Tuesday Morning TUES
May 20, 2006 - 4:33pm EST by
2006 2007
Price: 17.34 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 723 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Tuesday Morning (TUES) is a cheap retailer with 734 stores at the end of Q1-06 without a catalyst that could always get cheaper if things get worse but in a diversified portfolio these things seem to work more often than not. The chain sells mostly 2nd hand housewares in a 'treasure hunt' type of atmosphere. The stores are an acquired taste, with minimal merchandise presentation (ie, the stores look like muddled crap for the most part, which isn't so wonderfullly visually but surely keeps down the hired help), attracting older women for the most part.

Here is why I find the company interesting:

*valuation. The stock currently trades for 723m with 61m in trailing net income with 76m in cash flow, for a valuation of 11.9x earnings and 9.5x cash flow.

*free cash flow. Trailing CapEx was 14.4m, with 2006 plans for 18-19m in CapEx, so if things get worse if they can keep working capital tamed (see negatives section) the company won't be going anywhere so you've got time for things to turn happier.

*dividend yield. TUES doesn't buy shares but they do pay a sizable 80c dividend (one time per year), for a yield of 4.6% while you wait for things to get better

*recent comps have been miserable. Comps for the past 7 quarters have been: -4.5%, -4.0%, -3.6%, -4.7%, -0.3%, -6.6%, -4.0%. This makes for easier comparisons if and when sales do turn

*Compensation, options, and insider holdings. I'll let you review the proxy and options table but management doesn't take too much compensation and options are reasonable enough. The shares are largely owned by what I presume is venture capital type firm.

*history of cyclicality. Be warned - this stock could trade lower, perhaps a lot lower. It traded down to $3.50 in 01 when inventory issues flared out of control (see note) but then rebounded to $28 just two years later. A modest Q4 comp brought the stock down to $13 but then it went to $35 a year later.

*no buyback plan. Management hasn't foolishly pandered to short-term investors by buying shares yet; while this may not always seem particularly wonderful for most investors, it gives you some assurance that the company will remain in place during bad times and be there when something turns.

Of course, there are some big negatives:

*inventory levels. They look high, up 18% yoy. TUES said they were comfortable with it and expect it to be high in Q2 and Q3 but lower in Q4 but you have to wonder if gross margins issues are going to be a problem eventually.

*recent comps have been miserable. From Q2-00 to Q2-03 comps were almost uniformly positive so maybe something has changed in the business; maybe TUES has lost its relevance ala PIR. From my store visits I doubt this but the numbers lately paint a grim picture. Management did say a promotional environment would continue into Q2. If anybody has a theory as to why the company will die a death I'd really like to hear it.

*saturation looms. They plan 65-70 stores this year which would take them up to 800 which sounds about 200 away from tip-top saturation (and they might need a new DC fairly soon). This is a longer term issue, and you have to hope that management won't overreach themselves with something new.

*there is no clear reason why the stock will go higher. I could easily post this idea six months from now at $12 or $10. Maybe I will. While the company has had comp issues, profits have held up, so maybe that will be the next shoe to drop. I haven't heard a reason to believe comps will be any higher in the near future.

So, here is what has to happen for the company to succeed.

1. Higher comps. If they ever do turn, this will be a $25 stock in short order. It wasn't that far from $40 that long ago and sentiment in this things turns like a dime. Put two comps together with good margins and I'll bet you the stock will reach $30. Put four together and it will be a party.

2. Keep inventory levels under control. This obviously bears watching in the next few quarters (and always, frankly, but especially given the history here).

3. Don't mess with the balance sheet. Frankly, I'd rather they pay no dividend at all, but management IMO has to ignore requests by outside agitators (one who appeared in the Q1 conference call) who - and maybe I'm WAY off-base - are only interested in 20% returns but in exchange for this want to ruin the balance sheet and create a much worse situation.

4. Stop expanding if things do get worse. They are making plenty of money but management needs to stop expansion entirely if things get hairy. Again, that way they will be around when things do get better.

In the end, this is not a stock with a catalyst, but I owned a lot of retailers that I've owned that eventually went up regardless. You can always wait for the turn to invest - it would be more profitable then, but you might miss the first big move. Maybe that's when housing picks back up or somebody in the industry dies (PIR, anyone?) or inventory gets more appropriate or something happens that makes people happy again.

I prefer to invest in stair-steps myself, and TUES has some numbers NOW that make it interesting. Would it be more interesting 50% lower? Sure, but you have to start somewhere and I think now is an interesting time, though you could wait until the end of Q2 for more bad news to drop if it does.

All this said, be warned that my ideas on this board doesn't seem to be too hot lately (for anything other than a quick trade). I'm not entirely sure why but this would be termed a 3 year holding. My personal rating is a modest "6" and believe this is a stock for a diversified portfolio.


It looks cheap and eventually cheap retailers might get cheaper but if management isn't stupid, which this one isn't, the sun will rise again and you can make a lot very quickly.
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