 million outstanding under the Revolving Credit Facility, $10.1 million of outstanding letters of credit and availability of $93.7 million. Letters of credit under the Revolving Credit Facility are generally for self-insurance purposes. We incur commitment fees of up to 0.25% on the unused portion of the Revolving Credit Facility, payable quarterly. Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin), subject to a floor of one month LIBOR plus an applicable margin in the case of loans based on the prime rate.  Interest expense for the second quarter of the current fiscal year from the Revolving Credit Facility of $0.8 million was comprised of interest of $0.6 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the second quarter of the prior fiscal year from the Revolving Credit Facility of $0.5 million was comprised of interest of $0.3 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the six months ended December 31, 2018 of $1.4 million was comprised of interest of $1.0 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million. Interest expense for the six months ended December 31, 2017 of $1.0 million was comprised of interest of $0.6 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million.


16


Liquidity

We have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under our Revolving Credit Facility.  Cash and cash equivalents as of December 31, 2018 and 2017, were $6.1 million and $9.4 million, respectively. Our cash flows will continue to be utilized for the operation of our business and the use of any excess cash will be determined by the Board of Directors. Given the seasonality of our business, the amount of borrowings under our New Revolving Credit Facility may fluctuate materially depending on various factors, including the time of year, our strategic investment needs and the opportunity to acquire merchandise inventory. Our primary uses for cash provided by operating activities relate to funding our ongoing business activities and planned capital expenditures. We may also use available cash to repurchase shares of our common stock. We believe funds generated from our operations, available cash and cash equivalents and borrowings under our New Revolving Credit Facility will be sufficient to fund our operations for the next year. If our capital resources are not sufficient to fund our operations, we may seek additional debt or equity financing. However, we can offer no assurances that we will be able to obtain additional debt or equity financing on reasonable terms.

 

Off-Balance Sheet Arrangements and Contractual Obligations

We had no off-balance sheet arrangements as of December 31, 2018.

As of December 31, 2018, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

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 the SEC. 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 14 of our unaudited condensed consolidated financial statements, as of December 31, 2018, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

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 second quarter of fiscal 2019 were 4.1% of sales compared to 5.1% 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 at December 31, 2018 would result in a decline in gross profit and earnings per share for the second quarter of fiscal 2019 of $1.1 million and $0.02, 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 ended June 30, 2018.

Recent Accounting Pronouncements

 

Please refer to Note 14 of our unaudited condensed consolidated financial statements for a summary of recent accounting pronouncements.

17


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections.  These statements may be found throughout this Quarterly Report on Form 10-Q, particularly in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are expressed differently.  You should consider statements that contain these words or words that state other “forward-looking” information carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, future results of operations, future financial positions, and our current business outlook. Forward looking statements also include statements regarding our sales and growth expectations, our liquidity, capital expenditure plans, our inventory management plans, our real estate strategy and merchandising and marketing strategies.

Readers are referred to Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.  These risks, uncertainties and events also include, but are not limited to, the following:

 

our ability to successfully implement our long-term business strategy;

 

changes in economic and political conditions which may adversely affect consumer spending;

 

our ability to identify and respond to changes in consumer trends and preferences;

 

our ability to mitigate reductions of customer traffic in shopping centers where our stores are located;

 

our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand;

 

our ability to successfully manage our inventory balances profitably;

 

our ability to effectively manage our supply chain operations;

 

loss of, disruption in operations, or increased costs in the operation of our distribution center facilities;

 

unplanned loss or departure of one or more members of our senior management or other key management;

 

increased or new competition;

 

our ability to successfully execute our strategy of opening new stores and relocating and expanding existing stores;

 

increases in fuel prices and changes in transportation industry regulations or conditions;

 

our ability to generate strong cash flows from operations and to continue to access credit markets;

 

increases in the cost or a disruption in the flow of our imported products;

 

changes in federal tax policy including tariffs;

 

the success of our marketing, advertising and promotional efforts;

 

our ability to attract, train and retain quality employees in appropriate numbers, including key employees and management;

 

increased variability due to seasonal and quarterly fluctuations;

 

 

our ability to maintain and protect our information technology systems and technologies and related improvements to support our growth;

 

 

our ability to protect the security of information about our business and our customers, suppliers, business partners and employees;

 

our ability to comply with existing, changing and new government regulations;

 

our ability to manage litigation risks from our customers, employees and other third parties;

18


 

our ability to manage risks associated with product liability claims and product recalls;

 

the impact of adverse local conditions, natural disasters and other events;

 

our ability to manage the negative effects of inventory shrinkage;

 

our ability to manage exposure to unexpected costs related to our insurance programs; and

 

increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations.

The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made.  Except as may be required by law, we disclaim obligations to update any forward-looking statements to reflect events or circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events.  Investors are cautioned not to place undue reliance on any forward-looking statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s market risks as disclosed in our Annual Report on Form 10-K filed for the fiscal year ended June 30, 2018.

 

 

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Based on our management’s evaluation (with participation of our principal executive officer and our principal financial officer), our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)  under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2018 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under  the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that their objectives are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

19


PART II - OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies.  Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

 

 

Item 1A.

Risk Factors

We believe there have been no material changes from our risk factors previously disclosed in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Information regarding our repurchases of equity securities during the three months ended December 31, 2018 is provided in the following table:

 

Period

 

Total Number

of Shares

Repurchased

 

 

Average Price Paid

per Share

 

 

Total Number

of Shares

Purchased as

Part of

Publicly

Announced

Plans or

Programs

 

 

Approximate

Dollar Value of

Shares That May

Yet Be Purchased

Under the Plans or

Programs

(1)

 

October 1 through October 31, 2018

 

 

 

 

$

 

 

 

 

 

$

3,187,746

 

November 1 through November 30, 2018

 

 

 

 

$

 

 

 

 

 

$

3,187,746

 

December 1 through December 31, 2018

 

 

 

 

$

 

 

 

 

 

$

3,187,746

 

Total

 

 

 

 

$

 

 

 

 

 

$

3,187,746

 

 

 

(1)

On August 22, 2011, our Board of Directors adopted a share Repurchase Program pursuant to which we are authorized to repurchase from time to time shares of Common Stock, up to a maximum of $5.0 million in aggregate purchase price for all such shares (the “Repurchase Program”). On January 20, 2012, our Board of Directors increased the authorization for stock repurchases under the Repurchase Program from $5.0 million to a maximum of $10.0 million. The Repurchase Program does not have an expiration date and may be amended, suspended or discontinued at any time. The Board will periodically evaluate the Repurchase Program and there can be no assurances as to the number of shares of Common Stock we will repurchase. During the three months ended December 31, 2018, no shares were repurchased under the Repurchase Program.

 

 

Item 5.

Other Information

 

Entry Into a Material Definitive Agreement; Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

 

On January 29, 2019 (the “Closing Date”), the Company entered into a Second Amendment (the “Amendment”), among Tuesday Morning, Inc., as the Borrower, TMI Holdings, Inc. (“TMI Holdings”), the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the other parties party thereto, which amends that certain Credit Agreement, dated as of August 18, 2015, by and among the Company, the Borrower, TMI Holdings, the lenders party thereto, the Administrative Agent and the other parties party thereto (as amended by that certain Corrective Amendment dated October 17, 2015, the “Existing Credit Agreement” and as further amended by the Amendment, the “Credit Agreement”).  

 

Pursuant to the Amendment, the Existing Credit Agreement has been amended to, among other things:

 

Borrowing Base.  Increase the advance rate for eligible inventory (including in-transit and eligible inventory supported by letters of credit) to 92.5% for the period of October 1 through December 31 of each year.

20


 

Consolidated Fixed Charge Coverage Ratio.  Cause the numerator of such ratio to be calculated by reference to EBITDAR (EBITDA plus rent expense) and the denominator to include rent expense.

 

Letter of Credit Subline.  Decrease the letter of credit subline to $20,000,000 (but permit the same to be increased to up to $50,000,000 in the future, subject to the satisfaction of certain conditions).

 

Maturity.  The revolving credit facility will mature on January 29, 2024.

 

The amount of the revolving facility governed by the Credit Agreement and the interest rate margins applicable thereto, as well as the other material terms of the Existing Credit Agreement (other than those described above), remain unchanged.

 

The summary set forth above is not intended to be complete and is qualified in its entirety by reference to the full text of the Amendment attached hereto as Exhibit 10.1.

 

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

On January 29, 2019, the Board of Directors of the Company appointed Kelly Munsch as Vice President, Chief Accounting Officer and Controller of the Company, effective February 1, 2019.  Stacie R. Shirley, who previously acted as principal accounting officer of the Company, will continue to serve as Executive Vice President and Chief Financial Officer of the Company.

 

Ms. Munsch, age 51, has served as the Company's Vice President and Controller since November 2014. From July 2015 to January 2016, Ms. Munsch served as Interim Principal Financial Officer and Interim Chief Accounting Officer. Prior to November 2014 she had served as the Company's Assistant Controller since joining the Company in October 2013.

 

In her position as Chief Accounting Officer, Ms. Munsch will receive an annual base salary of $240,000 and her annual target bonus opportunity will be 30% of her annual base salary. In addition, pursuant to a retention agreement with the Company, Ms. Munsch will be entitled to receive a retention payment of $155,000 in February 2020 in the event she remains employed by the Company through February 1, 2020.

 

 

21


Item 6.

Exhibits

 

Exhibit
Number

 

Description

 

 

 

    3.1.1

 

Certificate of Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the “Commission”) on February 10, 1998)

 

 

 

    3.1.2

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999)

 

 

 

    3.1.3

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated May 7, 1999 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 10-Q (File No. 000-19658) as filed with the Commission on May 2, 2005)

 

 

 

    3.2

 

Amended and Restated Bylaws of the Company dated September 16, 2014 (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K (File No. 000-19658) as filed with the Commission on September 19, 2014)

 

 

 

   10.1

 

Second Amendment, among Tuesday Morning, Inc., as the Borrower, TMI Holdings, Inc., the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties party thereto, which amends that certain Credit Agreement, dated as of August 18, 2015

 

 

 

    31.1

 

Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

    31.2

 

Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

    32.1

 

Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

 

 

 

    32.2

 

Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

 

 

 

  101.INS

 

XBRL Instance Document

 

 

 

  101.SCH

 

XBRL Taxonomy Schema Document

 

 

 

  101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

  101.DEF

 

XBRL Taxonomy Definition Linkbase Document

 

 

 

  101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

 

 

  101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

*

The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Management contract or compensatory plan or arrangement

 

22


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TUESDAY MORNING CORPORATION

 

(Registrant)

 

 

 

DATE:    January 31, 2019

By:

 

/s/ Stacie R. Shirley

 

 

 

Stacie R. Shirley

Executive Vice President, Chief Financial Officer and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

23

tues-ex101_170.htm

Exhibit 10.1

Execution Copy

SECOND AMENDMENT

SECOND AMENDMENT, dated as of January 29, 2019 (this “Amendment”) to the Credit Agreement, dated as of August 18, 2015 (as amended by that certain Corrective Amendment, dated October 17, 2015, the “Credit Agreement”) among Tuesday Morning, Inc., a Texas corporation (the “Borrower”), Tuesday Morning Corporation, a Delaware corporation, as Parent, TMI Holdings, Inc., a Delaware corporation, as Intermediate Holdings, the Lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity the “Administrative Agent”) and the other parties thereto.

Recitals

WHEREAS, the Borrower has requested that the Lenders consent to certain amendments to the Credit Agreement, including among others, the extension of the final maturity date beyond the Revolver Termination Date;

WHEREAS, pursuant to Section 9.08(b)(i) of the Credit Agreement, the Credit Agreement may be amended to extend the final maturity date beyond the Revolver Termination Date with the prior written consent of each Lender directly and adversely affected thereby;

WHEREAS, effective as of the Amendment Effective Date (as defined below) each Lender consenting (each a “Consenting Lender”) to the Amendment has agreed to the amendment of the Credit Agreement as set forth in Exhibit A hereto, subject to the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

Section 1.Capitalized Terms. Capitalized terms used in this Amendment but not defined herein shall have the meanings assigned to them in the Credit Agreement.

Section 2.Amendment.  Effective as of the Amendment Effective Date (as defined below):

(a)the Credit Agreement is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined text) as set forth in the pages of the Credit Agreement attached as Exhibit A hereto (the Credit Agreement as amended hereby, the “Amended Credit Agreement”); and

(b)the Credit Agreement is hereby amended to add a new Schedule 2.01B to the Amended Credit Agreement attached as Exhibit B hereto; and

(c)Exhibit N to the Amended Credit Agreement attached as Exhibit C hereto hereby replaces Exhibit N to the Credit Agreement.

(d)Schedule 1.01(a) to the Amended Credit Agreement attached as Exhibit D hereto hereby replaces Schedule 1.01(a) to the Credit Agreement.

Section 3.Representations and Warranties.  Each Loan Party makes the following representations and warranties:

 


 

(a)at the time of and immediately after giving effect to the Amendment Effective Date, no Default or Event of Default has occurred and is continuing;

(b)the representations and warranties of each Loan Party set forth in Article III of the Credit Agreement and in any Loan Document are true and correct in all material respects (without duplication of any materiality qualifier contained therein) as of the Amendment Effective Date, with the same effect as though made on and as of such date (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties were true and correct in all material respects (without duplication of any materiality qualifier contained therein) as of such earlier date); and

(c)since June 30, 2018, no event, development, circumstance or change has occurred that has or would reasonably be expected to have a Material Adverse Effect.

Section 4.Conditions to Effectiveness of this Amendment .   This Amendment shall become effective on the date (such date, the “Amendment Effective Date”) that the following conditions have been satisfied:

(a)the Administrative Agent shall have received counterparts of this Amendment executed by (i) the Borrower, Holdings and the other Loan Parties, (ii) the Lenders, (iii) the Issuing Banks and (iv) the Swingline Lender;

(b)the Borrower (or its designee) shall have paid, or caused to be paid, all reasonable and documented out-of-pocket expenses of the Administrative Agent in connection with the preparation, negotiation and execution of this Amendment  (including the fees, charges and disbursements of Cahill Gordon & Reindel LLP as counsel to the Administrative Agent) for which invoices have been presented to the Borrower at least two business days prior to the Amendment Effective Date;

(c)the Borrower (or its designee) shall have paid, or caused to be paid to (i) the Administrative Agent, for the ratable account of each Consenting Lender, an upfront fee equal to 0.15% of the aggregate principal amount of such Lender’s Revolver Commitments under the Amended Credit Agreement as of the Amendment Effective Date and (ii) the Administrative Agent, the administrative agency fee on the terms set forth under that certain Amendment Fee Letter dated as of January 29, 2019 between the Borrower and the Administrative Agent;

(d)the Administrative Agent shall have received from Sidley Austin LLP, special counsel for Holdings and  the Borrower, an opinion addressed to the Administrative Agent and each of the Lenders party to the Amended Credit Agreement on the Amendment Effective Date and dated the Amendment Effective Date in form and substance reasonably satisfactory to the Administrative Agent;

(e)the Administrative Agent shall have received a certificate of a Responsible Officer of Holdings or the Borrower, dated the Amendment Effective Date, certifying on behalf of the Borrower or Holdings that as of the Amendment Effective Date, the representations and warranties set forth in Sections 3(a), 3(b) and 3(c) are true and correct;

(f)the Administrative Agent shall have received a certificate from each Loan Party, dated the Amendment Effective Date, signed by the secretary, assistant secretary or similar officer of such Loan Party, in each case, on behalf of such Loan Party (and not in any individual capacity), certifying (i) that the copies of such Loan Party’s certificate or articles of incorporation and by-

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laws (or limited partnership agreement, limited liability company agreement or other equivalent governing documents) (x) as previously certified and delivered to the Administrative Agent, remain in full force and effect as of the  Amendment Effective Date without modification or amendment since such original delivery or (y) as certified as of a recent date by the Secretary of State (or other similar official) of the jurisdiction of such Loan Party’s jurisdiction of its organization or formation and attached to such secretary’s certificate, are true and complete and in full force and effect as of the  Amendment Effective Date, (ii) that the copies of the Loan Parties’ resolutions duly adopted by the board of directors (or equivalent governing body) of such Loan Party (or its managing general partner or managing member) approving and adopting this Amendment ,  and authorizing the execution and delivery thereof, as attached to such secretary’s certificate, are true and complete copies, have not been modified, rescinded or amended and are in full force and effect as of the Amendment Effective Date, (iii) as to the incumbency and specimen signature of each officer executing the Amendment or any other document delivered in connection herewith on behalf of such Loan Party and (iv) as to the absence of any pending proceeding for the dissolution or liquidation of such Loan Party;

(g)the Administrative Agent shall have received certificates as to the good standing (to the extent such concept or a similar concept exists under the laws of such jurisdiction) of each Loan Party as of a recent date from such Loan Party’s Secretary of State (or other similar official) and bring-down telegrams or facsimiles, with respect to entities incorporated or formed under Applicable Law of any jurisdiction for the Loan Parties which the Administrative Agent reasonably may have requested, certified by proper governmental authorities;

(h)the Administrative Agent shall have received an updated Collateral Questionnaire, together with all attachments contemplated thereby, reflecting all changes since the date of the information most recently received pursuant to Sections 5.04(h) or 5.09(f) of the Credit Agreement; and

(i)each Lender that requests a Note at least two (2) Business Days prior to the Amendment Effective Date, if any, shall receive a Note executed by a Responsible Officer of the Borrower in favor of each such Lender.

Section 5.Counterparts.  This Amendment may be executed in two (2) or more counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute but one (1) contract, and shall become effective as provided in Section 4 of this Amendment.  Delivery of an executed counterpart to this Amendment by facsimile transmission or other electronic transmission (including by “.pdf” or “.tif”) shall be as effective as delivery of a manually signed original.

Section 6.Governing Law; Submission to Jurisdiction; Service of Process; Waiver of Jury Trial.  

(a)THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

(b)Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Amendment, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such federal court.  

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Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Amendment shall affect any right that any Lender, the Administrative Agent or any Issuing Bank may otherwise have to bring any action or proceeding relating to this Amendment against Holdings, the Borrower or any Loan Party or their properties in the courts of any jurisdiction.  Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this amendment or the other loan documents in any New York State or federal court.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(c)Each of the parties hereto agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested at its address provided in Section 9.01 of the Amended Credit Agreement agrees that service as so provided in is sufficient to confer personal jurisdiction over the applicable credit party in any such proceeding in any such court, and otherwise constitutes effective and binding service in every respect; and agrees that agents and lenders retain the right to serve process in any other manner permitted by law or to bring proceedings against any Loan Party in the courts of any other jurisdiction.

(d)EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING UNDER THIS AMENDMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AMENDMENT OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AMENDMENT, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AMENDMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS.  EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 6(d) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATED HEREWITH.  IN THE EVENT OF LITIGATION, THIS AMENDMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

Section 7.Headings.  The headings of the several Sections and subsections of this Amendment  are inserted for convenience only and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment.

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Section 8.Effect of this Amendment .  Except as expressly set forth herein, (i) this Amendment  shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders, the Administrative Agent or the Issuing Banks, in each case under the Credit Agreement or any other Loan Document, (ii) shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document and (iii) each and every term, condition, obligation, covenant and agreement contained in the Credit Agreement or any other Loan Document is hereby ratified and re-affirmed in all respects and shall continue in full force and effect. Each of the Loan Parties hereby consents to this Amendment  and confirms and reaffirms (i) that all obligations of such Loan Party under the Loan Documents to which such Loan Party is a party shall continue to apply to the Credit Agreement as amended hereby, (ii) its Guarantees of the Obligations, (iii) its pledges and grants of security interests and Liens on the Collateral to secure the Obligations pursuant to the Security Documents and (iv) such Guarantees, pledges and grants of security interests, as applicable, shall continue to be in full force and effect and shall continue to inure to the benefit of the Lenders and the other Secured Parties. This Amendment  shall constitute a Loan Document for purposes of the Credit Agreement. On and after the effectiveness of this Amendment , each reference in any Loan Document to “the Credit Agreement” shall mean and be a reference to the Amended Credit Agreement and each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import shall mean and be a reference to the Amended Credit Agreement. The parties hereto acknowledge and agree that the amendment of the Credit Agreement pursuant to this Amendment  and all other Loan Documents amended and/or executed and delivered in connection herewith shall not constitute a novation of the Credit Agreement or of any other Loan Documents as in effect prior to the Amendment Effective Date.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written.

TUESDAY MORNING, INC.

TUESDAY MORNING CORPORATION

TMI HOLDINGS, INC.

FRIDAY MORNING, LLC

DAYS OF THE WEEK, INC.

NIGHTS OF THE WEEK, INC.

 

 

 

By:  /s/ Stacie R. Shirley

 

Name:

Stacie R. Shirley

 

Title:

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

 

TUESDAY MORNING PARTNERS, LTD.

 

 

 

By:

DAYS OF THE WEEK, INC., as General Partner

 

 

 

By:  /s/ Stacie R. Shirley

 

Name:

Stacie R. Shirley

 

Title:

Executive Vice President, Chief Financial Officer and Treasurer

 

 


[Tuesday Morning - Signature Page to Second Amendment]


 

JPMORGAN CHASE BANK, N.A., as a Lender and as Administrative Agent, Swingline Lender and an Issuing Bank

By:/s/ Gregory T Martin
Name:Gregory T Martin
Title:Authorized Signer

 

 

[Tuesday Morning - Signature Page to Second Amendment]


 

BANK OF AMERICA, N.A., as a Lender and an Issuing Bank

By:/s/ Andrew Cerussi
Name:Andrew Cerussi
Title:Senior Vice President



 

WELLS FARGO BANK, NATIONAL ASSOCIATION, as a Lender and an Issuing Bank

 

By:

/s/ Jai Alexander
Name:Jai Alexander
Title:Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

Exhibit A

 

 

Amended Credit Agreement

 

(See Attached)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

Execution Copy

ANNEX A to Second Amendment

 

 

 

CREDIT AGREEMENT

Originally dated as of August 18, 2015,

as amended by the Corrective Amendment, dated as of October 17, 2015

   and

as further amended by the Second Amendment, dated as of January 29, 2019

among

TUESDAY MORNING CORPORATION,
as Holdings,

TUESDAY MORNING, INC.,
as Borrower,

THE LENDERS PARTY HERETO,

JPMORGAN CHASE BANK, N.A.,
as Administrative Agent,

and

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Syndication Agent,

_________________

J.P. MORGAN SECURITIES LLC,
as Lead Arranger and as Bookrunner

 

 

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TABLE OF CONTENTS

Page

ARTICLE I
Definitions

SECTION 1.01.Defined Terms1

SECTION 1.02.Terms Generally50

SECTION 1.03.Accounting Terms50

SECTION 1.04.Rounding51

SECTION 1.05.Timing of Payment or Performance51

SECTION 1.06.Classification52

SECTION 1.07.References to Laws52

SECTION 1.08.Pro Forma52

ARTICLE II
The Credits

SECTION 2.01.Revolver Commitments53

SECTION 2.02.Loans and Borrowings53

SECTION 2.03.Requests for Borrowings and Notices53

SECTION 2.04.Swingline Loans; Settlement54

SECTION 2.05.Letters of Credit55

SECTION 2.06.Funding of Borrowings59

SECTION 2.07.Interest Elections60

SECTION 2.08.Repayment of Loans; Termination of Revolver Commitments61

SECTION 2.09.Evidence of Debt62

SECTION 2.10.Application of Payment in the Dominion Accounts63

SECTION 2.11.[Reserved]63

SECTION 2.12.Fees63

SECTION 2.13.Interest64

SECTION 2.14.Alternate Rate of Interest65

SECTION 2.15.Increased Costs66

SECTION 2.16.Break Funding Payments67

SECTION 2.17.Taxes68