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EX-32.2 - EX-32.2 - TUESDAY MORNING CORP/DEtues-ex322_10.htm
EX-32.1 - EX-32.1 - TUESDAY MORNING CORP/DEtues-ex321_7.htm
EX-31.2 - EX-31.2 - TUESDAY MORNING CORP/DEtues-ex312_6.htm
EX-31.1 - EX-31.1 - TUESDAY MORNING CORP/DEtues-ex311_11.htm
EX-23.1 - EX-23.1 - TUESDAY MORNING CORP/DEtues-ex231_9.htm
EX-10.37 - EX-10.37 - TUESDAY MORNING CORP/DEtues-ex1037_437.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑K

 

(Mark One)

x

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

For the fiscal year ended June 30, 2016

or

o

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

Commission File Number 0‑19658

 

Tuesday Morning Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

75‑2398532

(I.R.S. Employer

Identification No.)

6250 LBJ Freeway

Dallas, Texas 75240

(972) 387‑3562

(Address, zip code and telephone number, including area code,

of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o  No  x

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  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment of this Form 10‑K.  x

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

 

Large accelerated filer o

Accelerated filer x

Non‑accelerated filer o

(Do not check if a

smaller reporting company)

Smaller reporting company o

 

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

The aggregate market value of shares of the registrant’s common stock held by non‑affiliates of the registrant at December 31, 2015 was approximately $207,870,865 based upon the closing sale price on the Nasdaq Global Select Market reported for such date.

As of the close of business on August 17, 2016, there were 44,551,846 outstanding shares of the registrant’s common stock.

Documents Incorporated By Reference:

Portions of the Registrant’s Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders are incorporated herein by reference (to the extent indicated) into Part III of this Form 10‑K.

 

 

 


 

Table of Contents

 

Cautionary Statement Regarding Forward‑Looking Statements

3

PART I

 

Item 1. Business

5

Item 1A. Risk Factors

9

Item 1B. Unresolved Staff Comments

16

Item 2. Properties

16

Item 3. Legal Proceedings

16

Item 4. Mine Safety Disclosures

16

PART II

 

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17

Item 6. Selected Financial Data

19

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

28

Item 8. Financial Statements and Supplementary Data

29

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

29

Item 9A. Controls and Procedures

29

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

30

Item 9B. Other Information

31

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

31

Item 11. Executive Compensation

31

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

31

Item 13. Certain Relationships and Related Transactions, Director Independence

32

Item 14. Principal Accountant Fees and Services

32

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

32

SIGNATURES

34

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F‑1

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

F‑2

Tuesday Morning Corporation Consolidated Balance Sheets (In thousands, except for share data)

F‑3

Tuesday Morning Corporation Consolidated Statements of Operations (In thousands, except per share data)

F‑4

Tuesday Morning Corporation Consolidated Statements of Stockholders’ Equity (In thousands)

F‑5

Tuesday Morning Corporation Consolidated Statements of Cash Flows (In thousands)

F‑6

Tuesday Morning Corporation Notes to Consolidated Financial Statements

F‑7

EXHIBIT INDEX

35

 

2


 

Cautionary Statement Regarding Forward‑Looking Statements

This Form 10‑K 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 Form 10‑K, particularly under the headings “Business” and “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 carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, our future results of operations, our future financial positions, and our current business outlook or state other “forward‑looking” information.

The factors listed below under the heading “Risk Factors” and in other sections of this Form 10‑K provide 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 failure to identify and respond to changes in consumer trends and preferences;

 

·

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

 

·

our ability to successfully manage our inventory balances profitably;

 

·

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

 

·

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;

 

·

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;

 

·

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;

 

·

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

 

·

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

 

·

our ability to manage the negative effects of inventory shrinkage.

The forward‑looking statements made in this Form 10‑K 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.

3


 

The terms “Tuesday Morning,” “the Company,” “we,” “us,” and “our” as used in this Form 10‑K refer to Tuesday Morning Corporation and its subsidiaries.

4


 

PART I

Item 1.  Business

Business Overview

We are a leading off‑price retailer specializing in selling deeply-discounted, upscale decorative home accessories, housewares, seasonal goods and famous‑maker gifts. We are nationally known for providing a fresh selection of brand-name, high-quality merchandise – never seconds or irregulars – at prices generally below those of department and specialty stores, catalogs and online retailers. We opened our first store in 1974 and operated 751 stores in 40 states as of June 30, 2016. Our strong everyday value proposition is also supported with periodic circulars and direct mail that keep customers familiar with Tuesday Morning.

We carry an ever changing assortment of products in a wide array of categories such as home décor, furniture, bed and bath, kitchen, toys, crafts, pets and seasonal goods.  In categories where brands are important, we carry first quality, high end brand-name merchandise such as Peacock Alley, Sferra, Lenox, Waterford and Hartmann.  In addition to branded goods, we also carry unique home furnishings items made around the world.  We buy our inventory opportunistically which allows us to offer great value to our customers.

The Tuesday Morning store environment is a treasure hunt of ever changing product, with new merchandise arriving weekly.  We buy our inventory broad and shallow which gives us the flexibility to take advantage of great buys in the market.  The opportunities that we find in the market come from a variety of sources, including direct from manufacturer, closeout sellers and occasionally other retailers.  

Our key strengths are:

 

-

Ever changing assortment of high quality merchandise at great values

 

-

Strong supplier partnerships that allow us to access deals in the market

 

-

Broad and shallow buying model that allows us the flexibility to react to deals and current trends

 

-

Strong loyal customer base that has been shopping Tuesday Morning for many years

 

-

Predominantly female customer base that has above average discretionary spend

 

-

Experienced management team

 

-

Financial strength and liquidity

We believe that our customers are attracted to our stores primarily because of our limited quantities of first quality, brand-name merchandise which we offer at attractive prices. Our stores operate in both primary and secondary locations of major suburban markets, such as strip malls, near our middle and upper‑income customers. We are generally able to obtain favorable lease terms because of our flexibility regarding site selection and our “no frills” format, allowing us to use a wide variety of space configurations. We operate our business as a single operating segment.

Business Strategy

Several years ago, we began a transformation of our Company in order to regain our position as a leader in off‑price retail. We executed on a number of critical steps under our business turnaround strategy. These steps included exiting certain categories, refreshing and reorganizing stores, reducing the level of clearance merchandise, modifying company policies, and eliminating assets that were no longer needed. During this phase, we took specific steps to improve our inventory management process, sourcing of inventory, merchandise offerings and sales productivity.

In fiscal year 2014, we substantially completed work on the final phase of our turnaround strategy and moved into our rebuilding phase, in which we have focused on continued improvement of merchandise assortment, supply chain efficiency, inventory turns, marketing strategy and store demographics and infrastructure.

As a key component of this rebuilding phase, we are focused on improving store locations and the in-store experience for our customers. In this regard, we are closing unproductive 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 two to three thousand square feet larger. In some cases, we are also expanding existing productive stores to this larger footprint. In addition, we are improving the finishes in these relocated, new and expanded stores, such as polished concrete floors, simple but attractive fixture packages and new lighting and color palettes, in an effort to match the in-store experience for our customers with the quality of our products.

5


 

Competition & Seasonality

We believe the principal factors by which we compete are brand names, price and breadth of product offerings. Our prices are generally below department stores and specialty and on‑line retailer prices and we offer a broad assortment of high‑end, first quality, brand-name merchandise. We currently compete against a diverse group of retailers, including department and discount stores, specialty, e‑commerce and catalog retailers and mass merchants, which sell, among other products, home furnishings, housewares and related products. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell. Some of these competitors have substantially greater financial resources that may, among other things, increase their ability to purchase inventory at lower costs or to initiate and sustain aggressive price competition.

Our business is subject to seasonality, with a higher level of our net sales and operating income generated during the quarter ending December 31, which includes the holiday shopping season. Net sales in the quarters ended December 31, 2015, 2014, and 2013 accounted for approximately 33% of our annual net sales for each of the 2016, 2015 and 2014 fiscal years.

Working Capital Items

Because of the seasonal nature of our business, our working capital needs are greater in the months leading up to our peak sales period from Thanksgiving to the end of December. The increase in working capital needs during this time is typically financed with cash flow provided by operations and our revolving credit facility. Additional details are provided in the Liquidity and Capital Resources section in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Inventory is the largest asset on our balance sheet. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels to meet our customers’ demands while keeping the inventory fresh and turning the inventory appropriately to optimize profitability.

Purchasing

We provide an outlet for manufacturers and other sources looking for effective ways to reduce excess inventory resulting from order cancellations by retailers, manufacturing overruns, bankruptcies and excess capacity. Since our inception, we have not experienced significant difficulty in obtaining first quality, brand-name off‑price merchandise in adequate volumes and at competitive prices. We utilize a mix of both domestic and international suppliers. We pay our suppliers timely and generally do not request special consideration for markdowns, advertising or returns. During fiscal 2016, our top ten vendors accounted for approximately 11% of total purchases, with no single vendor accounting for more than 3% of total purchases.

Low Cost Operations

We operate with a low cost structure in comparison to many other retailers. We place great emphasis on expense management throughout the Company. Our stores have a “no frills” format and we are flexible in our site selection in order to maintain favorable lease terms.

Customer Shopping Experience

While we offer a “no frills” format in our stores, we have made progress in reorganizing and refreshing our stores to enhance the customers’ shopping experience. We offer a flexible return policy and we accept all major payment methods including cash, checks and all major credit cards. We continue to work on initiatives we believe will enhance our customers’ shopping experience.

Distribution

We utilize 1.4 million square feet of distribution center facilities in Dallas, Texas and a 0.6 million square foot distribution center in Phoenix, Arizona which service all of our stores throughout the United States. The Phoenix distribution center commenced operations during the fourth quarter of fiscal 2016. We shipped approximately 118 million units to our stores during fiscal 2016.

Pricing

Our pricing policy is to sell merchandise generally below retail prices charged by department stores and specialty and on‑line retailers. Prices are determined centrally and are uniform at all of our stores. Once a price is determined for a particular item, labels displaying two‑tiered pricing are affixed to the product. A typical price tag displays a “Compare At” price, and “Our Price”. Our buyers determine and verify retail “Compare At” prices by reviewing prices published in advertisements, catalogs, on‑line and manufacturers’ suggested retail price lists and by visiting department or specialty stores selling similar merchandise. Our information

6


 

systems provide daily sales and inventory information, which enables us to evaluate our prices and inventory levels and to adjust prices on unsold merchandise in a timely manner and on a periodic basis as dictated by sales volumes and incoming purchases, thereby effectively managing our inventory levels and offering competitive pricing.

Employees

As of June 30, 2016, we employed 1,934 persons on a full‑time basis and 7,133 persons on a part‑time basis. Our employees are not represented by any labor unions. We have not experienced any work stoppage due to labor disagreements, and we believe that our employee relations are strong.

Intellectual Property

The trade name “Tuesday Morning” is material to our business. We have registered the name “Tuesday Morning” as a service mark with the United States Patent and Trademark office. We have also registered other trademarks including but not limited to “Tuesday Morning Perks®”.  Solely for convenience, trademarks and trade names referred to in this Form 10‑K may appear without the ® or tm symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor, to these trademarks and trade names.

Corporate Information

Tuesday Morning Corporation is a Delaware corporation incorporated in 1991. Our principal executive offices are located at 6250 LBJ Freeway, Dallas, Texas 75240, and our telephone number is (972) 387‑3562.

We maintain a website at www.tuesdaymorning.com. Copies of our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and any amendments to such reports filed with, or furnished to, the Securities and Exchange Commission (the “SEC”) are available free of charge on our internet website under the Investor Relations section as soon as reasonably practicable after we electronically file such reports and amendments with, or furnish them to, the SEC.

The reports we file or furnish to the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1‑800‑SEC‑0330. In addition, the SEC maintains a website, www.sec.gov, which contains the reports, proxy and information statements and other information which we file with, or furnish to, the SEC.

7


 

Stores and Store Operations

Store Locations.  As of June 30, 2016, we operated 751 stores in the following 40 states:

 

State

 

# of Stores

 

 

State

 

# of Stores

 

Alabama

 

 

23

 

 

Missouri

 

 

19

 

Arizona

 

 

22

 

 

Nebraska

 

 

4

 

Arkansas

 

 

13

 

 

Nevada

 

 

7

 

California

 

 

64

 

 

New Jersey

 

 

11

 

Colorado

 

 

21

 

 

New Mexico

 

 

7

 

Delaware

 

 

2

 

 

New York

 

 

11

 

Florida

 

 

65

 

 

North Carolina

 

 

28

 

Georgia

 

 

34

 

 

North Dakota

 

 

1

 

Idaho

 

 

5

 

 

Ohio

 

 

24

 

Illinois

 

 

19

 

 

Oklahoma

 

 

11

 

Indiana

 

 

13

 

 

Oregon

 

 

13

 

Iowa

 

 

5

 

 

Pennsylvania

 

 

20

 

Kansas

 

 

10

 

 

South Carolina

 

 

21

 

Kentucky

 

 

13

 

 

South Dakota

 

 

1

 

Louisiana

 

 

19

 

 

Tennessee

 

 

22

 

Maryland

 

 

18

 

 

Texas

 

 

109

 

Massachusetts

 

 

2

 

 

Utah

 

 

6

 

Michigan

 

 

9

 

 

Virginia

 

 

35

 

Minnesota

 

 

9

 

 

Washington

 

 

13

 

Mississippi

 

 

14

 

 

Wisconsin

 

 

8

 

 

Site Selection.  We continually evaluate our current store base for potential enhancement or relocation of our store locations. As a result of this ongoing evaluation, we intend to pursue attractive relocation opportunities in our existing store base, close certain stores by allowing leases to expire for underperforming stores or where alternative locations in similar trade areas are not available at acceptable lease rates, and, when appropriate, open new stores. For both new stores and relocations, we negotiate for upgraded sites. We believe that this strategy will better position us for long‑term profitable growth. We expect to upgrade both the appearance and operation of our new and relocated stores compared to our existing stores and do not anticipate difficulty in locating additional store locations in areas with our target customer demographics.

Store Leases.  Except for one store adjacent to our existing distribution center in Dallas, Texas, we lease our store locations under operating leases that typically include renewal options. Some of our leases also provide for contingent rent based upon store sales exceeding stipulated amounts.

Our store leases typically include “kick clauses,” which allow us, at our option, to exit the lease with no penalty 24 to 60 months after entering into the lease if store sales do not reach a stipulated amount stated in the lease. These kick clauses provide us with flexibility in opening new stores and relocating existing stores by allowing us to quickly and cost‑effectively vacate a site that does not meet our sales expectations. As a result, we generally do not operate locations with continued store‑level operating losses.

Store Layout. Our site selection process and “no frills” approach to presenting merchandise allow us to use a wide variety of space configurations. The size of our stores ranges from approximately 5,000 to 30,900 square feet, averaging on a per store basis approximately 11,000 square feet as of June 30, 2016.  Historically, we have designed our stores to be functional, with less emphasis placed upon fixtures and leasehold aesthetics. With our current real estate strategy, we continue to be focused on designing a very functional, easy to shop environment that also highlights the quality of the merchandise.  We display all merchandise on counters, shelves, or racks while maintaining minimum inventory in our stockrooms.

Store Operations.  Our stores are generally open seven days a week, excluding certain holidays. We continue to maintain the frequency of shipments of merchandise which results in improved efficiency of receiving and restocking activities at our stores. We attempt to align our part‑time employees’ labor hours with anticipated workload and with current customer sales. We conduct annual physical counts of our merchandise staggered throughout the year, except during the holiday selling season of November and December, primarily when stores are closed.

Store Management.  Each store has a manager who is responsible for recruiting, training and supervising store personnel and assuring that the store is managed in accordance with our established guidelines and procedures. Store managers are full‑time

8


 

employees. Our store managers are supported by district and regional level support. Store managers are responsible for centrally directed store disciplines and routines. The store manager is assisted primarily by part‑time employees who generally serve as assistant managers, cashiers, and help with merchandise stocking efforts. Members of our management visit selected stores periodically to review inventory levels and presentation, personnel performance, expense controls, security and adherence to our policies and procedures. In addition, district and regional field managers periodically meet with senior management to review store policies and discuss purchasing, merchandising, advertising and other operational issues.

Item 1A.  Risk Factors

Our business is subject to significant risks, including the risks and uncertainties described below. These risks and uncertainties and the other information in this Form 10‑K, including our consolidated financial statements and the notes to those statements, should be carefully considered. If any of the events described below actually occur, our business, financial condition or results of operations could be adversely affected in a material way.

Risks Related to Our Business

We may not be successful in the implementation of our long‑term business strategy, which could adversely affect our business and our results of operations.

Our success depends, to a significant degree, on our ability to successfully implement our long‑term business strategy. Our ability to successfully implement our business strategies depends upon a significant number of factors, including but not limited to:

 

·

our ability to access an adequate supply of top‑quality merchandise from suppliers at a competitive price;

 

·

our ability to deliver profitable sales;

 

·

our ability to make adjustments as market conditions change;

 

·

customer acceptance of our marketing and merchandise strategies;

 

·

our ability to respond to competitive pressures in our industry;

 

·

the ability of our management team to properly respond to the dynamics and demands of our market;

 

·

our ability to achieve positive cash flow, particularly during our peak inventory build‑ups in advance of the holiday selling season; and

 

·

our employees’ ability to adapt to our new strategic initiatives.

Changes in economic and political conditions may adversely affect consumer spending, which could significantly harm our business, results of operations, cash flows and financial condition.

The success of our business depends, to a significant extent, upon the level of consumer spending. A number of factors beyond our control affect the level of consumer spending on merchandise that we offer, including, among other things:

 

·

general economic and industry conditions;

 

·

unemployment;

 

·

the housing market;

 

·

deterioration in consumer confidence;

 

·

crude oil prices that affect gasoline and diesel fuel, as well as, increases in other fuels used to support utilities;

 

·

the effect of food prices on consumer discretionary spending;

 

·

efforts by our customers to reduce personal debt levels;

 

·

interest rates;

 

·

fluctuations in the financial markets;

 

·

tax rates and policies;

9


 

 

·

war, terrorism and other hostilities; and 

 

·

consumer confidence in future economic conditions.

The merchandise we sell generally consists of discretionary items. Reduced consumer confidence and spending cut backs may result in reduced demand for our merchandise, including discretionary items, and may force us to take significant inventory markdowns. Reduced demand also may require increased selling and promotional expenses. Adverse economic conditions and any related decrease in consumer demand for our merchandise could have a material adverse effect on our business, results of operations, cash flows and financial condition.

Any failure to identify and respond to changes in consumer trends and preferences could significantly harm our business.

The retail home furnishings and housewares industry is subject to sudden shifts in consumer trends and consumer spending. Our sales and results of operations depend in part on our ability to predict or respond to changes in trends and consumer preferences in a timely manner. Although our business model allows us greater flexibility than many traditional retailers to meet consumer preferences and trends, we may not successfully do so. Any sustained failure to anticipate, identify and respond to emerging trends in consumer preferences could negatively affect our business and results of operations.

We must continuously attract buying opportunities for off‑price merchandise and anticipate consumer demand as off‑price merchandise becomes available, and our failure to do so could adversely affect our performance.

By its nature, specific off‑price merchandise items are available from manufacturers or vendors generally on a non‑recurring basis. As a result, we do not have long‑term contracts with our vendors for supply, pricing or access to products, but make individual purchase decisions, which may be for large quantities. Due to economic uncertainties, some of our manufacturers and suppliers may cease operations or may otherwise become unable to continue supplying off‑price merchandise on terms acceptable to us. We cannot assure that manufacturers or vendors will continue to make off‑price merchandise available to us in quantities acceptable to us or that our buyers will continue to identify and take advantage of appropriate buying opportunities. In addition, if we misjudge consumer demand for products, we may significantly overstock unpopular products and be forced to take significant markdowns and miss opportunities to sell more popular products. An inability to acquire suitable off‑price merchandise in the future or to accurately anticipate consumer demand for such merchandise would have an adverse effect on our business, results of operations, cash flows and financial condition.

Our results of operations will be negatively affected if we are not successful in managing our inventory profitably.

Inventory is the largest asset on our balance sheet and represented approximately 67%, 63% and 62% of our total assets at June 30, 2016, 2015 and 2014, respectively. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impact our financial results. If our buying decisions do not accurately predict customer trends or purchasing actions, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. We continue to focus on ways to reduce these risks, but we cannot assure that we will be successful in our inventory management. If we are not successful in managing our inventory balances, our results of operations may be negatively affected. We have recorded significant inventory write‑downs from time to time in the past and there can be no assurances that we will not record additional inventory charges in the future.

The loss of, disruption in the operation of, or increased costs in the operation of our distribution center facilities would have a material adverse effect on our business and operations.

With few exceptions, all inventory is shipped directly from suppliers either to our distribution center in the Dallas, Texas metropolitan area, or our new Phoenix distribution center, where the inventory is then processed, sorted and shipped to our stores. We depend in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution center. We may not anticipate all of the changing demands which our expanding operations will impose on our receiving and distribution system. We may also experience delays in or increased costs in ramping up our new Phoenix distribution center or integrating the center with our existing distribution operations. In addition, events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, may result in delays in the delivery of merchandise to our stores. We also cannot assure that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event a distribution center is shut down for any reason.

10


 

The loss or departure of one or more members of our senior management or other key employees could have a material adverse effect on our business.

Our future performance will depend in large part upon the efforts and abilities of our senior management and other key employees. The loss of service of these persons could have a material adverse effect on our business and future prospects. We do not maintain key person life insurance for our senior management. In addition, we have recently experienced turnover of a number of members of senior management. We cannot provide any assurance that we will not experience future turnover related to our senior management team.

Our business is intensely competitive, and a number of different competitive factors could have a material adverse effect on our business, results of operations, cash flows and financial condition.

The retail home furnishings and housewares industry is intensely competitive. As an off‑price retailer of home furnishings and housewares, we currently compete against a diverse group of retailers, including department stores and discount stores, specialty, on‑line, and catalog retailers and mass merchants, which sell, among other products, home furnishing, houseware and related products similar and often identical to those we sell. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell. Many of these competitors have substantially greater financial resources that may, among other things, increase their ability to purchase inventory at lower costs or to initiate and sustain aggressive price competition.

A number of different competitive factors could have a material adverse effect on our business, results of operations, cash flows and financial condition, including:

 

·

increased operational efficiencies of competitors;

 

·

competitive pricing strategies, including deep discount pricing by a broad range of retailers during periods of poor consumer confidence or economic uncertainty;

 

·

continued and prolonged promotional activity by competitors;

 

·

liquidation sales by a number of our competitors who have filed or may file in the future for bankruptcy;

 

·

expansion by existing competitors;

 

·

entry by new competitors into markets in which we currently operate; and

 

·

adoption by existing competitors of innovative store formats or retail sales methods.

We cannot assure that we will be able to continue to compete successfully with our existing or new competitors, or that prolonged periods of deep discount pricing by our competitors will not materially harm our business. We compete for customers, employees, locations, merchandise, services and other important aspects of our business with many other local, regional, national and international retailers. We also face competition from alternative retail distribution channels such as catalogs and, increasingly, e‑commerce websites. Changes in the merchandising, pricing and promotional activities of those competitors, and in the retail industry, in general, may adversely affect our performance.

If we are unable to successfully execute our strategy of relocating and expanding existing stores and when appropriate, opening new stores, our operating performance could be adversely impacted.

As part of our business strategy, we intend to pursue relocation opportunities to improve our existing store base as well as open new stores that will offset the closing of lower performing stores as they come up for renewal. However, we cannot assure that we will be able to achieve our relocation goals or that we will be able to operate any new or relocated stores profitably. Further, we cannot assure that any new or relocated store will achieve similar operating results to those of our existing stores or that new, relocated or expanded stores opened in markets in which we operate will not have a material adverse effect on the net sales and profitability of our existing store base.

The success of our store development strategy will be dependent upon numerous factors, many of which are beyond our control, including the following:

 

·

the ability of our personnel to adequately analyze and identify suitable markets and individual store sites within those markets;

 

·

the competition for suitable store sites;

11


 

 

·

our ability to negotiate favorable lease terms with landlords; 

 

·

our ability to obtain governmental and other third‑party consents, permits and licenses needed to operate our stores;

 

·

the availability of employees to staff new stores and our ability to hire, train, motivate and retain store personnel;

 

·

the availability of adequate management and financial resources to properly manage a large volume of stores;

 

·

our ability to adapt our distribution and other operational and management systems to a changing network of stores; and

 

·

our ability to attract customers and generate sales sufficient to operate new, relocated or expanded stores profitably.

While we opened stores in existing markets during fiscal 2016, 2015, and 2014, we also opened stores in new markets during that time period. These markets may have different competitive conditions, consumer trends and discretionary spending patterns than our existing markets, which may cause our new stores in these markets to be less successful than stores in our existing markets.

Increases in fuel prices and changes in transportation industry regulations or conditions may increase our freight costs and thus our cost of sales, which could have a material adverse effect on our business and operations.

Our freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight cost both on inbound freight from vendors to our distribution center and outbound freight from our distribution center to our stores. In addition, the U.S. government requires drivers of over‑the‑road trucks to take certain rest periods which reduces the available amount of time they can drive during a 24‑hour period. Changes in trucking industry conditions, such as truck driver shortages and highway congestion, could increase freight costs. High fuel prices or surcharges, as well as stringent driver regulations and changes in transportation industry conditions, may increase freight costs and thereby increase our cost of sales.

If we are not able to generate strong cash flows from our operations or to continue to access credit markets, we will not be able to support capital expansion, operations or debt repayment.

Our business is dependent upon our operations generating strong cash flows to support capital expansion requirements and general operating activities. In addition, we have a credit agreement providing for a revolving credit facility in the amount of up to $180.0 million. The revolving credit facility contains certain restrictive covenants, and if borrowing availability falls below certain thresholds, a financial covenant. If we are unable to comply with the revolving credit facility, we may not be able to obtain an alternate source of funding on satisfactory terms, if at all. Our inability to continue to generate sufficient cash flows to support these activities or the lack of availability of financing in adequate amounts and on appropriate terms could adversely affect our financial performance.

An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

Merchandise manufactured and imported from overseas represents the majority of our total product purchases acquired both domestically and internationally. A disruption in the shipping of imported merchandise or an increase in the cost of those products may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Products from alternative sources may also be of lesser quality and more expensive than those we currently import.

Risks associated with our reliance on imported products include disruptions in the shipping and importation or increases in the costs of imported products because of factors such as:

 

·

raw material shortages;

 

·

work stoppages;

 

·

strikes and political unrest;

 

·

problems with oceanic shipping, including shipping container shortages;

 

·

increased customs inspections of import shipments or other factors causing delays in shipments;

 

·

economic crises;

 

·

international disputes and wars; loss of “most favored nation” trading status by the United States in relation to a particular foreign country;

 

·

import duties;

12


 

 

·

import quotas and other trade sanctions; and 

 

·

increases in shipping rates.

The products we buy abroad are sometimes priced in foreign currencies and, therefore, we are affected by fluctuating exchange rates. In the past, we have entered into foreign currency exchange contracts with major financial institutions to hedge these fluctuations. We might not be able to successfully protect ourselves in the future against currency rate fluctuations, and our financial performance could suffer as a result.

Our success depends upon our marketing, advertising and promotional efforts. If we are unable to implement them successfully, or if our competitors are more effective than we are, our results of operations may be adversely affected.

We use marketing and promotional programs to attract customers to our stores and to encourage purchases by our customers. We use various media for our promotional efforts, including print, database marketing, email, direct marketing, and other electronic communications such as online social networks. If we fail to choose the appropriate medium for our efforts, or fail to implement and execute new marketing opportunities, our competitors may be able to attract some of our customers and cause them to decrease purchases from us and increase purchases elsewhere, which would negatively impact our net sales. Changes in the amount and degree of promotional intensity or merchandising strategy by our competitors could cause us to have some difficulties in retaining existing customers and attracting new customers.

If we do not attract, train and retain quality employees in appropriate numbers, including key employees and management, our performance could be adversely affected.

Our performance is dependent on recruiting, developing, training and retaining quality sales, distribution center and other employees in large numbers, as well as, experienced buying and management personnel. Many of our employees are in entry level or part‑time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors, such as unemployment levels, prevailing wage rates, minimum wage legislation, changes in rules governing eligibility for overtime and changing demographics. In the event of increasing wage rates, if we do not increase our wages competitively, our customer service could suffer because of a declining quality of our workforce, or our earnings would decrease if we increase our wage rates whether in response to market demands or new minimum wage legislation. Changes that adversely impact our ability to attract and retain quality employees and management personnel could adversely affect our performance.

Our results of operations are subject to seasonal and quarterly fluctuations, which could have a material adverse effect on our operating results or the market price of our common stock.

Our business is subject to seasonality with a higher level of net sales and operating income generated during the quarter ended December 31, which includes the holiday shopping season. Net sales in the quarters ended December 31, 2015, 2014, and 2013, accounted for approximately 33% of our annual net sales for each of the 2016, 2015, and 2014 fiscal years.  For more information about our seasonality, please read Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results and Seasonality.”

Because a significant percentage of our net sales and operating income are generated in the quarter ending December 31, we have limited ability to compensate for shortfalls in December quarter sales or earnings by changes in our operations or strategies in other quarters. A significant shortfall in results for the quarter ending December 31 of any year could have a material adverse effect on our annual results of operations and on the market price of our common stock. In addition, in anticipation of higher sales during this period, we purchase substantial amounts of seasonal inventory and hire many temporary employees. An excess of seasonal merchandise inventory could result if our net sales during this principal selling season were to fall below either seasonal norms or expectations. If our December quarter sales results were substantially below expectations, our financial performance and operating results could be adversely affected by unanticipated markdowns, particularly in seasonal merchandise. Lower than anticipated sales in the principal selling season would also negatively affect our ability to absorb the increased seasonal labor costs.

Our quarterly results of operations may also fluctuate significantly based on additional factors, such as:

 

·

the timing of new store openings;

 

·

the amount of net sales contributed by new and existing stores;

 

·

the success of our store expansion and relocation program;

 

·

the timing of certain holidays and advertised events;

13


 

 

·

changes in our merchandise mix; 

 

·

general economic, industry and weather conditions that affect consumer spending; and

 

·

actions of competitors, including promotional activity.

These factors could also have a material adverse effect on our annual results of operations and on the market price of our common stock.

If we are unable to maintain and protect our information technology systems and technologies, we could suffer disruptions in our business, damage to our reputation, increased costs and liability, and obstacles to our growth.

The operation of our business is heavily dependent upon the implementation, integrity, security, and successful functioning of our computer networks and information systems, including the point‑of‑sale systems in our stores, data centers that process transactions, and various software applications used in our operations.  Our systems are subject to damage or interruption from weather events, power outages, telecommunications or computer failures, computer viruses, security breaches, employee errors and similar occurrences. A failure of our systems to operate effectively as a result of damage to, interruption, or failure of any of these systems could result in data loss, a failure to meet our reporting obligations, or material misstatements in our consolidated financial statements, or cause losses due to disruption of our business operations and loss of customer confidence. These adverse situations could also lead to loss of sales or profits or cause us to incur additional repair, replacement and development costs.  Our inability to improve our information technology systems and technologies may fail to support our growth and may limit opportunities.

If we fail to protect the security of information about our business and our customers, suppliers, business partners and employees, we could damage our reputation and our business, incur substantial additional costs and become subject to litigation and government investigations and enforcement actions.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, on our computer networks and information systems.  The secure processing, maintenance and transmission of this information is critical to our operations.  Despite our security measures, our information technology and infrastructure and that of our service providers may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.  Cyber threats are rapidly evolving and are becoming increasingly sophisticated. Any such attack or breach could compromise our security and remain undetected for a period of time, and confidential information could be misappropriated, resulting in a loss of customers’, suppliers’, business partners’ or employees’ personal information, negative publicity, harm to our business and reputation, and potentially causing us to incur costs to reimburse third parties for damages and potentially subjecting us to government investigations and enforcement actions. In addition, the regulatory environment surrounding data and information security and privacy is increasingly demanding, as new and revised requirements are frequently imposed across our business. For example, during 2015, we were required to comply with new chip card standards. Compliance with more demanding privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes, and implementing new initiatives could result in system disruptions. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems.

We are subject to various government regulations, changes in the existing laws and regulations and new laws and regulations which may adversely affect our operations and financial performance.

The development and operation of our stores are subject to various federal, state and local laws and regulations in many areas of our business, including, but not limited to, those that impose restrictions, levy a fee or tax, or require a permit or license, or other regulatory approval, and building and zoning requirements. Difficulties or failures in obtaining required permits, licenses or other regulatory approvals could delay or prevent the opening of a new store, and the suspension of, or inability to renew, a license or permit could interrupt operations at an existing store. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, health insurance mandates, working and safety conditions, and immigration status requirements. In May 2016, the Department of Labor released its final rule increasing the minimum salary that employees must be paid to qualify as exempt from the overtime requirements under the Fair Labor Standards Act, which will likely increase our labor costs.  Additionally, potential changes in federal labor laws, including “card check” regulations, could result in portions of our workforce being subjected to greater organized labor influence. This could result in an increase to our labor costs. A significant portion of our store personnel are paid at rates related to the minimum wage established by federal, state and municipal law. Additionally, we are subject to certain laws and regulations that govern our handling of customers’ personal information. A failure to protect the integrity and security of our customers’ personal information could expose us to private litigation and government investigations and enforcement actions, as well as materially damage our reputation with our customers. While we endeavor to comply with all applicable laws and regulations, governmental and regulatory bodies may change such laws and regulations in the future

14


 

which may require us to incur substantial cost increases. If we fail to comply with applicable laws and regulations, we may be subject to various sanctions, penalties or fines and may be required to cease operations until we achieve compliance which could have a material adverse effect on our consolidated financial results and operations.

We face litigation risks from customers, employees, and other third parties in the ordinary course of business.

Our business is subject to the risk of litigation by customers, current and former employees, suppliers, stockholders and others through private actions, class actions, administrative proceedings, regulatory actions, or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of merchandise offerings, regardless of whether the allegations are valid or whether we are ultimately found liable.

We face risks with respect to product liability claims and product recalls, which could adversely affect our reputation, our business, and our consolidated results of operations.

We purchase merchandise from third parties and offer this merchandise to customers for sale. In addition, as discussed above, we currently expect to develop and manufacture certain merchandise for sale, initially on a very limited basis. Merchandise could be subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the type of merchandise we offer to customers. We have experienced, and may in the future experience, issues that result in recalls of merchandise. In addition, individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from third‑party merchandise offered by us, and we may be subject to future lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our reputation, diversion of development and management resources, or reduced sales and increased costs, any of which could harm our business.

Our stores may be adversely affected by local conditions, natural disasters, and other events.

Certain regions in which our stores are located may be subject to adverse local conditions, natural disasters, and other events. If severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales could be adversely affected. If severe weather conditions occur during the second quarter of our fiscal year, the adverse impact to our sales and profitability could be even greater than at other times during the year because we generate a significant portion of our sales and profits during these periods. Natural disasters including tornados, hurricanes, floods, and earthquakes may damage our stores or other operations, which may adversely affect our consolidated financial results. Additionally, demographic shifts in the areas where our stores are located could adversely impact our consolidated financial results and operations.

Our results of operations may be negatively affected by inventory shrinkage.

We are subject to the risk of inventory loss and theft. Although our inventory shrinkage rates have not fluctuated significantly in recent years, we cannot assure that actual rates of inventory loss and theft in the future will be within our estimates or that the measures we are taking will effectively reduce the problem of inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our results of operations could be affected adversely.

Risks Related to Our Common Stock

Our certificate of incorporation, and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors.

Provisions in our certificate of incorporation and bylaws will have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

·

the ability of our Board of Directors to issue shares of our common stock and preferred stock without stockholder approval (subject to applicable NASDAQ requirements);

 

·

a requirement that stockholder meetings may only be called by our President, Chief Executive Officer, the Chairman of the Board or at the written request of a majority of the directors then in office and not our stockholders;

15


 

 

·

a prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; 

 

·

the ability of our Board of Directors to make, alter or repeal our bylaws without further stockholder approval; and

 

·

the requirement for advance notice for nominations for directors to our Board of Directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.

Because we do not presently have any plans to pay dividends on our common stock, stockholders must look solely to appreciation of our common stock to realize a gain on their investment.

We have not paid a regular cash dividend since 2008 and do not presently have any plans to pay dividends.  Accordingly, stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may not occur.

The price of our common stock has fluctuated substantially over the past several years and may continue to fluctuate substantially in the future.

From July 1, 2015 to June 30, 2016, the trading prices of our common stock ranged from a low of $4.86 per share to a high of $11.45 per share. We expect our stock to continue to be subject to fluctuations as a result of a variety of factors, including factors beyond our control, which have been included throughout this Annual Report on Form 10‑K. We may fail to meet the expectations of our stockholders or securities analysts at some time in the future, and our stock price could decline as well.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Stores.  We lease all of our stores from unaffiliated third parties, except one Company‑owned store located adjacent to our existing distribution facility in Dallas, Texas. A description of the location of our stores is provided in Item 1, “Business—Stores and Store Operations.” At June 30, 2016, the remaining terms of the majority of our store leases range from one month to five years. The average initial term of a store lease is approximately five years, typically with options available for renewal. We intend to continue to lease all of our new stores from unaffiliated third parties. Our store leases typically include “kick clauses,” which allow us, at our option, to exit the lease with no penalty 24 to 60 months after entering into the lease if store sales do not reach a stipulated amount stated in the lease.

Distribution Facilities and Corporate Headquarters.  

We own a 104,675 square foot building which houses our corporate office in Dallas, Texas. Our Dallas distribution center utilizes approximately 1.4 million square feet of which 1.2 million square feet is owned and 0.2 million square feet, which we do not consider part of our long-term distribution network, is leased through December 2017 in connection with a sale-leaseback transaction executed in the fourth quarter of fiscal 2016. During fiscal 2015, we executed a lease for approximately 0.6 million square feet related to our new, additional distribution center in Phoenix, Arizona which started operations in the fourth quarter of fiscal 2016.

We lease from unaffiliated third parties two parcels of land of approximately 301,600 square feet, for trailer storage and parking.

We are continuing to evaluate the reorganization of our distribution network and facilities to accommodate our distribution requirements for our existing store base as well as for future growth.

Item 3.  Legal Proceedings

From time to time, we are involved in litigation which is incidental to our business. In our opinion, no litigation to which we are currently a party is likely to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

Item 4.  Mine Safety Disclosures

Not applicable.

 

 

16


 

PART II

Item 5.  Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Global Select Market under the symbol “TUES.” The following table sets forth for the periods indicated the high and low sales prices per share as reported on the NASDAQ Select Global Market:

 

 

 

High

 

 

Low

 

Fiscal Year Ended June 30, 2016

 

 

 

 

 

 

 

 

First quarter

 

$

11.45

 

 

$

4.86

 

Second quarter

 

$

7.36

 

 

$

5.11

 

Third quarter

 

$

8.47

 

 

$

5.01

 

Fourth quarter

 

$

9.23

 

 

$

6.15

 

Fiscal Year Ended June 30, 2015

 

 

 

 

 

 

 

 

First quarter

 

$

19.90

 

 

$

16.01

 

Second quarter

 

$

22.82

 

 

$

17.47

 

Third quarter

 

$

22.88

 

 

$

14.90

 

Fourth quarter

 

$

17.58

 

 

$

11.20

 

 

As of August 17, 2016, there were approximately 249 holders of record of our common stock.

Dividend Policy

During the fiscal years ended June 30, 2016 and 2015, we did not declare or pay any cash dividends on our common stock. We do not presently have plans to pay dividends on our common stock. Our revolving credit facility may, in some instances, limit our ability to pay cash dividends and repurchase our common stock. Additional details are provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Revolving Credit Facility.”

Repurchases of Common Equity

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 twelve month period ended June 30, 2016, 18,166 shares were repurchased under the Repurchase Program at an average cost of $7.07 per share and for a total cost (excluding commissions) of approximately $129,000. All of such shares were purchased by us in connection with the vesting of equity awards under our equity incentive plans.

Repurchases of equity securities during the three months ended June 30, 2016 are listed 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)

 

April 1 through April 30, 2016

 

 

2,314

 

 

$

8.68

 

 

 

2,314

 

 

$

3,242,959

 

May 1 through May 31, 2016

 

 

2,314

 

 

$

6.80

 

 

 

2,314

 

 

$

3,227,223

 

June 1 through June 30, 2016

 

 

2,313

 

 

$

7.02

 

 

 

2,313

 

 

$

3,210,981

 

Total

 

 

6,941

 

 

$

7.50

 

 

 

6,941

 

 

$

3,210,981

 

 

(1)

As of June 30, 2016, 1.8 million shares have been repurchased under the Repurchase Program for a total cost (excluding commissions) of approximately $6.8 million.

17


 

Stock Price Performance

The following graph illustrates a comparison of the cumulative total stockholder return (change in stock price plus reinvested dividends) for the fiscal years ended June 30, 2016, 2015, 2014, 2013 and 2012, of (1) our common stock, (2) the S&P 500 Index, and (3) the S&P 500 retailing index, a pre‑established industry index. The chart assumes that $100 was invested on June 30, 2011, in our common stock and each of the comparison indices, and assumes that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Tuesday Morning, the S&P 500 Index

and the S&P 500 Retailing Index

 

 

*

$100 invested on 6/30/11 in stock or index, including reinvestment of dividends.

Fiscal year ending June 30.

Copyright© 2014 S&P, a division of The McGraw‑Hill Companies Inc. All rights reserved.

These indices are included for comparative purposes only and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved, and are not intended to forecast or be indicative of possible future performance of our common stock.

The performance graph and related text are being furnished to and not filed with the SEC, and will not be deemed to be “soliciting material” under Regulation 14A or 14C under the Securities Exchange Act of 1934 or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate such information by reference into such a filing.

18


 

Item 6.  Selected Financial Data

The following table sets forth the selected consolidated financial and operating data for the fiscal years ended June 30, 2016, 2015, 2014, 2013, and 2012.

The selected consolidated financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Form 10‑K.

 

 

 

Fiscal Year Ended June 30,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands, except per share, per square foot,

square foot per store amounts and number of stores)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

956,396

 

 

$

906,365

 

 

$

864,844

 

 

$

838,314

 

 

$

812,782

 

Cost of sales

 

 

614,594

 

 

 

579,746

 

 

 

562,692

 

 

 

578,876

 

 

 

503,918

 

Gross profit

 

 

341,802

 

 

 

326,619

 

 

 

302,152

 

 

 

259,438

 

 

 

308,864

 

Selling, general and administrative expenses

 

 

339,398

 

 

 

314,263

 

 

 

310,205

 

 

 

315,933

 

 

 

301,427

 

Operating income/(loss)

 

 

2,404

 

 

 

12,356

 

 

 

(8,053

)

 

 

(56,495

)

 

 

7,437

 

Interest expense

 

 

(1,068

)

 

 

(1,445

)

 

 

(1,500

)

 

 

(1,677

)

 

 

(2,254

)

Other income/(expense), net

 

 

2,640

 

 

 

(495

)

 

 

(582

)

 

 

(5,236

)

 

 

224

 

Income/(loss) before income taxes

 

 

3,976

 

 

 

10,416

 

 

 

(10,135

)

 

 

(63,408

)

 

 

5,407

 

Income tax provision/(benefit)

 

 

263

 

 

 

31

 

 

 

41

 

 

 

(7,032

)

 

 

1,494

 

Net income/(loss)

 

$

3,713

 

 

$

10,385

 

 

$

(10,176

)

 

$

(56,376

)

 

$

3,913

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

0.24

 

 

$

(0.24

)

 

$

(1.33

)

 

$

0.09

 

Diluted

 

$

0.08

 

 

$

0.24

 

 

$

(0.24

)

 

$

(1.33

)

 

$

0.09

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,705

 

 

 

43,480

 

 

 

42,943

 

 

 

42,248

 

 

 

41,986

 

Diluted

 

 

43,736

 

 

 

43,770

 

 

 

42,943

 

 

 

42,248

 

 

 

42,536

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

769

 

 

 

810

 

 

 

828

 

 

 

852

 

 

 

861

 

Opened during period

 

 

16

 

 

 

5

 

 

 

9

 

 

 

10

 

 

 

24

 

Closed during period

 

 

(34

)

 

 

(46

)

 

 

(27

)

 

 

(34

)

 

 

(33

)

Open at end of period

 

 

751

 

 

 

769

 

 

 

810

 

 

 

828

 

 

 

852

 

Comparable store sales increase/(decrease)(1)

 

 

7.8

%

 

 

7.2

%

 

 

6.1

%

 

 

3.9

%

 

 

(3.1

)%

Average sales per store(2)

 

$

1,263

 

 

$

1,148

 

 

$

1,058

 

 

$

1,000

 

 

$

950

 

Inventory turnover(3)

 

 

2.5

 

 

 

2.6

 

 

 

2.6

 

 

 

2.2

 

 

 

1.9

 

Total square footage

 

 

8,326

 

 

 

8,341

 

 

 

8,593

 

 

 

8,641

 

 

 

8,652

 

Net Sales per square foot

 

$

115

 

 

$

107

 

 

$

100

 

 

$

97

 

 

$

95

 

Average square feet per store

 

 

11,100

 

 

 

11,000

 

 

 

10,700

 

 

 

10,500

 

 

 

10,200

 

19


 

 

 

 

As of June 30,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(In thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

138,947

 

 

$

152,580

 

 

$

139,604

 

 

$

141,986

 

 

$

188,828

 

Inventories

 

 

242,315

 

 

 

209,984

 

 

 

207,663

 

 

 

211,981

 

 

 

265,630

 

Total assets

 

 

361,970

 

 

 

334,875

 

 

 

332,344

 

 

 

320,889

 

 

 

396,632

 

Total debt, including current portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

227,282

 

 

 

220,289

 

 

 

203,310

 

 

 

207,457

 

 

 

260,191

 

 

(1)

Stores are included in the comparable store sales calculation at the beginning of the quarter following the first anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered a comparable store for purposes of this computation. The number of days our stores are open may fluctuate from period to period.

(2)

Average sales per store is the sum of the average sales per store for each quarter.

(3)

Inventory turnover is the ratio of cost of sales to average inventory. Average inventory is calculated by taking the average of the previous year‑end and quarter‑end inventory levels throughout the year. Inventory turnover for fiscal 2014 and 2013 is unadjusted for the inventory charges recorded during those fiscal years as part of our business turnaround strategy.

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this Form 10‑K.

Overview

 

·

We sell off‑price, deeply-discounted, upscale decorative home accessories, housewares, seasonal goods and famous‑maker gifts generally below retail prices charged by department and specialty stores, catalogs and on‑line retailers. Our strong everyday value proposition is also supported with periodic circulars and direct mail that keep customers familiar with Tuesday Morning.

 

·

During fiscal 2016, we continued to implement our strategy of improving store locations and the in-store experience for our customers, which included (i) closing unproductive 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 two to three thousand square feet larger, (ii) expanding some existing productive stores to the larger footprint, and (iii) improving the finishes in these relocated, new and expanded stores.

 

·

We operate 751 stores in 40 states as of June 30, 2016. As part of the implementation of our real estate strategy, our store base decreased by 18 stores in fiscal 2016, decreased by 41 stores in fiscal 2015, and decreased by 18 stores in fiscal 2014. We relocated 46 stores in fiscal 2016, 30 stores in fiscal 2015, and 13 stores in fiscal 2014.

 

·

For fiscal 2016, net sales were $956.4 million, an increase of 5.5% compared to fiscal 2015, primarily due to an increase in sales from comparable stores (stores open at least one year, including stores relocated in the same market and renovated stores) of 7.8%. The increase in comparable store sales was comprised of an increase in customer transactions of 7.9%, slightly offset by a 0.1% decrease in average ticket. Sales at the 46 stores relocated during the past 12 months increased approximately 53% on average for fiscal 2016 as compared to last year and contributed approximately 230 basis points to the total company comparable store sales increase of 7.8%. 

 

·

Our operating income for fiscal 2016 was $2.4 million compared to $12.4 million for the twelve months ended June 30, 2015. Our net income for fiscal 2016 was $3.7 million, or diluted net income per share of $0.08, compared to a net income of $10.4 million, or diluted net income per share of $0.24, for the twelve months ended June 30, 2015.

 

·

Adjusted EBITDA for fiscal 2016 was $30.5 million compared to $30.0 million for fiscal 2015.

20


 

 

·

Inventory levels at June 30, 2016 increased $32.3 million to $242.3 million from $210.0 million at June 30, 2015. Inventory turnover for the trailing five quarters as of June 30, 2016 was 2.5 turns, slightly less as compared to the trailing five quarters as of June 30, 2015 of 2.6 turns. 

 

·

Cash and cash equivalents at June 30, 2016 decreased $30.6 million to $14.2 million from $44.8 million at June 30, 2015.  There were no outstanding borrowings under our revolving credit facility as of June 30, 2016.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operations data, expressed as a percentage of net sales, as well as the number of stores open at the end of each period. There can be no assurance that the trends in sales or operating results will continue in the future.

 

 

 

Fiscal Year Ended June 30,

 

 

 

2016

 

 

2015

 

 

2014

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

64.3

 

 

 

64.0

 

 

 

65.1

 

Gross margin

 

 

35.7

 

 

 

36.0

 

 

 

34.9

 

Selling, general and administrative expenses

 

 

35.5

 

 

 

34.7

 

 

 

35.9

 

Operating income/(loss)

 

 

0.3

 

 

 

1.3

 

 

 

(1.0

)

Interest expense

 

 

(0.1

)

 

 

(0.2

)

 

 

(0.2

)

Other income/(expense)

 

 

0.3

 

 

 

(0.1

)

 

 

(0.1

)

Income tax provision/(benefit)

 

 

0.0

 

 

 

0.0

 

 

 

(0.0

)

Net income/(loss)

 

 

0.4

 

 

 

1.1

 

 

 

(1.2

)

Number of stores open at end of period

 

 

751

 

 

 

769

 

 

 

810

 

 

Selling, general and administrative expenses are comprised of wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses and corporate office costs.  Selling, general and administrative expense increases and decreases are generally attributable to changes in variable expenses. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

Non-GAAP Financial Measures

 

The Company defines EBITDA as net income 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 the Company does not believe are representative of its core operating performance. This measure is not a presentation made in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income or loss as a measure of operating performance. In addition, Adjusted EBITDA is not presented as, and should not be considered as, an alternative to cash flows as a measure of liquidity. Adjusted EBITDA should not be considered in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP and should not be construed as an inference that the Company’s future results will be unaffected by such adjustments. The Company believes it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate the Company’s operating performance. These non-GAAP financial measures are included to supplement the Company’s financial information presented in accordance with GAAP and because the Company uses these measures to monitor and evaluate the performance of its business as a supplement to GAAP measures and believes the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in the Company’s business and evaluate the Company’s performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in the Company’s industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.

 

Adjusted EBITDA.  The following table reconciles net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA, a non-GAAP financial measure:

 

(in thousands)

21


 

 

 

Twelve Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Net income  (GAAP)

 

$

3,713

 

 

$

10,385

 

Depreciation and amortization

 

 

16,010

 

 

 

12,426

 

Interest expense, net

 

 

977

 

 

 

1,420

 

Income tax provision

 

 

263

 

 

 

31

 

EBITDA

 

 

20,963

 

 

 

24,262

 

Share-based compensation expense (1)

 

 

3,115

 

 

 

5,361

 

Cease-use rent expense

 

 

3,200

 

 

 

Phoenix distribution center related expenses

 

 

4,457

 

 

 

288

 

Other strategic initiative related expenses

 

 

1,250

 

 

 

57

 

Gain on sale of assets

 

 

(2,515

)

 

 

Adjusted EBITDA (non-GAAP)

 

$

30,470

 

 

$

29,968

 

 

(1)

Charges related to share-based compensation programs, which vary from period to period depending on volume and vesting timing of awards.  The Company adjusts for these charges to facilitate comparisons from period to period.

Fiscal Year Ended June 30, 2016 Compared to Fiscal Year Ended June 30, 2015

Net sales increased $50.0 million, or 5.5%, to $956.4 million in fiscal 2016 from $906.4 million in fiscal 2015, primarily due to a $67.7 million increase in sales from comparable stores (stores open at least one year, including stores relocated in the same market and renovated stores) of 7.8%. The increase in comparable store sales was comprised of an increase in customer transactions of 7.9%, slightly offset by a decrease in average ticket of 0.1%. Our comparable store sales increase was partially offset by a decrease in our non-comparable store sales, which decreased a total of $17.7 million, resulting in a 195 basis point negative impact on our increase in 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 34 store closures, partially offset by 16 store openings, which have occurred since the end of fiscal 2015.

Gross profit for fiscal 2016 was $341.8 million, an increase of 4.7% compared to $326.6 million for fiscal 2015. As a percentage of net sales, gross margin decreased to 35.7% in fiscal 2016 compared with 36.0% in fiscal 2015. This  decrease in gross margin rate of 30 basis points was primarily driven by an increase in supply chain and distribution costs to support higher sales volume, higher buying costs, as we have made greater investments in our merchant organization, and an increase in markdowns, partially offset by improvements in initial merchandise mark-up.

Selling, general and administrative expenses (SG&A) increased $25.1 million, or 8.0%, to $339.4 million in fiscal 2016 from $314.3 million in the prior fiscal year. As a percentage of net sales, SG&A increased to 35.5% in fiscal 2016 from 34.7% in fiscal 2015. This increase was driven primarily by higher store rent and depreciation, due in part to our strategy to improve store real estate, and $3.2 million of incremental rent expense in the current year, including a $2.0 million reserve for future lease payments, related to stores we exited prior to lease expiration, along with increased advertising. Additionally, during the current year, we incurred costs for our new Phoenix distribution center associated with the opening and ramping up of the new facility, a portion of which related to the delays in the completion of that facility. The increase was also driven by higher employee and recruiting costs, partially offset by favorable share based compensation expense in the current year compared to the prior year due to executive vacancies during the current year. We recorded approximately $8.9 million of incremental expenses in fiscal 2016 to support our strategic initiatives, which negatively impacted our operating results. These costs included $3.2 million of incremental rent expense related to closing stores prior to lease termination as explained above, as well as up-front costs for the Phoenix distribution center and duplication of certain costs at our Dallas facility, which has not yet ramped down to normalized levels, and other investments in the business such as recruiting costs for key executive positions, an inventory management project, expenses related to advertising research, and investments in store prototype development.

Our operating income was $2.4 million during fiscal 2016 as compared to $12.4 million for fiscal 2015. The decrease was primarily due to higher SG&A discussed above, partially offset by higher gross profit from higher net sales.

Net interest expense decreased $0.3 million to $1.1 million in fiscal 2016 compared to $1.4 million in the prior year, as a result of lower rates on our New Revolving Credit Facility combined with no borrowings during fiscal 2016. Other income/(expense) increased $3.1 million to other income of $2.6 million in fiscal 2016 compared to $0.5 million of other expense in fiscal 2015. This change was primarily attributable to a $2.5 million gain in connection with a sale-leaseback transaction in fiscal 2016.

22


 

Income tax expense for fiscal 2016 was $263,000 compared to $31,000 in fiscal 2015. The effective tax rates for fiscal 2016 and 2015 were 6.6% and 0.3%, respectively. A full valuation allowance was recorded against our deferred tax assets as of June 30, 2016.  The total valuation allowance at the end of fiscal years 2016, 2015 and 2014 was $16.0 million, $16.7 million and $20.2 million, respectively. A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) results from the valuation allowance.                

Fiscal Year Ended June 30, 2015 Compared to Fiscal Year Ended June 30, 2014

Net sales increased $41.6 million, or 4.8%, to $906.4 million in fiscal 2015 from $864.8 million in fiscal 2014, primarily due to an increase in sales from comparable stores (stores open at least one year, including stores relocated in the same market and renovated stores) of 7.2%. The increase in comparable store sales was comprised of an increase in customer transactions of 7.0%, along with an increase in average ticket of 0.2%. Our comparable store sales increase in fiscal 2015 was partially offset by a decrease in our non-comparable store sales compared to the prior year, which decreased a total of $18.2 million, resulting in a 240 basis point negative impact on our increase in net sales.  The non-comparable store sales decrease in fiscal 2015 was driven by 46 store closures, partially offset by 5 store openings, which occurred during the year.

Gross profit for fiscal 2015 was $326.6 million, an increase of 8.1% compared to $302.2 million for fiscal 2014. As a percentage of net sales, gross margin increased to 36.0% in fiscal 2015 compared with 34.9% in fiscal 2014. This increase in gross margin rate of 110 basis points was primarily driven by reduced markdowns in fiscal 2015, partially offset by slightly lower initial mark-up. Gross margin in fiscal 2014 was impacted by a $5.3 million markdown charge as a result of the strategic decision to accelerate the sell-off of merchandise categories.

SG&A increased $4.1 million, or 1.3%, to $314.3 million in fiscal 2015 from $310.2 million in the prior fiscal year. As a percentage of net sales, SG&A decreased to 34.7% in fiscal 2015 from 35.9% in fiscal 2014 due to strong expense management in fiscal 2015, particularly in store labor, combined with higher expenses incurred as part of our strategic company turnaround in the prior year. These expenses, primarily legal, consulting, recruiting, store reorganization and cleanup, and employee severance totaled $4.6 million in fiscal 2014.

Net interest and other expense decreased $0.2 million to $1.9 million of expense in fiscal 2015 compared to $2.1 million of expense in fiscal 2014. This decrease was primarily attributable to expenses in fiscal 2014 relating to the discontinuation of our e‑commerce platform.

Income tax expense for fiscal 2015 was $31,000 compared to income tax expense of $41,000 in fiscal 2014. The effective tax rates for fiscal 2015 and fiscal 2014 were 0.3% and (0.4%), respectively. A full valuation allowance was recorded against our deferred tax assets as of June 30, 2015.  The total valuation allowance at the end of fiscal years 2015, 2014 and 2013 was $16.7 million, $20.2 million and $16.2 million, respectively. A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) resulted from the valuation allowance.

Liquidity and Capital Resources

Cash Flows from Operating Activities

In fiscal 2016, cash provided by operating activities was $8.4 million, compared to cash provided by operating activities of $9.7 million in the prior year. The $8.4 million of cash provided by operating activities for fiscal 2016 was due to net income of $3.7 million adjusted for non-cash items, including depreciation and amortization of $16.5 million, share based compensation expense of $3.1 million, loss on disposal of assets of $0.7 million, which primarily related to our store closing and relocation program, which were partially offset by a non-cash gain on sale-leaseback of $2.5 million recorded in other income. Also impacting the cash provided by operating activities were increases in accounts payable of $6.6 million, accrued liabilities of $6.7 million, deferred rent of $2.8 million, cease-use rent of $0.9 million, asset retirement obligations of $1.4 million and decreases in prepaid expenses and other current assets of $0.7 million, which were partially offset by an increase in inventory of $30.0 million. The growth in inventory was primarily due to a higher level of pack-and-hold inventory from opportunistic buys, inventory in preparation for our July advertisement, higher levels of store inventory, a greater portion of which is in regular priced versus clearance inventory this year, additional investment in seasonal inventory, and incremental inventory related to our import strategy.  There were no significant changes to our vendor payment policy during fiscal 2016, 2015, or 2014.

In fiscal 2015, cash provided by operating activities was $9.7 million, compared to cash provided by operating activities of $31.2 million in fiscal 2014. The $9.7 million of cash provided by operating activities for fiscal 2015 was due to net income of $10.4 million, plus the non-cash impacts of depreciation of $12.4 million, stock compensation expense of $5.4 million, and loss on

23


 

disposal of assets of $1.1 million, which primarily related to our store closing and relocation program, partially offset by a decrease in accounts payable of $12.0 million, decreased accrued liabilities of $5.3 million and increased inventory of $2.0 million.

Cash Flows from Investing Activities

Net cash used in investing activities was due to capital expenditures of $45.5 million, $15.5 million and $13.4 million for the fiscal years ended June 30, 2016, 2015, and 2014, respectively. Capital expenditures were primarily associated with store relocations, expansions and new store openings, capital improvements to existing stores, the new Phoenix distribution center and enhancements to our distribution center facilities, equipment, and systems along with improvements related to our corporate office and equipment. The increase in investment spend in fiscal 2016 as compared to fiscal 2015 was primarily driven by $16.0 million of increased spending on the Phoenix distribution center and related information technology and $10.5 million of increased spending on new, relocated and expanded stores.  In fiscal year 2016, we received $8.8 million of proceeds from the sale of two buildings and land that comprise a portion of the Dallas distribution center facilities in a sale-leaseback transaction.  Additionally, in fiscal 2016, we invested $1.3 million in intellectual property.

We currently expect to incur capital expenditures in the range of $40 million to $45 million in fiscal year 2017.

Cash Flows from Financing Activities

Net cash used in financing activities of $1.0 million in fiscal 2016 was primarily comprised of $0.9 million of debt issuance costs related to the New Revolving Credit Facility, discussed below. Net cash provided by financing activities in fiscal years 2015 and 2014 was due to the proceeds from employee stock option exercises which were $0.9 million and $3.0 million, respectively.

New Revolving Credit Facility

On August 18, 2015, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million which matures on August 18, 2020 (the “New Revolving Credit Facility”), which replaced our prior revolving credit facility. The availability of funds under the New Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the New Revolving Credit Facility. Our indebtedness under the New Revolving Credit Facility is secured by a lien on substantially all of our assets. The New 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 New 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 New 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 New 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 New Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment.  As of June 30, 2016, we were in compliance with all of the New Revolving Credit Facility covenants.

At June 30, 2016, we had no amounts outstanding under the New Revolving Credit Facility, $5.7 million of outstanding letters of credit and availability of $119.3 million under the New Revolving Credit Facility. Letters of credit under the New Revolving Credit Facility are primarily for self-insurance purposes. We incur commitment fees of up to 0.25% on the unused portion of the New Revolving Credit Facility, payable quarterly. Any borrowing under the New 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 the one month LIBOR plus an applicable margin in the case of loans based on the prime rate.  Interest expense of $1.1 million for fiscal 2016 was due to commitment fees of $0.6 million and the amortization of financing fees of $0.5 million.

Prior Revolving Credit Facility

Prior to entering into the New Revolving Credit Facility on August 18, 2015, we were 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 maturing on November 17, 2016. Our former indebtedness under this revolving credit facility was secured by a lien on substantially all of our assets. The revolving credit facility contained certain restrictive covenants, which affected, 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. Our former financial covenant required that we maintain availability of 10% of our calculated borrowing base, but never less than $15 million. Our prior revolving credit facility limited, in

24


 

some instances, payment of cash dividends and repurchases of our common stock. In order to make a restricted payment, including payment of a dividend or a repurchase of shares, we were required to maintain availability of 17.5% of our lenders’ aggregate commitments under the revolving credit facility for three months prior to, and on a pro forma basis for the six months immediately following, and after giving effect to, the restricted payment and we were required to satisfy a fixed charge coverage ratio requirement.

At June 30, 2015, we had no amounts outstanding under the prior revolving credit facility, $5.9 million of outstanding letters of credit and availability of $100.2 million under the prior facility. The letters of credit were primarily for self-insurance purposes.

We incurred commitment fees of up to 0.375% on the unused portion of the prior facility. Any borrowing under the prior facility incurred 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). These rates increased or reduced as our average daily availability changed.  Interest expense of $1.4 million for fiscal 2015 was due to commitment fees of $0.8 million and the amortization of financing fees of $0.6 million.

Liquidity

We have financed our operations with funds generated from operating activities, available cash and cash equivalents, proceeds from the sale of owned properties and borrowings under our revolving credit facility. Cash and cash equivalents as of June 30, 2016, 2015, and 2014, were $14.1 million, $44.8 million, and $49.7 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. Our borrowings have historically peaked during our second fiscal quarter as we build inventory levels prior to the holiday selling season. 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 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.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory—Our inventories consist of finished goods and are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. We have a perpetual inventory system that tracks on hand inventory and inventory sold at a SKU level. Inventory is relieved and cost of goods sold is recorded based on the current cost of the item sold. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are charged to cost of sales as the related inventory is sold. The retail inventory method, which is used by a number of our competitors, involves management estimates with regard to items such as markdowns. Such estimates may significantly impact the ending inventory valuation at cost as well as the amount of gross margin recognized.

Our stores conduct annual physical inventories, staggered throughout the year. During periods in which physical inventory observations do not occur, we utilize an estimate for recording inventory shrink based on the historical results of our previous physical inventories. This estimate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventory results yield a different result. We have loss prevention and inventory controls programs that we believe minimize shrink. Although inventory shrink rates have not fluctuated significantly in recent years, if the actual rate were to differ from our estimates, then an adjustment to inventory shrink would be required.

Inventory is the largest asset on our balance sheet and represented approximately 67%, 63%, and 62% of total assets at June 30, 2016, 2015, and 2014, respectively. Inventory increased 15.4%, or $32.3 million, from June 30, 2015 to June 30, 2016. Inventory

25


 

increased 1.1%, or $2.3 million, from June 30, 2014 to June 30, 2015. On a per store basis, inventory increased 18.2% from June 30, 2015 to June 30, 2016 and increased 6.5% from June 30, 2014 to June 30, 2015.

Markdowns—We utilize markdowns to promote the effective and timely sale of merchandise which allows us to consistently provide new merchandise to our customers. We also utilize markdowns coupled with promotional events to drive traffic and stimulate sales. Markdowns may be temporary or permanent. Temporary markdowns are for a designated period of time with markdowns recorded to cost of sales based on quantities sold during the period. Permanent markdowns are charged to cost of sales immediately based on the total quantities on hand at the time of the markdown. Permanent markdowns may vary throughout the quarter or year in timing, with higher markdowns traditionally recorded in the quarters ending December 31 and June 30, primarily due to seasonal merchandise.

The effect of a 1.0% markdown in the value of our inventory at June 30, 2016 would result in a decline in gross profit and a reduction in our earnings per share for the fiscal year ended June 30, 2016 of $2.4 million and $0.05, respectively.

Insurance and Self‑Insurance Reserves—We use a combination of insurance and self‑insurance plans to provide for the potential liabilities associated with workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers’ compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors.

The insurance liabilities we record are primarily influenced by the frequency and severity of claims and include a reserve for claims incurred but not yet reported. Our estimated reserves may be materially different from our future actual claim costs, and, when required adjustments to our estimated reserves are identified, the liability will be adjusted accordingly in that period. Our self‑insurance reserves for workers’ compensation, general liability and medical were $8.2 million, $3.3 million, and $1.0 million, respectively, at June 30, 2016 and $7.8 million, $2.9 million, and $1.4 million, respectively, at June 30, 2015.

We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims paid reduce our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers. Expenses for workers’ compensation, general liability and medical insurance were $3.4 million, $4.0 million and $7.2 million, respectively, for the fiscal year ended June 30, 2016; $3.6 million, $3.2 million and $7.6 million, respectively, for the fiscal year ended June 30, 2015; and $5.6 million, $3.8 million and $8.4 million, respectively, for the fiscal year ended June 30, 2014.

Share‑based compensation—The Compensation Committee of our Board of Directors and, through express consent of the Compensation Committee, our CEO, are authorized to grant stock options and restricted stock awards from time to time to eligible employees and directors. Those awards may be service or performance based. We grant options with exercise prices equal to the market price of our common stock on the date of the option grant as determined in accordance with the terms of our equity incentive plans. The majority of the options granted prior to June 30, 2008 have a vesting period of one to five years and expire ten years from the date of grant. Options granted after June 30, 2008, typically vest over periods of one to four years with equal portions of the grant vesting on an annual basis and expire ten years from the date of grant. In accordance with U.S. generally accepted accounting principles, we recognize compensation expense at an amount equal to the fair value of share‑based payments granted under compensation arrangements. We calculate the fair value of stock options using the Black‑Scholes option pricing model. Determining the fair value of share‑based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield, the risk free rate, the expected term and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share‑based awards that are expected to be forfeited. Amortization for share‑based compensation expense was $3.1 million for the fiscal year ended June 30, 2016, $5.4 million for the fiscal year ended June 30, 2015 and $3.0 million for the fiscal year ended June 30, 2014.

Income taxes—We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are recorded in our consolidated balance sheets. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered including past operating results, future reversals of taxable temporary differences, estimates of future income and tax planning strategies. We have elected to utilize the “with and without” method for purposes of determining when excess tax benefits will be realized. We are subject to income tax in many jurisdictions, including the United States, various states and localities. At any point in time, we may not be subject to audit by any of the various jurisdictions; however, we record estimated reserves for uncertain tax benefits for potential domestic tax audits. The timing of these audits and negotiations with taxing authorities

26


 

may affect the ultimate settlement of these issues. If different assumptions had been used, our tax expense or benefit, assets and liabilities could have varied from recorded amounts. If actual results differ from estimated results or if we adjust these assumptions in the future, we may need to adjust our reserves for uncertain tax benefits or our deferred tax assets or liabilities, which could impact our effective tax rate.

Off‑Balance Sheet Arrangements

We had no off‑balance sheet arrangements as of June 30, 2016.

Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2016 and the effects that such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

 

 

 

Payments Due by Period

 

Contractual Obligations

 

Total

 

 

1 Year

or Less

 

 

2 - 3

Years

 

 

4 - 5

Years

 

 

More than

5 Years

 

Operating leases

 

$

352,191

 

 

$

80,005

 

 

$

116,726

 

 

$

66,313

 

 

$

89,147

 

Maintenance, insurance and taxes on operating

   leases

 

 

59,517

 

 

 

13,520

 

 

 

19,726

 

 

 

11,206

 

 

 

15,065

 

Commitment fees on New Revolving Credit

   Facility

 

 

2,155

 

 

 

521

 

 

 

1,042

 

 

 

592

 

 

 

Total

 

$

413,863

 

 

$

94,046

 

 

$

137,494

 

 

$

78,111

 

 

$

104,212

 

 

Contractually required payments for maintenance, insurance and taxes on our leased properties are estimated above as a percentage of rent based on historical trends. These amounts can vary based on multiple factors including inflation, macroeconomic conditions, various local tax rates and appraised values of our rental properties. The operating lease obligations include the lease obligations of our new, additional distribution center in Phoenix, Arizona. We do not consider most merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order.

Commitment fees on the New Revolving Credit Facility are calculated based on contractual commitment fees and standby letter of credit fees assuming our current balances of zero on the revolving credit facility and letters of credit totaling $5.7 million. See "—Liquidity and Capital Resources—New Revolving Credit Facility" above.

We have not included other long-term liabilities related to self-insurance reserves in the contractual obligations table, as they do not represent cash requirements arising from contractual payment obligations. While self-insurance reserves represent an estimate of our future obligation and not a contractual payment obligation, we have disclosed our self-insurance reserves under "Critical Accounting Policies and Estimates - Insurance and Self-Insurance Reserves."

Quarterly Results and Seasonality

The following tables set forth certain quarterly financial data for the eight quarters ended June 30, 2016. The quarterly information is unaudited, but has been prepared on the same basis as the audited financial statements included elsewhere in this Form 10‑K. We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10‑K. The results of operations for any quarter are not necessarily indicative of the results for any future period. (In thousands, except for per share data and comparable store sales.)

 

 

 

Quarters Ended

 

 

 

Sept. 30,

2015

 

 

Dec. 31,

2015

 

 

Mar. 31,

2016

 

 

June 30,

2016

 

Net sales

 

$

202,328

 

 

$

319,876

 

 

$

211,380

 

 

$

222,812

 

Gross profit(1)

 

 

72,674

 

 

 

112,679

 

 

 

77,477

 

 

$

78,971

 

Operating income/(loss)(1)

 

 

(5,956

)

 

 

20,571

 

 

 

(5,932

)

 

$

(6,281

)

Net income/(loss)(1)

 

 

(6,140

)

 

 

18,944

 

 

 

(5,240

)

 

 

(3,851

)

Basic income/(loss) per share(2)

 

 

(0.14

)

 

 

0.43

 

 

 

(0.12

)

 

 

(0.09

)

Diluted income/(loss) per share(2)

 

 

(0.14

)

 

 

0.43

 

 

 

(0.12

)

 

 

(0.09

)

Comparable store sales increase

 

 

3.6

%

 

 

8.4

%

 

 

13.4

%

 

 

6.0

%

27


 

 

 

 

Quarters Ended

 

 

 

Sept. 30,

2014

 

 

Dec. 31,

2014

 

 

Mar. 31,

2015

 

 

June 30,

2015

 

Net sales

 

$

202,208

 

 

$

301,401

 

 

$

189,726

 

 

$

213,030

 

Gross profit(1)

 

 

71,934

 

 

 

109,046

 

 

 

72,400

 

 

 

73,237

 

Operating income/loss(1)

 

 

(5,755

)

 

 

24,222

 

 

 

(2,115

)

 

 

(3,997

)

Net income/(loss)(1)

 

 

(6,230

)

 

 

23,658

 

 

 

(2,804

)

 

 

(4,240

)