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January 2011
The Award for Most Ridiculous Top-Line Excuse Goes to… TUES
Most savvy buy-side professionals get a chuckle when companies use excuses to account for top-line shortfalls. But, Tuesday Morning (TUES – $5.00) may win this year’s prize for the most ridiculous excuse.
Last week, when discussing the prior quarter’s sales trends, the company’s CEO and COO pulled the “mid-term election” card. Yep, TUES management suggested that sales in the quarter were negatively impacted by the “record” voting turnout related to the mid-term election in November 2010.
We’ve heard some clever excuses before, but this one takes the cake. If management honestly believes that the mid-term election materially hampered sales in the quarter, investors in TUES have some serious reasons for concern.
In addition, the company has provided fairly aggressive EPS guidance for the back half of the fiscal year that ends in June 2011. We’re lower than the company’s annual guidance (click here), as it appears that TUES management is betting on a materially improved sequential comp store sales result in 2H.
Yes, TUES’s valuation is cheap on many levels. But, investors are stuck with a management team that appears to not fully grasp the dynamics of their top-line trends.
Here’s the transcript of that particular exchange on last week’s conference call:
Mark Montagna – Avondale Partners – Analyst
Okay. Looking back at the second quarter, was there a particular monthly promotion that maybe did not go as well as you had
hoped? Because you had comped nicely for four consecutive quarters. Was there something that might have been a miss that
was just an aberration?
Kathleen Mason – Tuesday Morning Corporation – CEO and President
I think our November Green Card coincided with the election. And normally, we do well in a mid-term, and it isn’t a factor. And that certainly was a factor this year.
Michael Marchetti – Tuesday Morning Corporation – COO & EVP
This year was a record turnout.
Mark Montagna – Avondale Partners – Analyst
Say that again?
Michael Marchetti – Tuesday Morning Corporation – COO & EVP
This year was a record turnout in terms of voting.
Mark Montagna – Avondale Partners – Analyst
Oh, right.
Michael Marchetti – Tuesday Morning Corporation – COO & EVP
So, because of the heavy participation, sales weren’t as good as they are regularly at this time.
Mark Montagna – Avondale Partners – Analyst
Okay.
But, it gets better. Take a look at this exchange below (we’ve even provided you a recording). Classic!
[audio:http://www.retailgeeks.com/wp-content/uploads/2011/01/20110127-095325.mp3|titles=TUES Q2 2011 Conference Call Excerpt]
Ali Montagne – Boston Partners – Analyst
I’m wondering what you think is the reason that your stock trades below net working capital.
Kathleen Mason – Tuesday Morning Corporation – CEO and President
The magic question. Perhaps exposure. We’re really a bit baffled.
Ali Montagne – Boston Partners – Analyst
But do you use it as — obviously you’re not doing something right. I mean, wouldn’t that be a fair assumption off the bat?
Kathleen Mason – Tuesday Morning Corporation – CEO and President
And what do you think we’re not doing right?
Ali Montagne – Boston Partners – Analyst
I don’t think you have a good process of shareholder communication. I don’t think you present the Company well. I don’t sense a belief from you — I mean, most other companies that are guiding to a positive comp and making $40 million a year and you could liquidate and walk away with a buck more than the Company is worth. It doesn’t really exist, and yet, it is what it is. But, you should be looking very critically at your processes with regards to shareholder communication, because they are not working. I mean everybody in the stock market wants to make money. If this is — so their eyes are out there. But something you’re doing is turning them off, besides the operating of the stores. And that’s from a communication perspective. So, I hope you’re being self-critical, because the market is boding that you should be. And that’s it, I guess.
Michael Marchetti – Tuesday Morning Corporation – COO & EVP
We certainly will be self-critical.
Ali Montagne – Boston Partners – Analyst
I think you have such a lack of enthusiasm in presenting the Company. I listened to some of your presentations you made at the — we’re a shareholder. Like I said, I feel you could liquidate and walk away and make 20% here. But I listened to some of those presentations you just made on your two investor days, and it was just so boring and so lacking of enthusiasm. And I just felt like I didn’t even want to listen anymore. And it just was shocking to me. And you would think that if you really believe the comps are positive, you could come out and explain. This is the first time you’ve said, for example, the mid-term election, and you had an event, and it was a promotion, and it didn’t work. I mean these types of things. You could go out and talk about your balance sheet. You could talk about your lease book. You have a lease book that turns over every five years. You have leases from 2006 coming on, and you should be able to move those stores or reevaluate them.
It should comp positively. You have so many drivers in the business that I see. And maybe I’m delusional, but that I see. And it doesn’t seem you guys do a very good job of addressing them.
Kathleen Mason – Tuesday Morning Corporation – CEO and President
I’m sorry, I wasn’t at the presentation, the investor presentation, but we’ll certainly look into it. And we’ll take your lead. We’ll certainly look into our presentation and what we can do better. Thank you for sharing that.
Weekly Top 5 – Five Articles Worth Reading
J.C. Penney to Name Ackman to Board, Close Underperforming Stores
Source: WSJ
Here’s what this announcement says to us… Q4’s strong top-line came at the expense of profitability and Q1 2011 EPS guidance is likely to materially disappoint. We’ll know in a few weeks.
Coach to Move Production From China
Source: WSJ
Moving production from China to cheaper countries is in vogue today. It will be interesting to see if quality becomes an issue (not just for COH, but all retailers that are shifting a material amount of its production). Also, it’s always interesting to see how a company suggests that bloated inventory (+36% year-over-year at the end of Q2 at COH) “positions it well for the Spring season.” Hmmm.
Macy’s Plots Push in Contemporary With Exclusives
Source: WWD
Bar III and Impulse have the potential to be a game changer at M. But, the idea of branching out into the specialty arena is taking this strategy much too far.
Taco Bell Counters Suit Over Meat
Source: WSJ
While sales at KFC continue to struggle, YUM certainly does not need this crisis at Taco Bell getting out of hand.
Home Depot Shuts Last Beijing Store
Source: WSJ
Everyone continues to push into China and appears to having great success… except for home improvement chains.
CMG Should Scrap Current Plans for a New Asian Concept and Just Buy Sushirrito
Recently, Chipotle Mexican Grill (CMG – $218.20) management has been discussing plans to develop an Asian concept with a ‘model’ similar to Chipotle (fresh ingredients, transparent prep, etc.).
Why waste time developing a new concept when there appears to be a proven winner in operation today? Sushirrito (www.sushirrito.com) is located in San Francisco in SOMA bordering the financial district. It’s getting rave reviews (click here). We’ve never seen lines so long! Ironically, it’s right across the street from a current Chipotle location (comp store sales are likely imploding at this particular Chipotle store).
Something tells us that you’ll be hearing more about Sushirrito in the near future.
SBUX Has EPS Upside Potential in Q1/Q2. But, Consensus Expectations in 2H and Next Year Are Too High
We believe that Starbucks (SBUX – $33.39) will deliver a continuation of its recent material profitability improvement in Q1 2010 (December 2010) and Q2 2010 (March 2011).
Beyond Q2, we see little to no EPS upside opportunity as (1) coffee/dairy commodity prices are rising, (2) marketing will bump up against material year-over-year increases, and (3) remodel costs may become a modest drag on earnings/profitability as comp store sales decelerate (the company plans to remodel/refresh 1,000 stores this year, similar to LY).
If you’re a qualified institutional investor and would like to receive a copy of this report, contact us at Info@RetailGeeks.com.
Does SBUX Make Money at its International Company-Owned Stores?
There’s strong evidence that Starbucks (SBUX – $33.20) may be losing money at its overseas company-owned stores.
We’ve consistently questioned whether the company’s international company-owned stores make money because if you exclude Licensing Revenue and Equity Investee Income and adjust G&A Expense lower, one could conclude that international company-owned locations lose money.
You be the judge.
SBUX International Division Income Statement:
