TUES Tuesday Morning Corp

PROPOSAL NO. 4
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

        On September 19, 2017, the Audit Committee selected Ernst & Young as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2018. Although SEC regulations and the NASDAQ listing requirements require the Company's independent registered public accounting firm to be engaged, retained and supervised by the Audit Committee, the selection is being submitted for ratification at the Annual Meeting with a view towards soliciting the opinion of the Company's stockholders, which the Audit Committee will take into consideration in future deliberations. If the selection of Ernst & Young as the Company's independent registered public accounting firm is not ratified at the Annual Meeting, the Audit Committee may consider the engagement of another independent registered public accounting firm, but will not be obligated to do so. The Audit Committee may terminate the engagement of Ernst & Young as the Company's

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independent registered public accounting firm without the approval of the Company's stockholders if the Audit Committee deems termination to be necessary or appropriate. The Company expects that representatives of Ernst & Young will be present at the Annual Meeting to respond to appropriate questions and will have an opportunity to make a statement if they desire to do so.

         The Board of Directors unanimously recommends that you vote "FOR" the ratification of the selection of Ernst & Young as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2018.

CORPORATE GOVERNANCE

Director Nomination

        The Nominating and Governance Committee of the Board of Directors is responsible for providing oversight as to the identification, selection and qualification of candidates to serve as directors of the Company and will recommend to the Board candidates for election or re-election as directors (or to fill any vacancies on the Board). The members of the Nominating and Governance Committee are Terry Burman, as Chair, Barry S. Gluck and Richard S Willis. Each of the members of the Nominating and Governance Committee is an independent director under applicable NASDAQ rules. The Nominating and Governance Committee Charter is available on the Company's website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance—Corporate Governance Documents." The Nominating and Governance Committee Charter is also available in print to any stockholder who requests a copy from the Secretary of the Company at 6250 LBJ Freeway, Dallas, Texas 75240.

        In identifying and evaluating nominees for director, the Nominating and Governance Committee will take into account the following attributes and qualifications: (1) relevant knowledge and mix of background and experience; (2) personal and professional ethics, integrity and professionalism; (3) accomplishments in their respective fields; (4) the skills and expertise to make a significant contribution to the Board, the Company and its stockholders; and (5) whether the candidate has any of the following qualities: financial expertise, general knowledge of the retail industry, and Chief Executive Officer, Chief Financial Officer or other senior management experience. In addition, although the Nominating and Governance Committee does not have a formal diversity policy in place for the director nomination process, diversity is an important factor in the Nominating and Governance Committee's consideration and assessment of a candidate, with diversity being broadly construed to mean a variety of opinions, perspectives, experiences and backgrounds, including gender, race and ethnicity differences, as well as other differentiating characteristics, all in the context of the requirements of the Board at that point in time. In addition, no person may be considered as a candidate for nomination as a director of the Company if (i) during the last ten years, that person, or any of his or her affiliates, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or is currently under investigation for same or (ii) during the last ten years, that person, or any of his or her affiliates, was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which that person, or any of his or her affiliates, was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws on finding any violation with respect to such laws, or is currently under investigation for same. In addition, the Nominating and Governance Committee will recommend to the Board candidates for re-election as directors. The Nominating and Governance Committee may conduct all necessary and appropriate inquiries into the backgrounds and qualifications of potential candidates. There are no specific or minimum qualities a candidate must have to be recommended as a director nominee by the Nominating and Governance Committee.

        The process for evaluating candidates is the same regardless of the source of the recommendation. The Nominating and Governance Committee will not discriminate on the basis of race, color, national origin, gender, religion or disability in selecting nominees. In addition to those candidates identified

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through its own internal processes, the Nominating and Governance Committee will evaluate a candidate proposed by any single stockholder (or group of stockholders) that beneficially owns our Common Stock provided that the information regarding the potential candidate or candidates has been timely given to the Company. In order to be considered by the Nominating and Governance Committee for evaluation for an upcoming annual meeting of stockholders, a notice from a stockholder regarding a potential candidate must be sent to the Company's Secretary at the Company's headquarters by the date specified in the "Stockholders' Proposals" section of the previous year's proxy statement for notice of the intention to nominate directors at the meeting. The notice should set forth (a) as to each person whom the stockholder proposes as a potential candidate for director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Company that are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice, (i) the name and address of the stockholder of record, as they appear on the Company's books, of the beneficial owners, if any, and, if such stockholder or beneficial owner is an entity, the persons controlling such entity, proposing such nomination, (ii) the class and number of shares of the Company which are held of record and beneficially by such stockholder and control persons and a description of certain agreements, arrangements or understandings among the stockholder, beneficial owners or control persons (and a representation to notify the Company of any such agreements, arrangements or understandings in effect as of the record date of the meeting), (iii) a representation that the stockholder is entitled to vote at the meeting and intends to appear at the meeting in person or by proxy, and (iv) a representation whether the stockholder or the beneficial owner or control person, if any, will engage in a solicitation with respect to the nomination and, if so, certain information concerning the solicitation. All candidates (whether identified internally or by a stockholder) who, after evaluation and recommendation by the Nominating and Governance Committee, are then nominated by the Board will be included as the Board's recommended slate of director nominees in the Company's proxy statement.

        In addition to submitting potential candidates for consideration by the Nominating and Governance Committee, any stockholder of the Company may nominate one or more individuals for election as a director of the Company at an annual meeting of stockholders if the stockholder sends a notice to the Company's Secretary at the Company's headquarters, in the form specified in the Bylaws, by the date specified in the "Stockholders' Proposals" section of the previous year's proxy statement for nomination of directors. The procedures described in the prior paragraph are meant to establish an additional means by which certain stockholders can have access to the Company's process for identifying and evaluating Board candidates and is not meant to replace or limit stockholders' general nomination rights in any way.

        Each of the nominees for director, other than Mr. Gluck and Mr. Corcoran, served as a director prior to the last annual meeting of stockholders. The Nominating and Governance Committee identified Mr. Gluck as a director candidate through a third party search firm retained by the Board of Directors. Mr. Corcoran is being nominated as a director pursuant to the terms of the Cooperation Agreement.

Director Independence

        NASDAQ listing standards require our Board of Directors to be comprised of at least a majority of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with the Company which would interfere with the exercise of independent judgment in carrying out of his or her responsibilities as a

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director. Based on the independence standards prescribed by NASDAQ, our Board has affirmatively determined that six of the eight current directors, including Mr. Wade who will be retiring from the Board effective as of immediately following the Annual Meeting, are independent. Mr. Corcoran, a new director nominee, has also been determined to be independent. Mr. Becker is not independent due to his relationship with the Company as Chief Executive Officer. The Board determined that Mr. Montalto is not independent due to the services that he provided between August 2015 and October 2016 in various capacities. In determining that Mr. Burman is independent, our Board considered his prior service as a member and Vice Chairman of the Office of the Chairman as described below, and determined that such service would not interfere with his independence because he received no compensation for such service, served only in an advisory role and did not perform any management or executive functions. As prescribed by NASDAQ rules, the independent directors have regularly scheduled meetings without management present.

Independent Chairman of the Board

        The Company had different individuals serving as its Chief Executive Officer and Chairman of the Board from 2000 until September 2015 and, effective December 2015, reestablished the separation of these roles. In connection with the retirement of the Company's Chief Executive Officer in September 2015, the Board appointed Mr. Becker, the then-serving Chairman of the Board, to serve as Executive Chairman of the Company, in which role Mr. Becker continued his duties as Chairman of the Board and also served as the interim principal executive officer of the Company. In September 2015, the Board also created a new Office of the Chairman to provide oversight to the Company's strategic initiatives until the Board hired a new Chief Executive Officer. The Office of Chairman was led by Mr. Becker, as Executive Chairman, and included Mr. Burman as Vice Chairman, Melissa Phillips, in her capacity as the Company's President and Chief Operating Officer, and Phillip Hixon, in his capacity as the Company's Executive Vice President, Store Operations. At the same time, the Board also appointed Mr. Burman to serve as Lead Independent Director. The Board determined that this leadership structure was appropriate and in the best interests of the Company and its stockholders at that time because it provided strong executive leadership through the Executive Chairman together with independent leadership of the independent directors through the Lead Independent Director.

        In December 2015, the Board appointed Mr. Becker as the Company's new Chief Executive Officer and eliminated the office of Executive Chairman and dissolved the Office of Chairman. The Board also appointed Mr. Burman as independent Chairman of the Board and eliminated the position of Lead Independent Director. The separation of the roles of Chairman of the Board and Chief Executive Officer is designed to allow our Chief Executive Officer, Mr. Becker, to focus on the day-to-day management of the Company's business and our independent Chairman of the Board, Mr. Burman, to focus on the continued development of a high-performing Board, including (1) ensuring the Board remains focused on the Company's long-term strategic plans, (2) developing Board agendas, (3) working with Company management to ensure the Board has timely and adequate information, (4) coordinating Board committee activities, (5) supporting the Chief Executive Officer and (6) ensuring effective stakeholder communications. The Board recognizes the time, effort and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as the Board's oversight responsibilities continue to grow. The Board believes, due to the continued leadership and experience provided by these two individuals, that having separate positions is the appropriate leadership structure for the Company at this time and demonstrates our commitment to good corporate governance.

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Board of Directors' Role in Risk Oversight

        Our Company, like others, faces a variety of enterprise risks, including credit risk, liquidity risk and operational risk. In fulfilling its risk oversight role, the Board focuses on the adequacy of the Company's risk management process and overall risk management system. The Board believes an effective risk management system will (1) adequately identify the material risks that the Company faces in a timely manner, (2) implement appropriate risk management strategies that are responsive to the Company's risk profile and specific material risk exposures, (3) integrate consideration of risk and risk management into business decision-making throughout the Company and (4) include policies and procedures that adequately transmit necessary information with respect to material risks to senior executives and, as appropriate, to the Board or relevant committee.

        The Board of Directors oversees the Company's policies with respect to risk assessment and risk management, as well as major risk exposures and the process used to manage those exposures. Accordingly, the Board of Directors periodically reviews the risks associated with the various departments within the Company, in addition to its other duties. The Board of Directors receives information from Board committees, management and advisors regarding the Company's risk management process and system, the nature of the material risks the Company faces and the adequacy of the Company's policies and procedures designed to respond to and mitigate these risks.

Communication with the Board of Directors

        Stockholders may communicate with one or more members of the Board in writing by regular mail. The following address may be used by stockholders who wish to send such communications:

Board of Directors
c/o Secretary
Tuesday Morning Corporation
6250 LBJ Freeway Dallas,
Texas 75240

        Such communication should be clearly marked "Stockholder-Board Communication." The communication must indicate whether it is meant to be distributed to the entire Board, a specific committee of the Board or to specific members of the Board, and must state the number of shares beneficially owned by the stockholder making the communication. The Secretary has the authority to disregard any inappropriate communications. If deemed an appropriate communication, the Secretary will submit such stockholder's correspondence to the Chairman of the Board (on behalf of the Board) or to any specific committee, director or directors to whom the correspondence is directed.

Code of Business Conduct

        We have adopted a "Code of Business Conduct" that establishes the business conduct to be followed by all of our officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (the "Senior Financial Officers"), and all of our employees and members of our Board and embodies the Company's principles and practices relating to the ethical conduct of the Company's business and its long-standing commitment to honesty, fair dealing and full compliance with all laws affecting the Company's business. Amendments to and waivers from the Code of Conduct with respect to the Senior Financial Officers will be posted on our website within four business days after approval by the Board. Any waiver from the Code of Conduct with respect to our Senior Financial Officers requires approval by the Board. There were no waivers from the Code of Conduct with respect to the Senior Financial Officers during the fiscal year ended June 30, 2017. The Code of Conduct is available on the Company's website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance—Corporate Governance Documents".

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MEETINGS AND COMMITTEES OF THE BOARD

Board of Directors

        Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of his or her duties and to attend all Board, committee and stockholder's meetings. During the fiscal year ended June 30, 2017, the Board of Directors held 7 meetings. Each of our directors attended 75% or more of the Board and committee meetings held during the fiscal year (or portion of the fiscal year during which he or she served as a director or committee member). Directors are encouraged to attend the Company's annual meeting of stockholders. All of the directors then serving on the Board attended the Company's 2016 Annual Meeting of Stockholders meeting held on November 16, 2016.

Committees of the Board

        The Board has three standing committees to facilitate and assist the Board in the execution of its responsibilities. The committees are the Audit Committee, the Compensation Committee and the Nominating and Governance Committee.

Audit Committee

        For the fiscal year ended June 30, 2017, the Audit Committee had three members and met 8 times. Such members included Richard S Willis, as Chair, Jimmie L. Wade and Frank M. Hamlin, all of which were non-employee directors and all of whom the Board has determined are independent pursuant to the applicable NASDAQ rules and satisfy the SEC requirements relating to the independence of audit committee members. Mr. Wade will retire from the Board and all committees and subcommittees thereof, including the Audit Committee, effective as of immediately following the Annual Meeting. The Board also determined that all the members of the Audit Committee had the ability to read and understand fundamental financial statements.

        For the fiscal year ended June 30, 2017, the Board of Directors determined that Messrs. Willis and Wade each qualified as an "audit committee financial expert" as defined by applicable SEC rules and designated each as the Company's audit committee financial expert. The Board has adopted a charter for the Audit Committee, which is available on the Company's website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance—Corporate Governance Documents." The Audit Committee Charter is also available in print to any stockholder who requests a copy from the Secretary of the Company at 6250 LBJ Freeway, Dallas, Texas 75240.

        The Audit Committee's responsibilities, which are discussed in detail in its charter include, among other things, the duty and responsibility to:

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establish policies and procedures for reviewing and approving the appointment, compensation, retention and oversight of our independent registered public accounting firm;



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review and discuss with our independent registered public accounting firm, internal auditors and management the adequacy and effectiveness of the Company's system of internal controls;



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review the scope and results of our independent registered public accounting firm's audit of the Company's annual financial statements, accompanying footnotes and audit report;



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pre-approve all audit and permissible non-audit fees;



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review and discuss with management and the registered independent public accounting firm of the Company the annual and quarterly consolidated financial statements of the Company and related disclosures;

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review and discuss with management and the registered independent public accounting firm of the Company significant issues regarding accounting principles and financial statement presentations;



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review, approve and ratify related party transactions; and



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perform other functions or duties deemed appropriate by the Board.

        The Audit Committee has authority under its charter to retain any independent counsel, experts or advisors (accounting, financial, legal or otherwise) that the Audit Committee believes to be necessary or appropriate to assist in the fulfillment of its responsibilities. At each meeting, the Audit Committee meets in executive session in which only independent directors are present. The Audit Committee also meets independently with the Company's independent registered public accounting firm.

Compensation Committee

        The Compensation Committee has three members and met 8 times during the fiscal year ended June 30, 2017. The Compensation Committee is comprised solely of non-employee directors, all of whom the Board has determined are independent pursuant to applicable NASDAQ rules.

        For the fiscal year ended June 30, 2017, the Compensation Committee was comprised of Sherry M. Smith, as Chair, Frank M. Hamlin and Jimmie L. Wade. Mr. Wade will retire from the Board and all committees and subcommittees thereof, including the Compensation Committee, effective as of immediately following the Annual Meeting. The Board adopted a charter for the Compensation Committee, which is available on the Company's website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance—Corporate Governance Documents." The Compensation Committee Charter is also available in print to any stockholder who requests a copy from the Secretary of the Company at 6250 LBJ Freeway, Dallas, Texas 75240.

        The Compensation Committee's responsibilities, which are discussed in detail in its charter include, among other things, the duty and responsibility to:

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review and approve the corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluate the performance of our Chief Executive Officer in light of those goals and objectives, and determine the compensation of our Chief Executive Officer based on this evaluation;



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review and approve compensation and incentive arrangements (including any employment or severance agreements) for the executive officers of the Company;



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review and assess the results of any stockholder advisory vote with respect to the Company's executive compensation;



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administer the Company's equity incentive plans, including the review and grant of stock options and other equity incentive grants to directors, executive officers and other key employees of the Company; and



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perform other functions or duties deemed appropriate by the Board.

        The Compensation Committee also oversees the Company's stock ownership guidelines for non-employee directors and certain executive officers.

        Compensation Committee meetings have been regularly attended by the Chief Executive Officer. At each meeting, the Compensation Committee meets in an executive session in which only independent directors are present. None of the executive officers are present during voting or deliberations on his or her compensation.

        The Compensation Committee has authority under its charter to retain, approve fees for and terminate advisors, consultants and legal counsel as it deems necessary to assist in the fulfillment of its

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responsibilities. See "Executive Compensation—Compensation Discussion and Analysis—How Compensation Decisions Are Made—The Role of the Executive Compensation Consultant" below for more information regarding the role of the compensation consultant utilized by the Compensation Committee. Prior to engaging any such advisor, consultant or legal counsel, the Compensation Committee conducts an independence assessment of such advisor pursuant to NASDAQ rules and federal securities laws and regulations, but the Compensation Committee retains discretion to engage any such advisor, without regard to its independence, after considering the findings in such assessment. The Compensation Committee also reviews and discusses with the appropriate officers of the Company any disclosures required under federal securities laws and regulations regarding conflicts of interest with respect to such advisors.

Nominating and Governance Committee

        The Nominating and Governance Committee has three members and met 4 times during the fiscal year ended June 30, 2017. The Nominating and Governance Committee is comprised solely of non-employee directors, all of whom the Board has determined are independent pursuant to applicable NASDAQ rules.

        The Nominating and Governance Committee is currently comprised of Terry Burman, as Chair, Richard S Willis and Barry Gluck. The Board adopted a charter for the Nominating and Governance Committee, which is available on the Company's website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance—Corporate Governance Documents." The Nominating and Governance Committee Charter is also available in print to any stockholder who requests a copy from the Secretary of the Company at 6250 LBJ Freeway, Dallas, Texas 75240.

        The Nominating and Governance Committee's responsibilities, which are discussed in detail in its charter include, among other things, the duty and responsibility to:

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evaluate and recommend to the Board from time to time as to changes that the Nominating and Governance Committee believes to be necessary, appropriate or desirable with respect to the size, composition, and functional needs of the Board;



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periodically review the Company's Certificate of Incorporation and Bylaws and make recommendations to the Board as they relate to corporate governance matters;



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develop and recommend to the Board specific guidelines and criteria for screening and selecting nominees to the Board, including any director nominations submitted by the Company's stockholders;



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provide oversight as to the identification, selection, and qualification of candidates for the Board, including interviewing and evaluating new candidates for the Board;



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recommend to the Board candidates for election or re-election as directors or to fill any vacancies on the Board;



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recommend to the Board candidates for appointment to the standing committees of the Board in accordance with the policies and principles in such committees' charters and taking into consideration such other factors as it deems necessary, appropriate or desirable;



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oversee and approve the management continuity planning process and make recommendations to the Board regarding CEO and other executive officer succession;



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periodically review and assess the Company's corporate governance principles and make recommendations to the Board for changes as deemed necessary, appropriate or desirable; and



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perform other functions or duties deemed appropriate by the Board.

        The Nominating and Governance Committee has authority under its charter to retain, approve fees for and terminate advisors, consultants and legal counsel as it deems necessary to assist in the fulfillment of its responsibilities.

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EXECUTIVE OFFICERS

        The following sets forth certain information about our executive officers, other than Mr. Becker, our Chief Executive Officer, whose biographical information is included above under "Proposal No. 1—Election of Directors."

Stacie R. Shirley

        Ms. Shirley, age 48 has served as the Company's Executive Vice President, Chief Financial Officer and Treasurer since January 2016. Prior to joining the Company, Ms. Shirley served as an executive officer of Neiman Marcus Group LTD LLC, a luxury fashion retailer, serving as Senior Vice President, Finance and Treasurer from September 2010 until December 2015 and Vice President, Finance and Treasurer from December 2001 until September 2010. In her most recent position with Neiman Marcus Group, Ms. Shirley's areas of responsibility included finance, capital markets and treasury operations, capital planning and forecasting, credit operations, investor relations, risk management and internal audit. Prior to joining Neiman Marcus Group, Ms. Shirley served in various capacities at CompUSA Inc. from 1993 to 2001, including serving as Vice President, Finance and Treasurer from 1999 to 2001. Ms. Shirley began her career as an accountant with Ernst & Young in 1990 and is a certified public accountant.

Phillip D. Hixon

        Mr. Hixon, age 63, has served as the Company's Executive Vice President, Store Operations since September 2015 and served as a member of the Office of Chairman from September 2015 until the dissolution of that office in December 2015. From June 2014 to September 2015, Mr. Hixon served as the Company's Senior Vice President, Store Operations, and from September 2013 to June 2014, Mr. Hixon served as the Company's Vice President, Store Planning. Prior to joining the Company, Mr. Hixon served as Vice President of Business Development of Merchco Services, Inc., a provider of retail store development and support services, from June 2012 until August 2013. From 2011 until 2012 and 2005 until 2006, Mr. Hixon owned and served as principal of Diversified Resources LLC, where he developed and implemented programs for clients in the areas of strategic planning, effective business practices, process enhancement and organizational effectiveness. From 2009 until 2011, Mr. Hixon served in the Department of Strategy and Innovation of Petco Animal Supplies Inc., a specialty retailer of pet supplies. From 2006 until 2009, Mr. Hixon held various executive positions with Duckwall-Alco Stores Inc., a retail chain, including Senior Vice President, Store Operations, Real Estate, Store Development and Senior Vice President, Merchandising. Mr. Hixon served as Vice President, Store Development for Michaels Stores, Inc., a national arts and crafts specialty retailer, from 1987 until 2005.

Trent E. Taylor

        Mr. Taylor, age 60, has served as the Company's Senior Vice President, Chief Information and Inventory Management Officer since June 2017. From January 2017 to June 2017, Mr. Taylor served as the Company's Senior Vice President, Chief Information and Supply Chain Officer, and from April 2016 to January 2017, Mr. Taylor served as the Company's Senior Vice President, Chief Information Officer. Prior to joining the Company, Mr. Taylor served as Chief Information Officer of hhgregg, a retailer of consumer electronics and home appliances from September 2011 until March 2016. From November 1992 until 2009, Mr. Taylor served in various roles for the Walgreen Company including Chief Information Officer and Executive Vice President of e-commerce.

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Belinda J. Byrd-Rohleder

        Ms. Byrd-Rohleder, age 54, has served as the Company's Senior Vice President, General Merchandising Manager since January 2017 and served as Vice President, Division Merchandising Manager from June 2015 until January 2017. Prior to joining the Company, Ms. Byrd-Rohleder served as the Senior Vice President of Arden Companies from August 2012 until May 2014. From February 2010 until January 2012, Ms. Byrd-Rohleder served as the Senior Vice President, General Merchandise Manager for Home and Hardlines at Shopko, a regional mass merchant. Prior to joining Shopko, Ms. Byrd-Rohleder was the Senior Vice President at HSN for Home and Apparel/Accessories from August 2006 to July 2008. Prior to joining HSN, Ms. Byrd-Rohleder held the role of VP/GMM of Soft Home for Sears Holdings (both Kmart and Sears companies) from May 2004 to August 2006. Prior to Sears Holdings Ms. Byrd-Rohleder served in various roles with Kmart Corporation from 1994 to 2004, including Divisional Vice President of Soft Home and Senior Buyer of numerous home businesses, including Home Textiles, Housewares and Furniture.

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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis

        This Compensation Discussion and Analysis describes our compensation policies, principles and practices and presents a review and analysis of executive compensation earned in fiscal 2017 by our named executive officers (NEOs). This discussion and analysis also contains statements regarding our performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management's expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.

Fiscal 2017 Financial and Business Review

        Retail industry performance, in general, has been very challenging in most sectors in 2017. We believe Tuesday Morning, as an off-price retailer, has strong potential for long term growth along with the rest of the segment. We believe Tuesday Morning is in the right business and is working to capitalize on the opportunity that the off-price segment offers.

        Some of our financial and business highlights for the fiscal year include:

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Net sales were $966.7 million, compared to $956.4 million for fiscal 2016.



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Comparable store sales increased 2.2% compared to the same period a year ago.



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Fiscal 2017 net sales were negatively impacted by lower than plan store level inventories for a portion of the year due to the supply chain challenges experienced during the year, as well as 20 fewer stores.



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During fiscal 2017, we continued to implement our strategy of improving store locations and the in-store experience for our customers, which included (i) closing less productive stores with limited foot traffic and relocating some of these stores to, or opening new stores in, better locations with footprints that are on average three to five thousand square feet larger, (ii) expanding some existing stores to a larger footprint, and (iii) improving the finishes in these relocated, new and expanded stores.



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Sales at the 52 stores relocated during the past 12 months increased approximately 52% on average for fiscal 2017 as compared to fiscal 2016 and contributed approximately 290 basis points of comparable store sales growth.



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The Company's operating loss for fiscal 2017 was $32.3 million, compared to operating income of $2.4 million for fiscal 2016.



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The Company reported a net loss of $32.5 million, or $0.74 per share, for fiscal 2017 compared to net income of $3.7 million, or $0.08 per share, in the prior year period.

        Tuesday Morning has taken significant steps to improve our business operations and financial performance. During the fiscal year, we benchmarked our progress against six top priorities, which are regularly discussed at executive team meetings and are included in both job performance and short-term incentive plan objectives.

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While we experienced supply chain challenges in fiscal 2017 in connection with the implementation of the Phoenix distribution center, the new distribution center is operating effectively and costs throughout our entire supply chain are improving. The Dallas distribution center performance has significantly improved and is exceeding many of our internal efficiency metrics. These efforts are expected to continue to bring costs down over time.

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We have had improvement in working capital management. During the fourth quarter, we reduced our inventory balance and have reduced borrowings on our bank line compared to the third quarter of fiscal 2017. The reduction in our inventory balance was largely the result of improvements in the efficiency of our supply chain, a decrease in cycle times and reduction in the amount of inventory held in our distribution centers. We have increased our inventory turn and expect that progress to continue.



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We believe we continue to experience strong results from the execution of our real estate strategy. Our new real estate, including store relocations, new stores and expansion stores, continue to be top producers and we remain focused on upgrading our portfolio while managing the costs associated with this program.



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We have increased the effectiveness of our marketing dollars. Our marketing efforts are focused on driving customer engagement. We partnered with a new advertising agency to roll out a new advertising campaign in the first quarter of fiscal 2018. We have also improved our data capture and significantly increased our customer database.



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We have improved our merchandise assortment. The overall retail environment has allowed us to enter into some new vendor relationships and add new brands to our product mix. We have been very focused on improving store level turn by driving a compelling product assortment with a sharp value proposition and carefully managing our weeks of supply.



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And finally, cost control. We completed a headcount reduction in our corporate office and a consolidation of our field operations. As a result, we have a lean organization that is well-positioned to deliver improved results.

Our Compensation Philosophy

        Our compensation program is designed to motivate long-term growth, to hold executives accountable for key annual results year-over-year and to support executive recruitment and engagement. This philosophy includes the following:

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A significant portion of our executives' total direct compensation is based on our performance and improving stockholder value. This philosophy is reflected in the design of both our short-term cash incentive program as well as our long-term equity incentive program.



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Our compensation program attempts to better align the interests of executives and stockholders through performance-based compensation and equity compensation. We have stock ownership guidelines for executives.



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Our compensation program is also designed to attract and retain talented executives who are committed to our future success.



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We consider all relevant factors to determine an executive's compensation, and manage individual total compensation around the median of the market as determined by peer group analysis and an evaluation of the broader retail industry.



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Our program provides incentives for performance by giving individual executives the opportunity to earn more or less than targeted compensation levels based on actual performance.

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        At the fiscal 2016 annual stockholder meeting, in addition to approving an additional 2,500,000 shares for the plan to support ongoing competitive equity grants to participants, the following amendments were approved for 2014 Long-Term Incentive Plan:

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Removing the liberal share recycling provision for awards granted pursuant to the 2014 Plan.



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Reducing the number of shares exempt from minimum vesting requirements from 10% to 5% and requiring that vesting of any stock option awards may not occur sooner than 1 year following grant, or if earlier, the participant's death, total and permanent disability, retirement or, in the two-year period following a change in control, if the participant is terminated without cause or a participant terminates his or her service for good reason.



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Eliminating the Board's discretion to accelerate the vesting of outstanding and unvested awards upon a change-in-control and require a "double-trigger" for vesting whereby such awards would only accelerate in full if a participant is terminated without cause or a participant terminates his or her service for good reason on or within two years after a change in control. In connection with the cash-out of awards in a change of control where the acquirer or surviving or resulting corporation does not agree to assume such awards, the Board may cancel unvested portions of such awards for no consideration unless otherwise determined by the Board.



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Including a robust clawback policy that will authorize the recovery of gains from all or most equity awards in the event of certain financial restatements.

        The Board believes that these approved changes, in addition to the existing provisions in the 2014 Plan, serve the interests of our stockholders better, support effective governance and further demonstrate reasonable use of the shares.

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        In January 2017, the Company eliminated the Chief Operations Officer position and it was mutually agreed Ms. Phillips would resign from her position effective immediately.

How Compensation Decisions Are Made

        The Compensation Committee, which is comprised solely of independent directors, has responsibility for overseeing the development and administration of our executive compensation programs. Annually, the Compensation Committee reviews executive compensation programs and practices relative to our performance and market trends and practices.

        The Compensation Committee establishes the design of all executive remuneration programs, including those for our Chief Executive Officer. The Compensation Committee reviews and approves annual pay targets, sets financial and business metrics for performance plans, and approves final payout levels for executive officers within the Compensation Committee's scope.

The Role of the Executive Compensation Consultant

        The Compensation Committee has the authority to retain, terminate, compensate and oversee any compensation consultant or other advisors to assist the committee in the discharge of its responsibilities. Since December 2013, the Compensation Committee has engaged Hay Group, Inc., now known as Korn Ferry Hay Group, as its outside compensation consultant. For 2017, Korn Ferry Hay Group assisted the Compensation Committee with:

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advice and analysis on the design, structure and level of executive and director compensation;



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review of market survey and proxy compensation data for benchmarking;



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advice on the external retail environment and evolving compensation trends;



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peer group review and analysis;



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review of current and past retail practices on broad-based and performance-based pay in a market downturn; and



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assistance with continuing regulatory compliance and changes regarding compensation matters.

        Korn Ferry Hay Group attends the Compensation Committee meetings, including executive sessions. Although Korn Ferry Hay Group works with our management on various matters for which the Compensation Committee is responsible, our management does not direct or oversee the retention or activities of Korn Ferry Hay Group.

        In December 2015, Hay Group was acquired by Korn Ferry, an organizational advisory and executive search firm. Prior to the public announcement of Korn Ferry's pending acquisition of Hay

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Group, our management, with the approval of our Compensation Committee, engaged Korn Ferry for services in addition the executive and director compensation services provided by Hay Group, primarily consisting of executive recruitment services. During fiscal 2017, a total of $233,323 was paid to Korn Ferry Hay Group. These costs include $101,000 paid to Korn Ferry Hay Group as the Compensation Committee's compensation consultant in fiscal 2017, $7,500 for the PayNet online compensation survey subscription, $107,323 for residual executive recruitment services expenses from fiscal 2016, and $17,500 for executive coaching services.

        Following a review of the independence of Korn Ferry Hay Group, the Compensation Committee concluded that no conflict of interest exists with respect to the work of Korn Ferry Hay Group. The Compensation Committee re-engaged Korn Ferry Hay Group as its outside consultant for executive and director compensation matters for fiscal 2017. The committee has a policy that states that any projects done with Korn Ferry Hay Group outside of board and executive compensation activities must be reviewed and approved by the Committee.

The Role of Management

        In reviewing and making compensation decisions, the Compensation Committee also relies on the CEO's view of the business, people strategy, and performance of the other senior executives. Certain members of our management meet periodically with Korn Ferry Hay Group at the direction of the Compensation Committee to ensure the consultants have the information they need to advise the Compensation Committee. The compensation consultant works directly with the Compensation Committee on CEO compensation.

Our Use of Compensation Peer Group Analysis

        We typically review peer group information in making compensation determinations. In fiscal 2017, the Compensation Committee conducted a comprehensive review of our peer group to assure that it provides a relevant comparison to the market. The Compensation Committee considered a number of factors in determining the appropriate peer group including: similar size in terms of revenue (1/2x to 2x our revenue), financial performance (market capitalization, profitability, and gross margin), and business model (e.g., retail, hard goods retail, household goods retail, and off-price retail, number of stores, number of employees). Companies may still be considered for inclusion in the peer group even if they do not meet all of the criteria. The Compensation Committee, with advice from Korn Ferry Hay Group, elected to make the following changes to our peer group in fiscal 2017:

        Our current peer group includes the following companies:

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Results of Fiscal 2016 Advisory Vote on Executive Compensation

        At our 2016 annual stockholders' meeting, 88% of our stockholders who voted on our "Say on Pay" advisory proposal voted in favor of our executive compensation program, up from approximately 86% in the prior year.

        Although the advisory stockholder vote on executive compensation is non-binding, the Compensation Committee took the results of the stockholder vote into consideration when determining its approach to future compensation decisions.

Fiscal 2017 Compensation Program and Payouts

Summary

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Consistent with fiscal 2016, we continued to provide the same three basic elements of executive compensation in fiscal 2017, consisting of base salary, short-term cash incentive compensation and long-term equity compensation, with limited changes other than those relating to our management changes and business initiatives as discussed below.



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Our top priority continued to be to make investments in the business and create operational changes and improvements to our processes and procedures in order to create sustainable profitability. As a result, for fiscal 2017 the majority of the compensation objectives, pay programs and pay practices aligned pay with actual Company financial and operational performance.



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The Compensation Committee targets base salary, short-term cash incentive opportunities and long-term equity awards generally around the median of the market.



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Primarily as a result of supply chain challenges we experienced for a portion of fiscal 2017 while implementing our new Phoenix distribution center, we did not meet our short-term threshold operating income goal, and therefore no incentive awards were earned under the revised incentive plan.



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In consultation with its independent compensation consultant, the Compensation Committee decided to make a number of proactive enhancements to the executive compensation program for fiscal 2018 in order to better align executive rewards with stockholder value creation. These changes are discussed in further detail below under "Fiscal 2018 Compensation Enhancements".

Pay Mix

        Our executive pay programs emphasize pay-at-risk. The charts below represent the targeted mix of pay between base salary, short-term incentives and long-term equity incentives for our current CEO and other active NEOs for fiscal 2017:

CEO		Other NEOs

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Components of Compensation

Base salary

        Upon joining Tuesday Morning, an executive's base salary level is determined using a combination of internal and external factors. Generally, base salaries are initially set based around the median value of the position in the market and the executive's experience. Given our emphasis on pay-at-risk, subsequent base salary increases are generally based on annual market movement and individual performance. The Compensation Committee receives input from the Board of Directors regarding our CEO's performance and the Committee receives input from the CEO on the other NEOs' performance.

        Based upon the factors described above, the Compensation Committee made the following base salary determinations for fiscal 2017:

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Mr. Becker's salary was determined by the Compensation Committee after completion of a peer group analysis by its independent consultant. Korn Ferry Hay Group conducted a detailed analysis of CEO compensation that included both a comparison of each CEO's pay within our proxy peer group as well as an evaluation of the broader retail industry. See "Chief Executive Officer Compensation" below.



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Ms. Phillips received a budgeted merit increase in base salary from $425,000 to $435,625 for her work achievements over the prior fiscal year performance period.



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Ms. Shirley received a prorated merit increase based on her time with the Company and her contributions to date.



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Mr. Hixon received a base salary increase for the strategic direction he has provided to the stores organization to execute on our real estate, merchandising, and supply chain programs.



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Mr. Taylor joined the Company in the last quarter of fiscal 2016 and therefore did not receive a merit pay increase; however, because of Mr. Taylor's prior experience with Supply Chain operations, he was promoted to CIO and SVP Supply Chain in January 2017. As a result of this change, his pay increased from his hire rate of $315,000 to $340,000 commensurate with the additional scope of responsibility. Later in the year, his job responsibilities were refined and he became responsible for Inventory Management which includes the Planning and Allocation functions as well as continued responsibility for Information Technology.



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Ms. Byrd-Rohleder joined the Company in June 2015 as a Vice President and Division Merchandising Manager. With the elimination of Melissa Phillip's position and her departure in January 2017, Ms. Byrd-Rohleder, was promoted to Senior Vice President, General Merchandising Manager. In recognition of the promotion, Ms. Byrd was given a promotional increase from $221,450 to $270,000.

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Annual Cash Incentive Plan

        Our Annual Cash Incentive Program is designed to recognize short-term operational and financial performance. Individual target award levels are reviewed and approved by the Compensation Committee within the first 90 days of the performance period to the extent practicable. The target award levels are determined based on guidance from our independent compensation consultant's annual total compensation survey using external market data for comparable positions at our peer companies and in the market. Earned incentives are paid in cash at the end of the performance period. The executive must be employed by us at the time the awards are paid to earn an award.

        Under the fiscal 2017 Annual Cash Incentive Plan, participants had the opportunity to earn a target bonus payout as a percentage of incentive-eligible base salary. For 2017, the Compensation Committee determined that each NEO's annual cash incentive payments would be based on achievement of adjusted Operating Income goals (80% of total) and achievement of certain strategic and personal objectives important for the Company to achieve its business plan (20% of total). Actual earned awards could range from 0% to a maximum of 200% of their target award opportunity. The Committee also established that all annual cash incentive payments would be subject to a minimum Operating Income performance hurdle. Executive payments are based on threshold, target, and maximum Operating Income targets as well as strategic and personal objective performance levels and are subject to reduction at the discretion of the Compensation Committee.

        The objective metric and performance levels at threshold, target and maximum for Operating Income under the 2017 Annual Cash Incentive Plan are shown below:

        In the event the threshold performance level for Operating Income is not achieved, no bonus is payable under the 2017 Annual Cash Incentive Plan.

        In addition to the Operating Income metric, the fiscal 2017 Annual Cash Incentive Plan included three strategic financial and operational goals that require support from all leadership team members in order to achieve the business plan. Specifically, the three strategic metrics were related to strategic project stores and associated sales plans, distribution center cost control and SG&A budget adherence. One to three individual metrics, specific to each executive, are also established to measure contributions on an individual level. Threshold and target levels of performance are created for each strategic and individual goal. The strategic and individual goals sum to 20% of the total cash incentive opportunity; however, such amounts are payable only if the minimum Operating Income threshold is satisfied.

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        Performance under Fiscal 2017 Plan.     The Company's operating loss for fiscal 2017 was $32.3 million. As a result, no short-term incentives were paid to NEOs for fiscal 2017 because threshold performance was not achieved.

Long-Term Equity Incentives

        Our long-term equity incentive program ("LTI") is intended to align NEO interests with stockholders, drive decisions that result in sustained long-term financial and operational performance, and retain key executive talent. Our LTI Plan for fiscal 2017 includes the following:

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September annual grants, consistent with our total compensation philosophy which allows the timing of the annual base salary review for merit adjustments, results from the annual incentive plan, and equity grants for the upcoming year to be communicated after the completion of our fiscal year.



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In September 2016, the LTI program provided for the CEO to receive 50% of the target grant in performance-based non-qualified stock options (with additional stretch opportunity to earn additional options for performance above target level) and 50% time-based non-qualified stock options.



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In September 2016, the fiscal year 2017 LTI program was enhanced to include performance-based restricted awards for the leadership team at the SVP-level and above (other than the CEO). The program includes a 36-month performance cycle and is measured on total 3-year EBITDA results at the end of the performance cycle. In addition, there is a +3% Comp Sales modifier which may be applied at the end of the cycle. If overall Comp Sales results are less than 3%, there will be a 25% reduction in earned performance-based RSAs. Given the negative EBITDA result for fiscal 2017, we believe it is unlikely that any amounts will be earned under the performance share portion of the fiscal 2017 LTI award.



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Under the fiscal 2017 LTI Program, the mix of stock option, time-based restricted stock and performance-based restricted stock awards were:

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Each executive's equity award target was determined by the individual NEO's executive level, external market competitiveness, as well as other factors as deemed appropriate by the Compensation Committee.



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Full year award values are granted to new hires at the next regularly scheduled Compensation Committee meeting, and the subsequent annual award is prorated.

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Awards to NEOs other than CEO.

        In September 2016, our NEOs (excluding the CEO) at an Executive Vice President-level received 35% of their long-term award value in time-based non-qualified stock options and 35% of their award value in time-based restricted stock, all of which vest ratably in four equal installments (25% per year) beginning on the first anniversary of the award date. In addition, they were granted 30% of their award value in performance-based restricted stock awards which will vest based on actual overall 3-year Company EBITDA, as adjusted, subject to reduction of payouts by the Compensation Committee at its discretion. Our Senior Vice President NEOs and their peers received 40% of their long-term award value in time-based non-qualified stock options and 35% of their award value in time-based restricted stock, all of which vest ratably in four equal installments (25% per year) beginning on the first anniversary of the award date. In addition, they were granted 25% of their award value in performance-based restricted stock awards which will vest based on overall 3-year Company EBITDA, as adjusted, subject to reduction of payouts by the Compensation Committee at its discretion.

        The following table summarizes the dollar value and the number of shares subject to awards granted to the NEOs (other than the CEO who is discussed separately below) in fiscal 2017: