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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended June 30, 2021

or

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

Commission File Number 001-40432

 

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

 

Trading

Symbol

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

TUEM

 

The Nasdaq Capital Market

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    No  

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    No  

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

 

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

 

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

 

Large accelerated filer 

Accelerated filer 

 

Emerging growth company 

Non‑accelerated filer 

Smaller reporting company 

 

 

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

 

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

The aggregate market value of shares of the registrant’s common stock held by non‑affiliates of the registrant at December 31, 2020 was approximately $78,942,980 based upon the closing sale price on the OTC Pink Market reported for such date.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes    No  

 

As of the close of business on September 7, 2021, there were 85,934,779 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 2021 Annual Meeting of Stockholders are incorporated by reference 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

10

Item 1B. Unresolved Staff Comments

17

Item 2. Properties

18

Item 3. Legal Proceedings

18

Item 4. Mine Safety Disclosures

18

PART II

 

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

19

Item 6. Reserved

20

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

21

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

30

Item 8. Financial Statements and Supplementary Data

30

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

59

Item 9A. Controls and Procedures

59

Item 9B. Other Information

61

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

62

Item 11. Executive Compensation

62

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

62

Item 13. Certain Relationships and Related Transactions, and Director Independence

62

Item 14. Principal Accountant Fees and Services

62

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

63

Item 16. Form 10-K Summary

63

EXHIBIT INDEX

64

 

 

SIGNATURES

68

 

 

 

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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 or words that state other “forward‑looking” information carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, future results of operations, future financial positions, and our current business outlook.  Forward looking statements also include statements regarding the Company’s strategy, future operations, performance and prospects, sales and growth expectations, our liquidity, capital expenditure plans, future store openings and closings, our inventory management plans and merchandising and marketing strategies.

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.

The factors listed below in Item 1A. 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:

 

 

 

the effects and length of the COVID-19 pandemic;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

our ability to obtain merchandise on varying payment terms;

 

 

our ability to successfully manage our inventory balances profitably;

 

 

our ability to effectively manage our supply chain operations;

 

 

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

 

 

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

 

 

increased or new competition;

 

 

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

 

 

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

 

 

increases in the cost or a disruption in the flow of our products, including the extent and duration of the ongoing impacts to domestic and international supply chains from the COVID-19 pandemic;

 

 

changes in federal tax policy including tariffs;

 

 

the success of our marketing, advertising and promotional efforts;

 

 

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

 

 

increased variability due to seasonal and quarterly fluctuations;

 

 

our ability to 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 risk to our corporate reputation from our customers, employees and other third parties;

 

 

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;

 

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

 

 

our ability to manage the negative effects of inventory shrinkage;

 

 

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

 

 

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

 

 

our ability to maintain an effective system of internal controls over financial reporting.

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.

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PART I

Item 1. Business

Business Overview

One of the original off-price retailers, Tuesday Morning is a leading destination for unique home and lifestyle goods. We were established in 1974 and specialize in name-brand, better/best products for the home. We are known for irresistible finds at an incredible value and we search the world for amazing deals to bring to our customers.

We are an off-price retailer, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our primary merchandise categories are upscale home textiles, home furnishings, housewares, gourmet food, pet supplies, bath and body products, toys and seasonal décor. We buy our inventory opportunistically from a variety of sources including direct from manufacturer, through closeout sellers and occasionally other retailers. We have strong supplier relationships and we strive to make it easy for our vendors to do business with us, so that they will come to us first. Our goods are deeply-discounted, but never seconds or irregulars.

Our customer is a savvy shopper with a discerning taste for quality at a value. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email, direct mail, and digital media.

With 490 stores across the country as of June 30, 2021 (“fiscal 2021”), we are in the neighborhood in convenient, accessible locations. Our store layout is clean and simple, and the low-frills environment means we can pass even deeper savings on to our dedicated customer base. Our stores operate in both primary and secondary locations of major suburban markets, near our middle and upper‑income customers. We are generally able to obtain favorable lease terms due to our flexibility regarding site selection and our straightforward format, allowing us to use a wide variety of space configurations.

We operate our business as a single operating segment.

 

COVID-19 Pandemic

 

The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020. Two stores were permanently closed during the fourth quarter 2020.  In accordance with our bankruptcy plan of reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix, Arizona distribution center (“Phoenix distribution center”) in second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.  

 

Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.

 

Emergence from Chapter 11 Bankruptcy Proceedings

 

In response to the impacts of the COVID-19 pandemic, on May 27, 2020, we filed voluntary petitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”).  During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court.

 

On June 9, 2020, the Bankruptcy Court issued an order approving procedures for the closure of up to 230 of our store locations.  In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close 132 store locations in a first wave of store closings.  By the end of July 2020, all of these stores were permanently closed. In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020. In total, we permanently closed 197 stores during the first quarter of fiscal 2021. In addition, we closed our Phoenix distribution center in the second quarter of fiscal 2021.

 

On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”).  The Bankruptcy Court entered an

5


 

order on December 23, 2020 (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”). On December 31, 2020, we legally emerged from bankruptcy, resolving all material conditions precedent listed in the Plan of Reorganization. However, the closing of the Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 – Reorganizations until that transaction closed on February 9, 2021. In connection with our legal emergence from bankruptcy on December 31, 2020, the Company completed certain debt financings and sale-leaseback transactions of our corporate office and Dallas distribution center properties contemplated by the Plan of Reorganization. See Notes 1, 2, 3 and 8 of our Consolidated Financial Statements for further discussions on these matters.

 

In February 2021, the Company completed the equity financing transaction contemplated by the Plan of Reorganization with a $40 million rights offering (the “Rights Offering”) that expired in February 2021. Eligible holders of the Company’s common stock subscribed to purchase approximately $19.8 million of shares, at $1.10 per share, with Osmium Partners (Larkspur SPV) LP (the “Backstop Party”) purchasing the remaining $20.2 million of shares. The Company closed on the Rights Offering and in February 2021, recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million for a change in fair value of the company’s common stock issued to the Backstop Party. See Note 7 of our Consolidated Financial Statements for further discussion.

 

Business Strategy  

In fiscal 2021, we focused on resetting our merchandise strategy to our heritage of being an off-price retailer. We edited our assortment and drove our merchandising efforts to deliver our customers a treasure hunt and strong values that are representative of the off price marketplace. Additionally, we worked to improve working capital management and inventory turns, and continued to optimize our marketing effectiveness, cost controls and infrastructure.

Competition & Seasonality

We believe the principal factors by which we compete are value, brand names, breadth and quality of our product offerings. Our prices are generally below those of department and specialty stores, catalog and on‑line retailers 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, discount and specialty stores, 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, 2020, 2019, and 2018 accounted for approximately 29%, 37% and 34% of our annual net sales for fiscal years 2021, 2020 and 2019, respectively.  The rate for fiscal 2021 is impacted by store closures during the first quarter of fiscal 2021.

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. We expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under our revolving credit facility.  See Liquidity and Capital Resources section in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.  

Inventory is one of the largest assets 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 generally pay our suppliers timely and generally do not request special consideration for markdowns, advertising or returns. During fiscal 2021, our top ten vendors accounted for approximately 10.3% of total purchases, with no single vendor accounting for more than 1.3% of total purchases. We continue to build strong vendor relationships following our emergence from Chapter 11 and have had no significant supplier issues as a result of the bankruptcy filing.

 

6


 

 

Low Cost Operations

It is our goal to 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 our customers’ shopping experience. We offer a flexible return policy and we accept all major payment methods including cash, checks, all major credit cards, gift cards and digital wallets. We continue to work on initiatives we believe will enhance our customers’ shopping experience.

Distribution Network

In fiscal 2021, we primarily utilized our 1.2 million square feet of distribution center facilities in Dallas, Texas along with bypass facilities and a network of pool point facilities throughout the country which service all of our stores throughout the United States. During the fourth quarter of fiscal 2020, we reached the decision to close our 0.6 million square foot distribution center in the Phoenix distribution center and consolidate operations in our Dallas-based facility, which was completed in the second quarter of fiscal 2021. In June 2021, we leased an additional 100,000 square foot warehouse in Dallas, Texas (the “Stemmons DC Facility”) to supplement our distribution network.

Pricing

Our pricing policy is to sell merchandise generally below retail prices charged by department and specialty stores, catalog and on‑line retailers. Prices are determined centrally and are initially 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” or “Compare Estimated Value” price, and “Our Price”. Our buyers determine and verify retail “Compare At” or “Compare Estimated Value” 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 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 as dictated by sell-through percentages, thereby effectively managing our inventory levels and offering competitive pricing.

 

Human Capital Management

As of June 30, 2021, we employed 1,607 persons on a full‑time basis and 4,692 persons on a part‑time basis, which is a significant reduction from the prior year due to the impacts of COVID-19 resulting with a reduction in force we implemented in the fourth quarter of fiscal 2020. Our associates are not represented by any labor unions, and we have not experienced any work stoppage due to labor disagreements. We believe that our associate relationships are strong, in part, due to the following areas of commitment to a loyal and inclusive associate base:

Associate Engagement

We have an Engagement Committee of which the associate members are diverse from across the organization. The Committee focuses on communication and events to bring our associates together such as ongoing associate events, associate appreciation week, community volunteer opportunities, and charitable events. We conduct periodic associate opinion surveys to directly engage with and collect feedback from our associates, which we use to improve the experience of our teams. Our leadership and human resources department maintain an open-door policy for associates to report concerns, and we provide an anonymous reporting hotline, available in multiple languages. Also, we conduct town hall meetings so that associates can directly hear about the business from senior leaders. We strive to deliver a workplace experience where the quality of our engagement with fellow associates, business partners and customers aligns with our company values.  

Talent Development

We utilize an online training and education platform for all associates to be compliant with federal, state, privacy and cybersecurity laws as applicable. We also invest in our store associates through structured training programs for our assistant store managers and store managers that enable our associates to be more effective leaders and helps them strive towards achieving the career they envision for themselves. All associates are given detailed feedback about their performance on at least an annual basis through formal performance appraisals. Based on the associate’s career goals, leaders may work to design individual development plans. Further, the company engages in succession planning to identify and develop talent within the organization.

7


 

Diversity, Equity and Inclusion

Associate engagement and retention require an understanding of the needs of a diverse, creative and purpose-driven workforce. We firmly believe that working in a culture focused on diversity, equity and inclusion spurs innovation, creates healthy and high-performing teams, and delivers superior customer experiences. We aim to provide equal opportunity for all employees. As of June 30, 2021, 74.5% of our total workforce identified as female and 43.8% were minorities. Additionally, 50% of our Vice-Presidents and above identified as female. Currently, we are building relationships with organizations, universities, colleges and other networks to expand our reach to potential diverse candidates including a summer internship program at the corporate office that we look to expand to other areas of the business in the near future.

We remain focused on increasing the representation of minority talent through hiring and career development by striving to have our stores reflect the diversity in their communities. Our core value of being welcoming to all celebrates our commitment to respect and diversity. Further, the stores offering a diverse range of products creates an inclusive shopping experience.  Our passion for the deal extends to our commitment to providing our customers with a multicultural range of products at a variety of price points.

Safety/Health and Wellness

We are committed to providing a safe and healthy work environment for our associates and customers. Aligned with our values, we strive to continuously monitor our work environment to keep our associates and customers as safe as possible. We have an open door policy for all associates to report concerns or safety issues. If an associate does not feel comfortable reporting an incident to their immediate manager or the human resources department, then the associate may contact the company’s ethics and compliance hotline via a toll free number or access it via the web.  The hotline is available 24 hours a day, 7 days a week. Our commitment to associate safety also include ongoing safety communications with weekly safety topics, safety training and audits for review.

During fiscal 2020, to address the safety and public health of our workforce and customers due to the unprecedented COVID-19 pandemic, we implemented a number of protocols, including:

 

Developing and distributing a playbook along with a video to guide the safe return to offices, stores, work sites and implementing temporary work-from home-policies as appropriate;

 

Establishing strict safety protocols and procedures company-wide, including an in-depth training program, social distancing measures, enhanced sanitization, daily wellness checks including temperature verifications and supplying personal protective gear such as masks and gloves;  

During the fourth quarter of fiscal 2021, we began offering a vaccination incentive program including offering vaccines onsite at the corporate office and distribution center.

 Compensation and Benefits

We offer a benefits package designed to put our associates’ health and well-being, and that of their families, at the forefront. Depending on position and location, associates may be eligible for: 401(k) plan and other investment opportunities; paid vacations, holidays and other time-off programs; health, dental and vision insurance; health and dependent care tax-free spending accounts; medical, family and bereavement leave; paid maternity/primary caregiver benefits; tax-free commuter benefits; wellness programs; time off to volunteer, and matching donations to qualifying nonprofit organizations.

In connection with the COVID-19 pandemic, we acted quickly to meet the needs of our team members, by providing certain enhanced benefits, such as:

• Created a dedicated associate hotline to provide real time support for any COVID-19-related issues;

• Reinforced social distancing through signage, floor markers, taped grid patterns on floors, and directional arrows;

• Continued telehealth support and employee assistance programs; and

• Provided special wellness resources and tools.

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.

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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 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.  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.

Stores and Store Operations

Store Locations.  As of June 30, 2021, we operated 490 stores in the following 40 states:

 

State

 

# of Stores

 

 

State

 

# of Stores

 

Alabama

 

 

16

 

 

Missouri

 

 

13

 

Arizona

 

 

19

 

 

Nebraska

 

 

1

 

Arkansas

 

 

10

 

 

Nevada

 

 

5

 

California

 

 

37

 

 

New Jersey

 

 

1

 

Colorado

 

 

16

 

 

New Mexico

 

 

5

 

Delaware

 

 

2

 

 

New York

 

 

3

 

Florida

 

 

43

 

 

North Carolina

 

 

26

 

Georgia

 

 

19

 

 

North Dakota

 

 

1

 

Idaho

 

 

3

 

 

Ohio

 

 

12

 

Illinois

 

 

8

 

 

Oklahoma

 

 

10

 

Indiana

 

 

8

 

 

Oregon

 

 

6

 

Iowa

 

 

3

 

 

Pennsylvania

 

 

10

 

Kansas

 

 

5

 

 

South Carolina

 

 

19

 

Kentucky

 

 

11

 

 

South Dakota

 

 

1

 

Louisiana

 

 

14

 

 

Tennessee

 

 

17

 

Maryland

 

 

9

 

 

Texas

 

 

86

 

Massachusetts

 

 

1

 

 

Utah

 

 

5

 

Michigan

 

 

4

 

 

Virginia

 

 

18

 

Minnesota

 

 

4

 

 

Washington

 

 

4

 

Mississippi

 

 

13

 

 

Wisconsin

 

 

2

 

 

In fiscal 2022, we plan to open approximately eight new stores. We also plan to close approximately eight stores.

 

Site Selection. We continue to 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.  Additionally, we have reviewed all of our leases and renegotiated the terms, with favorable outcomes for many of our leases.  We believe that this strategy will better position us for long‑term profitable growth.

Store Leases. We conduct substantially all operations from leased facilities, including our corporate offices in Dallas and the Dallas warehouse, distribution and retail complex, which were leased on December 31, 2020, subsequent to the sale and leaseback of those facilities on that date. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 5 years.

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 6,000 to 30,000 square feet, averaging on a per store basis approximately 12,400 square feet as of June 30, 2021.  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.

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Store Operations.  Our stores are generally open seven days a week, excluding certain holidays. The timing and frequency of shipments of merchandise to our stores results in 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 sales. We conduct annual physical counts of our store merchandise staggered throughout the second half of our fiscal year, 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 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 and cashiers, and help with merchandise stocking efforts. Members of our management visit selected stores routinely to review inventory levels and merchandise 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

 

Outbreaks of communicable disease, or other public health emergencies, such as the current COVID-19 pandemic, could substantially harm our business.

 

The COVID-19 pandemic has had, and could continue to have, an adverse effect on our business operations, store traffic, employee availability, financial condition, results of operations, liquidity and cash flow.

As of March 25, 2020, we had temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but two of our stores had reopened as of the end of June 2020. In the first quarter of fiscal 2021, we completed the permanent closure of 197 stores in connection with our Chapter 11 bankruptcy proceedings. The pandemic also has significantly impacted the global supply chain, with restrictions and limitations on business activities causing disruption and delay. These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain products.

Our customers may also be negatively affected by the consequences of COVID-19, which could negatively impact demand for our products as customers delay, reduce or eliminate discretionary purchases at our stores. Any significant reduction in customer visits to, and spending at, our stores caused directly or indirectly by COVID-19 would result in a further loss of revenue and cash flows and negatively impact profitability and could result in other material adverse effects.

The extent to which the ongoing COVID-19 pandemic will continue to impact our business, results of operations, financial condition and liquidity is uncertain considering the rapidly evolving environment and will depend on future developments, including the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.

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 costs are impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight costs both on inbound shipments from vendors and outbound shipments 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.

 

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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:

 

industry wide supply chain dislocation

 

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;

 

merchandise quality or safety issues;

 

economic crises;

 

international disputes, wars, and terrorism;

 

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

 

natural disasters;

 

import duties and tariffs;

 

foreign government regulations;

 

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. 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 results of operations will be negatively affected if we are unsuccessful in effectively managing our supply chain operations.

With few exceptions, all inventory is shipped directly from suppliers to our distribution network, primarily through our Dallas distribution center, where the inventory is then processed, sorted and shipped to our stores. We also use bypass and pool point facilities to distribute inventory 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 our distribution centers. External factors, such significant supply chain dislocation caused by COVID-19 pandemic and excessive market demand, can negatively impact our supply chain operations resulting in increased costs and delay.  We may not anticipate all of the changing demands which our operations will impose on our receiving and distribution system.

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

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. In the event our distribution center is shut down for any reason, we cannot assure that our insurance will be sufficient, or that insurance proceeds will be paid to us in a timely manner.  As a result of the COVID-19 pandemic and impact to our business, we decided to close our Phoenix distribution center in fourth quarter fiscal 2020 with the closure completed in the second quarter of fiscal 2021. The level of costs of our distributions center operations, and our related profitability, will be negatively impacted by increased wages as a result of competition to attract qualified employees. In addition, any inefficiencies in the operation of our distribution center facilities as well as delays in the delivery of merchandise to our stores will also negatively impact our profitability.

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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;

 

efforts by our customers to reduce personal debt levels;

 

availability of consumer credit;

 

interest rates;

 

fluctuations in the financial markets;

 

tax rates, tariffs and policies;

 

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.

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.

Our sales depend on a volume of traffic to our stores, and a reduction in traffic to, or the closing of, anchor tenants and other destination retailers in the shopping centers in which our stores are located could significantly reduce our sales and leave us with excess inventory.

Most of our stores are located in shopping centers that benefit from varied and complementary tenants, whether specialty or mass retailers, and other destination retailers and attractions to generate sufficient levels of consumer traffic near our stores. Any decline in the volume of consumer traffic at shopping centers, whether because of consumer preferences to shop on the internet or at large warehouse stores, an economic slowdown, a decline in the popularity of shopping centers, the closing of anchor stores or other destination retailers or otherwise, could result in reduced sales at our stores and leave us with excess inventory, which could have a material adverse effect on our financial results or business.

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 their 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, which is especially true at present with the inherent supply chain issues caused by the COVID-19 pandemic, 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

12


 

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 one of the largest assets on our balance sheet and represented approximately 35% of our total assets at June 30, 2021 and 23% at June 30, 2020. Our inventory balance at June 30, 2021 is higher than during fiscal 2020 due to the COVID-19 disruption to our sales and store closures during the third and fourth quarter of fiscal 2020. 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 unplanned loss or departure of one or more members of our senior management or other key management 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. 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 of 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 and mobile device applications. Changes in the merchandising, pricing and promotional activities of those competitors, and in the retail industry, in general, may adversely affect our performance.

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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 continue to result in inefficiencies, fail to support growth and limit opportunities.

Changes to federal tax policy may adversely impact our operations and financial performance.

Changes in U.S. tax or trade policy regarding merchandise produced in other countries could adversely affect our business. Changes in U.S. tariffs, quotas, trade relationships or tax provisions that reduce the supply or increase the relative cost of goods produced in other countries could increase our cost of goods and/or increase our effective tax rate. Although such changes would have implications across the entire industry, we may fail to effectively adapt and to manage the adjustments in strategy that would be necessary in response to those changes. In addition to the general uncertainty and overall risk from potential changes in U.S. laws and policies, as we make business decisions in the face of uncertainty as to potential changes, we may incorrectly anticipate the outcomes, miss out on business opportunities, or fail to effectively adapt our business strategies and manage the adjustments that are necessary in response to those changes. These risks could adversely affect our revenues, increase our effective tax rates, and reduce our profitability.

 

Our success depends partly upon our marketing, advertising and promotional efforts. If our marketing spend is inadequate, if we fail to implement programs successfully, or if our competitors are more effective than we are, our results of operations may be adversely affected.

Historically, we have used marketing and promotional programs to attract customers to our stores and to encourage purchases by our customers. We use various media for our marketing efforts, including email, direct mail, digital video, digital display, search and 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 store 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, and 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 staffing levels and 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. In addition, our recent emergence from bankruptcy may negatively impact our ability to attract and retain employees. 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, 2020, 2019, and 2018 accounted for approximately 29%, 37% and 34% of our annual net sales for fiscal years 2021, 2020 and 2019, respectively. 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

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

 

the timing of certain holidays and advertised events;

 

changes in our merchandise mix and inventory levels;

 

the timing of new store openings;

 

the success of our store relocation program;

 

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 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. 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, and other state and federal wage and hour regulations, regulations governing leaves of absence, health insurance mandates, working and safety conditions, and immigration status requirements. Additionally, changes in federal labor laws 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 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.

15


 

We face risks to our corporate reputation from our customers, employees and other third parties.

Damage to our corporate reputation could adversely affect our sales results and profitability. Our reputation is partially based on perception. Any incident that erodes the trust or confidence of our customers or the general public could adversely affect our reputation and operating performance, particularly if the incident results in significant adverse publicity or governmental inquiry. An incident could include alleged acts, or omissions by, or situations involving our vendors, our landlords, or our employees outside of work, and may pertain to social or political issues or protests largely unrelated to our business. The use of social media platforms, including blogs, social media websites, and other forms of internet-based communications, which allow individuals access to a broad audience, continues to increase. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our Company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, which could negatively affect our sales and profitability, diminish customer trust, reduce employee morale and productivity, and lead to difficulties in recruiting and retaining qualified employees. The harm may be immediate, without affording us an opportunity for redress or correction.

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 directly import a limited amount of product as importer of record and offer this merchandise to customers for sale. 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, in the past, 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 this period. Natural disasters including tornados, hurricanes, floods, and earthquakes may damage our stores, corporate office, and distribution facilities or other operations, which may adversely affect our financial results. Additionally, demographic shifts in the areas where our stores are located could adversely impact our 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.

Our results of operations may be negatively impacted by exposure to unexpected costs related to our insurance programs.

Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as losses due to acts of war and terrorism, employee and certain other crime, and some natural

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disasters. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, general liability, and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these self-insured losses, including potential increases in medical and indemnity costs, could result in significantly different expenses than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. Although we continue to maintain property insurance for catastrophic events, we are self-insured for losses up to the amount of our deductibles. If we experience a greater number of self-insured losses than we anticipate, our financial performance could be adversely affected.

We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to potential liability and potentially disrupt our business.

We accept payments using a variety of methods, including cash, credit and debit cards, gift cards, gift certificates, store credits, and digital wallets. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. In October 2015, the payment card industry shifted liability for certain debit and credit card transactions to retailers who are not able to accept EMV chip technology transactions. Any disruption to our ability to accept EMV chip technology transactions may subject us to increased risk of liability for fraudulent transactions and may adversely affect our business and operating results.

For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems.  If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.

Risks Related to Trading Restrictions in our Common Stock

Our common stock is subject to ownership and transfer restrictions intended to preserve our ability to use our net operating loss carryforwards and other tax attributes.

We have incurred significant net operating loss carryforwards and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. Our Amended and Restated Certificate of Incorporation imposes certain restrictions on the transferability and ownership of our common stock in order to reduce the possibility of an equity ownership shift that could result in limitations on our ability to utilize net operating loss carryforwards and other tax attributes from prior years for federal income tax purposes.  Any acquisition or sale of our common stock that results in a stockholder being in violation of these restrictions may not be valid.

Subject to certain exceptions, these ownership restrictions restrict (i) any transfer that would result in any person acquiring 4.5% or more of our common stock, (ii) any transfer that would result in an increase of the ownership percentage of any person already owning 4.5% or more of our common stock, or (iii) any transfer during the five-year period following December 31, 2020 that would result in a decrease of the ownership percentage of any person already owning 4.5% or more of our common stock.  These restrictions will remain in effect until the earliest of (i) the repeal of Section 382 of the Internal Revenue Code or any successor statute if the board of directors determines these restrictions are no longer necessary for preservation of the Company’s tax benefits, (ii) the beginning of a taxable year in which the board of directors determines no tax benefits may be carried forward, or (iii) such other date as shall be established by the board of directors.

Item 1B.  Unresolved Staff Comments

None.

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Item 2.  Properties

Stores.  

We lease all of our stores from unaffiliated third parties. A description of the location of our stores is provided in Item 1, “Business—Stores and Store Operations.” At June 30, 2021, the remaining terms of the majority of our store leases range from one month to five years. The average initial term of store leases executed under our real estate strategy is approximately ten 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 approximately 5 years after entering into the lease if store sales do not reach a stipulated amount stated in the lease.

Distribution Facilities and Corporate Headquarters.  

We previously owned a 104,675 square foot building which houses our corporate office in Dallas, Texas and a Dallas distribution center, of which we utilize approximately 1.2 million square feet. On December 31, 2020, we sold our corporate office and Dallas distribution center properties and leased back those facilities. The lease of the corporate office is for a term of 10 years, and the lease of the distribution center is for an initial term of two and one-half years, with an option to extend the distribution center lease for one additional year. We believe it is reasonably certain the option to extend will be exercised.

During fiscal 2015, we executed a lease for approximately 0.6 million square feet related to our additional distribution center in Phoenix, Arizona which started operations in the fourth quarter of fiscal 2016. We reached the decision in the fourth quarter of fiscal 2020 to close our Phoenix distribution center and consolidate operations in our Dallas-based facility, which was completed in the second quarter of fiscal 2021.

We also lease from unaffiliated third parties four parcels of land of approximately 538,250 square feet, for trailer parking and a 100,000 square foot warehouse in Dallas, Texas to supplement our distribution network.

 

Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Notes 1 and 2 in the Notes to Consolidated Financial Statements.

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

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

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

 

 

During the pendency of our bankruptcy proceedings, the Company’s common stock was delisted by the Nasdaq Stock Market, LLC (“Nasdaq”) and began trading on the OTC Pink marketplace under the symbol “TUESQ”. In January 2021, following our emergence from bankruptcy, the Company’s common stock began trading on the OTCQX market under the ticker symbol “TUEM.”

On May 24, 2021, Nasdaq approved our application for the relisting of the Company's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market at the opening of the market on Tuesday, May 25, 2021, under the ticker symbol "TUEM."

As of September 7, 2021, there were approximately 149 holders of record of our common stock.

Performance Graph

The following performance graph compares the cumulative total return to holders of our common stock, since January 13, 2021, with the cumulative total returns of the S&P 500 index and the S&P Specialty Retail index.  The graph assumes that the value of the investment in the Company's common stock, S&P 500 index and S&P Specialty Retail index on January 13, 2021 and is calculated assuming the quarterly reinvestment of dividends as applicable. Due to our legal emergence from bankruptcy on December 31, 2020, information for our common stock is only available from January 13, 2021 (the date shares of our common stock began trading following our legal emergence from bankruptcy).  The information is included for historical comparative purposes only, reflects a time period of very limited duration, and should not be considered indicative of future share performance.

 

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INDEXED RETURNS

 

 

Periods Ending

 

Company / Index

1/13/2021

 

3/31/2021

 

6/30/2021

 

Tuesday Morning

$

100

 

$

161.05

 

$

381.44

 

S&P 500 Index

 

100

 

 

104.62

 

 

118.81

 

S&P 500 Specialty Retailing Index

 

100

 

 

124.75

 

 

161.84

 

 

The information under the heading performance graph shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

Dividend Policy

During the fiscal years ended June 30, 2021, 2020, and 2019, 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. The agreements relating to our outstanding indebtedness restrict our ability to pay dividends or repurchase our common stock. Additional details are provided in Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Liquidity and Capital Resources.”

 

Item 6.  Reserved

Not Required

 

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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 and our consolidated financial statements and related notes thereto included elsewhere in this Form 10‑K.

 

Background

 

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers.  Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices.  Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email, direct mail and digital media.

 

The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020. Two stores were permanently closed during the fourth quarter 2020.  In accordance with our bankruptcy plan of reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix distribution center in second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.

 

Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.

 

Emergence from Chapter 11 Bankruptcy Proceedings

 

 

In May 2020, we filed voluntary petitions under Chapter 11 of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court.

 

In early June 2020, in accordance with the orders of the Bankruptcy Court, we commenced the process to close 132 store locations in a first wave of store closings. By the end of July 2020 all of these stores were permanently closed. In mid-July, 2020, we closed an additional 65 stores following negotiations with our landlords and those store closures were completed in August 2020. In total, we closed 197 stores during fiscal 2021. In addition, we also closed our Phoenix distribution center in the second quarter of fiscal 2021.

 

On December 23, 2020, the Bankruptcy Court entered an order confirming our Plan of Reorganization. On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and we legally emerged from bankruptcy, resolving all material conditions precedent listed in the Plan of Reorganization. However, the closing of the Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 – Reorganizations until that transaction closed on February 9, 2021. In connection with our legal emergence from bankruptcy on December 31, 2020, we completed the debt financing and sale-leaseback transactions contemplated by the Plan of Reorganization. See Notes 1, 2, 3, 7 and 8 to the consolidated financial statements.

 

In February 2021, the Company completed the equity financing transaction contemplated by the Plan of Reorganization with a $40 million Rights Offering that expired in February, 2021.  Eligible holders of our common stock subscribed to purchase approximately $19.8 million of shares, at $1.10 per share, with the Backstop Party purchasing the remaining $20.2 million of shares. The Company closed on the Rights Offering and in February, 2021, recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million for a change in fair value of the company’s common stock issued to the Backstop Party. See Notes 7 and 11 to the consolidated financial statements.

 

Key Metrics for Fiscal 2021

 

Key operating metrics for continuing operations for the year ended June 30, 2021 include:

 

 

Net sales for fiscal 2021 were $690.8 million, a decrease of $184.1 million or 21.0%, compared to $874.9 million for the same period last year, primarily due to the permanent closure of 197 stores, partially offset by an increase in comparable store sales of 0.7%.

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Gross margin for fiscal 2021 was 29.8%, compared to 32.6% for fiscal 2020.

 

Selling, general and administrative expenses for fiscal 2021 decreased $86.4 million to $244.2 million, from $330.6 million for fiscal 2020.

 

Restructuring, impairment and abandonment charges were $10.8 million during fiscal 2021, compared to $113.5 million during fiscal 2020, related to the executive severance and employee retention cost of $3.6 million, and intangible impairment charge of $1.6 million, as well as abandonment costs of $5.6 million related to the permanent closure of our stores and the Phoenix distribution center.

 

Reorganization items, were a net benefit of $60.0 million during fiscal 2021 related primarily to a $66.2 million net gain from store lease terminations and the termination of Phoenix distribution center lease under our permanent closure plan and a $49.6 million gain on the sale-leaseback transactions under the Plan of Reorganization.  These gains were partially offset by $34.6 million in professional and legal fees related to our reorganization as well as $20.0 million in non-cash charges related to execution of the Rights Offering.

 

Our net earnings for fiscal 2021 were $3.0 million, or diluted net earnings per share of $0.05 compared to a net loss for fiscal 2020 of $166.3 million, or diluted net loss per share of $3.68

 

As shown under the heading “Non-GAAP Financials Measures” below, EBITDA was $26.9 million for fiscal 2021 compared to a negative $135.3 million for fiscal 2020.  Adjusted EBITDA was negative $20.3 million for fiscal 2021 compared to a negative $15.4 million for fiscal 2020.

Key balance sheet and liquidity metrics for the year ended June 30, 2021 include:

 

Cash and cash equivalents at June 30, 2021 decreased $40.2 million to $6.5 million from $46.7 million at June 30, 2020. Cash and cash equivalents, including restricted cash, at June 30, 2021 decreased $17.8 million to $28.9 million from $46.7 million at June 30, 2020. The decrease in cash and cash equivalents including restricted cash were primarily driven by payments for bankruptcy court approved petition claims, legal and professional fees and payments to the Company vendors for inventory. See Note 2 to our consolidated financial statements for additional information.  

 

As of June 30, 2021, total liquidity, defined as cash and cash equivalents plus $38.9 million availability for borrowing under the New ABL Facility, was $45.4 million. In addition, as of June 30, 2021, we had $12.0 million of borrowings outstanding under the New ABL Facility and, $12.1 million of letters of credit outstanding. Taking into account $10.0 million of borrowing capacity that is unavailable until December 31, 2021, we have borrowing availability of $38.9 million under the New ABL Facility, as of June 30, 2021.

 

Inventory levels at June 30, 2021 increased $30.1 million to $145.1 million from $114.9 million at June 30, 2020. Inventory levels at June 30, 2020 were low driven primarily by the disruption to our business caused by the COVID-19 pandemic in the back half of fiscal 2020. Inventory turnover for the trailing five quarters as of June 30, 2021 was 3.9 turns, an increase from the trailing five quarter turnover as of June 30, 2020 of 2.8 turns, and was favorably impacted by lower than optimal current inventory levels and higher merchandise sell-through rates.

Store Data

The following table presents information with respect to our stores in operation during each of the fiscal periods:

 

 

 

 

 

Fiscal Year Ended June 30,

 

 

 

 

 

2021

 

 

 

 

 

2020

 

 

 

 

 

2019

 

Open at beginning of period

 

 

 

 

685

 

 

 

 

 

714

 

 

 

 

 

726

 

Opened

 

 

 

 

2

 

 

 

 

 

1

 

 

 

 

 

11

 

Closed

 

 

 

(197)

 

 

 

 

(30)

 

 

 

 

(23)

 

Open at end of the period

 

 

 

 

490

 

 

 

 

 

685

 

 

 

 

 

714

 

 

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Results of Operations

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

 

 

 

Fiscal Year Ended June 30,

 

 

 

2021

 

 

2020

 

 

2019

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

70.2

 

 

 

67.4

 

 

 

65.0

 

Gross margin

 

 

29.8

%

 

 

32.6

%

 

 

35.0

%

Selling, general and administrative expenses

 

 

35.3

 

 

 

37.8

 

 

 

36.0

 

Restructuring, impairment, and abandonment charges

 

 

1.6

 

 

 

13.0

 

 

 

0.0

 

Operating loss

 

 

(7.1

%)

 

 

(18.2

%)

 

 

(1.0

%)

Interest expense

 

 

(1.2

)

 

 

(0.4

)

 

 

(0.2

)

Reorganization items, net

 

 

8.7

 

 

 

(0.4

)

 

 

0.0

 

Other income

 

 

0.0

 

 

 

0.0

 

 

 

0.1

 

Income tax provision

 

 

0.0

 

 

 

0.0

 

 

 

0.0

 

Net earnings/(loss)

 

 

0.4

%

 

 

(19.0

%)

 

 

(1.2

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

See Note 2 in the Notes to Consolidated Financial Statements herein for a discussion of restructuring, impairment, and abandonment charges, as well as reorganization items.

2021 Compared with 2020

Net sales for fiscal 2021 were $690.8 million, a decrease of 21.0%, compared to $874.9 million for the same period last year, primarily due to the completion of our permanent store closing plans approved through bankruptcy proceedings of 197 stores, partially offset by an increase in comparable store sales of 0.7%. New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. The slight increase in comparable store sales was due to an 8.7% increase in average ticket and by the temporary closure of all stores on March 25, 2020 related to COVID-19, largely offset by a 7.4% decrease in customer transactions. As of June 30, 2021, store inventory levels on a comparable store basis, were approximately 41.1% higher than last year. Store level inventory challenges were due in part to the closure of much of our merchant and supply chain operations during the third quarter of fiscal 2020, at the height of the spring 2020 COVID outbreak as well as pandemic-related disruptions to the supply chain. Non-comparable store sales decreased by a total of $187.3 million primarily due to the permanent closure of 199 stores since the third quarter of fiscal 2020. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. We expect inventory levels to increase throughout the fall and expect supply chain costs to remain elevated due to higher freight costs and other supply chain conditions.

Gross margin for fiscal 2021 was $206.0 million, a decrease of 27.7% compared to $284.9 million for fiscal 2020.  As a percentage of net sales, gross margin decreased to 29.8% in fiscal 2021 compared with 32.6% in fiscal 2020. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the current year, partially offset by lower markdowns.

Selling, general and administrative expenses (‘SG&A”) decreased $86.4 million to $244.2 million in fiscal 2021, compared to $330.6 million in fiscal 2020.  The decrease was due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base.  Subsequent to the filing of the Chapter 11 proceedings, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Labor costs and depreciation were also lower on the smaller base. Also contributing to the favorable comparison were reduced advertising costs and lower corporate expenses.  As a percentage of net sales, SG&A decreased 250 basis points to 35.3% for fiscal 2021, compared to 37.8% in fiscal year 2020.

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Restructuring, impairment and abandonment charges were $10.8 million during fiscal 2021, compared to $113.5 million during fiscal 2020, related to the executive severance and employee retention cost of $3.6 million, and intangible impairment charge of $1.6 million, as well as abandonment costs of $5.6 million related to the permanent closure of our stores and the Phoenix distribution center. These costs during fiscal 2020, were charges primarily related to (i) $80.1 million in impairment cost and $25.1 million in abandonment cost relating to our permanent store closing plan along with our decision to close the Phoenix distribution center; (ii) $5.2 million in pre-filing incremental professional fees; and (iii) $3.1 million in compensation costs related to a reorganization reduction in force completed prior to the filing of the Chapter 11 Cases.  Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.

Our operating loss was $49.0 million during fiscal 2021 as compared to an operating loss of $159.2 million for fiscal 2020, a decrease of $110.2 million.  The operating loss in the current year was primarily the result of the lower net sales which were significantly driven by the impact of the COVID-19 pandemic, together with an increased cost of sales, significant impairment and abandonment charges recognized for the approved permanent store and Phoenix distribution center closures.

Interest expense increased $4.4 million to $8.2 million in fiscal 2021 compared to $3.8 million in the prior year.  The increase in fiscal 2021 primarily due to the amortization of financing fees incurred on our new revolving credit facility our debtor-in-possession financing agreements, and accrued interest on our term loan.  See Note 3 to our consolidated financial statements for additional information.

Reorganization items were a net benefit of $60.0 million for fiscal 2021 compared to a net expense of $3.6 million in fiscal 2020. The net benefit during fiscal 2021 related primarily to a $66.2 million net gain from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and a $49.6 million gain due from the sale-leaseback transactions pursuant to the Plan of Reorganization.  These benefits were partially offset by $34.6 million in professional and legal fees related to our reorganization as well as $20.0 million in non-cash charges related to execution of our Rights Offering.  For fiscal 2020, reorganization items, net represent professional fees of $3.6 million incurred during our Chapter 11 proceedings.

Income tax expense for fiscal 2021 was $0.3 million compared to $0.2 million in fiscal 2020.  The effective tax rates for fiscal 2021 and 2020 were 8.9% and (0.1%), respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.  A full valuation allowance is currently recorded against substantially all of our net deferred tax assets at June 30, 2021.  The total valuation allowance at the end of fiscal years 2021, 2020, and 2019 was $53.7 million, $67.6 million and $27.5 million, respectively.  A deviation from the customary relationship between income tax benefit and pretax income results from utilization of the valuation allowance.

Our net earnings/(loss) for fiscal 2021 was $3.0 million, or diluted net earnings per share of $0.05 compared to a net loss for fiscal 2020 of $166.3 million, or diluted net loss per share of $3.68

Fiscal Year Ended June 30, 2020 Compared to Fiscal Year Ended June 30, 2019

For a discussion of fiscal 2020 results of operations as compared to fiscal 2019 results of operations, please refer to Part II, Item 7, Management’s Discussion of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on September 14, 2020.

Non-GAAP Financial Measures

We define EBITDA as net income or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.

 

24


 

 

The following table reconciles net earnings (loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):

 

 

 

Year Ended June 30,

 

 

 

2021

 

 

2020

 

Net earnings/(loss) (GAAP)

 

$

2,982

 

 

$

(166,328

)

Depreciation and amortization

 

 

15,412

 

 

 

27,019

 

Interest expense, net

 

 

8,169

 

 

 

3,823

 

Income tax provision

 

 

291

 

 

 

221

 

EBITDA (non-GAAP)

 

 

26,854

 

 

 

(135,265

)

Share-based compensation expense  (1)

 

 

2,054

 

 

 

2,720

 

Restructuring, impairment and abandonment charges (2)

 

 

10,834

 

 

 

113,492

 

Reorganization items, net (3)

 

 

(60,015

)

 

 

3,619

 

Adjusted EBITDA (non-GAAP)

 

$

(20,273

)

 

$

(15,434

)

 

1)

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

2)

For the year-ended June 30, 2021, adjustments include restructuring and abandonment costs primarily related to $3.6 million to executive severance and employee retention cost, intangible impairment charge of a $1.6 million as well as abandonment cost of $5.6 million related to the permanent closure of our stores and the Phoenix distribution center. For the year-ended June 30 2020, adjustments include restructuring, impairment and abandonment charges primarily related to: $80.1 million in impairment cost and $25.1 million in abandonment cost relating to our permanent store closing plan along with our decision to close the Phoenix distribution center; $5.2 million in pre-filing incremental professional fees; and $3.1 million in compensation costs related to a reorganization reduction in force completed prior to the filing of the Chapter 11 Cases.  Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.

3)

For the year-ended June 30, 2021, adjustments include a net $66.2 million gain due to the leases for store locations related to our permanent closure plan, as well as the lease for our Phoenix distribution center, which were rejected and the related lease liabilities were reduced to the amount of estimated claims allowable by the Bankruptcy Court (See note 1) as well as a $49.6 million gain due to the execution of a sale-leaseback agreement during the second quarter of 2021 on our owned real estate as part of our Plan of Reorganization (see note 1 and note 8). These were partially offset by reorganization costs primarily related to $34.6 million in professional & legal fees related to our reorganization as well as $20.0 million in non-cash charges related to the execution of our Rights Offering (see Note 1 and 7).  

Liquidity and Capital Resources

Cash Flows from Operating Activities

In fiscal 2021, cash used in operating activities was $158.1 million, compared to cash provided by operating activities of $93.9 million in the prior fiscal year. Net cash used in operations in fiscal 2021 was primarily driven by payments for bankruptcy court approved pre-petition claims, legal and professional fees and payments to the Company’s vendors for inventory. In fiscal 2020, cash provided by operating activities of $93.9 million related to primarily to a $126.4 million larger decrease in inventory. This increase was partially offset by our higher net loss in fiscal 2020, adjusted for the non-cash impacts of asset impairment and abandonment charges, totaling $105.2 million, as well as a $9.6 million cash outlay for July 2020 rents, which were paid at the end of June 2020, and a $4.5 million higher cash usage in accounts payable and accrued liabilities.

Cash flows from Investing Activities

Net cash provided by investing activities for fiscal 2021 of $66.7 million related primarily to $68.6 million of proceeds from the sale of our corporate office and Dallas distribution center properties in a sale-leaseback transaction under our Plan of Reorganization, along with $1.9 million of property and equipment at the 197 stores that we permanently closed, and was partially offset by $3.8 million of capital expenditures. For additional information regarding the sale-leaseback transaction, see Note 8 to our consolidated financial statements. Net cash used in investing activities for fiscal 2020 of $13.9 million related primarily to $15.8 million of capital expenditures offset by $1.9 million in proceeds received from the sale of assets.

Cash Flows from Financing Activities

Net cash provided by financing activities of $73.6 million for fiscal 2021 related primarily to the proceeds of $12.0 million from borrowings of $386.0 million and repayments of $376.0 million on our new revolving credit facility, $25.0 million from a term loan and

25


 

$40.0 million from the Rights Offering, partially offset by the payment of financing fees of $3.2 million. For additional information regarding our new revolving credit facility, the term loan and the Rights Offering, see Notes 2, 3 and 7 to our consolidated financial statements.  The proceeds of these financings were used primarily to pay pre-petition claims of general unsecured in our bankruptcy proceedings and for purchases of inventory.  Net cash used in financing activities of $44.7 million in fiscal 2020 related to $34.6 million in net repayments on our revolving credit facility, a $5.0 million lower cash overdraft provision, and the payment of $4.9 million in financing costs related to obtaining debtor-in-possession financing.

Capital Resources

Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under an asset-based, senior secured revolving credit facility. During the pendency of our bankruptcy proceedings, we financed our operations with funds generated from operating activities and available cash and cash equivalents, and also had in place debtor-in-possession financing arrangements.  We made no borrowings under the DIP ABL Credit Agreement (defined below) and the DIP DDTL Agreement (defined below) and both were terminated on December 31, 2020 in connection with our legal emergence from bankruptcy.

On December 31, 2020, as contemplated by our Plan of Reorganization, the Company and its subsidiaries entered into a Credit Agreement (the “New ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. that provides for a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”). The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The New ABL Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio if borrowing availability falls below certain minimum levels, after the first anniversary of the agreement.  For additional information regarding the New ABL Facility, see Note 3 to our consolidated financial statements.

On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (the “Term Loan Credit Agreement”) providing for a term loan of $25.0 million to the Company (the “Term Loan”).

Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind. Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at prepayment price equal to the greater of (1) the original principal amount of the Term Loan plus accrued interest thereon, and (2) 125% of the original principal amount of the Term Loan. The Term Loan is subject to mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of June 30, 2021, the outstanding principal balance of the Term Loan was $26.4 million, net of debt issuance costs.  For additional information regarding the Term Loan, see Note 3 to our consolidated financial statements.

In addition, in February 2021, we completed the Rights Offering and recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million for a change in fair value of the company’s common stock issued to the Backstop Party.

Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.  

As of June 30, 2021, cash and cash equivalents, excluding restricted cash, were $6.5 million and total liquidity, defined as cash and cash equivalents plus the $38.9 million availability for borrowing under the New ABL Facility, was $45.5 million as of June 30, 2021.

We incurred capital expenditures, net of construction allowances received from landlords, of approximately $3.8 million in fiscal year 2021, which reflects reduced capital spending as one of the liquidity preservation measures we have taken due to the financial impact of COVID-19. Capital expenditures are anticipated to be $9.1 million for fiscal year 2022. The amounts include the expected costs to open approximately eight stores, costs of enhancements to our store fleet, investment in technology as well as our Dallas distribution center.  

We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock.  Under the terms of the New ABL Credit Agreement, we must maintain certain minimum levels of borrowing availability, and under the Term Loan any amounts paid for these purposes may not exceed $2 million.

 

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our audited year end 2021 consolidated financial statements, which have been prepared pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and

26


 

expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates.

Impairment of Long-Lived Assets—We evaluate long-lived assets, principally property and equipment, and intangible assets, as well as lease right-of-use assets, for indicators of impairment whenever events or changes in circumstances indicate their carrying values may not be recoverable. Management's judgments regarding the existence of impairment indicators are based on market conditions and financial performance. Indicators of impairment may also include the planned closure of a store or facility, among others. 

Impairment is indicated when the sum of the estimated future cash flows, on an undiscounted basis, is less than the asset’s (asset group’s) carrying amount.  Then, when the fair value of the estimated future cash flows, on a discounted basis, is less than carrying amount, an impairment charge is recorded.  The testing of an asset group for recoverability involves assumptions regarding the future cash flows of the asset group, the growth rate of those cash flows, and the remaining useful life over which an asset group is expected to generate cash flows.  In the event we determine an asset group is not recoverable, the measurement of an estimated impairment loss involves a number of management judgments, including the selection of an appropriate discount rate, as well as various unobservable inputs incorporated in valuation techniques used to determine fair value.  These assumptions are required to be consistent with market participant assumptions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Key market participant assumptions used for purposes of determining the fair value of our long-lived assets, including lease right-of-use assets, in connection with the fiscal 2020 impairment discussed above included market rent assumptions and the discount rate.

If actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material.  Additionally, we can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in our operating results or assumptions.

Asset impairment and abandonment charges totaled $5.6 million and $80.1 million for Fiscal 2021 and Fiscal 2020, respectively, which were the result of our closing plans for stores and the Phoenix distribution center.

Our property and equipment, combined with our operating lease right-of-use assets totaled $231.0 million as of June 30, 2021, or approximately 55% of total assets, compared to $327.1 million as of June 30, 2020 or approximately 65% of total assets.  

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 stock-keeping unit (“SKU”) level. Inventory is relieved and cost of goods sold is recorded based on the current calculated 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 during the second half of the fiscal 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. We have loss prevention and inventory controls programs that we believe minimize shrink. The estimated shrink rate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventory results yield a different result.  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.

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. Markdowns and damages were 4.3% in fiscal 2021 and were 5.9% in fiscal 2020. Markdowns may vary throughout the quarter or year in timing.

The effect of a 0.5% markdown in the value of our inventory at June 30, 2021 would result in a decline in Gross margin and a reduction in our diluted earnings per share for fiscal 2021, of $0.7 million and $0.01 respectively.

Leases— Prior to fiscal 2020, rent expense on operating leases, including rent holidays and scheduled rent increases, was recorded on a straight-line basis over the term of the lease, commencing on the date we take possession of the leased property. Rent expense is recorded in selling, general and administrative expenses. The net excess of rent expense over the actual cash paid has been recorded as deferred rent in our consolidated balance sheets. Tenant improvement allowances are also included in the accompanying consolidated balance sheets as deferred rent liabilities and are amortized as a reduction of rent expense over the term of the lease from the possession date. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.

27


 

Starting in fiscal 2020, upon the adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 842”), we determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (“ROU”) assets represent our right to use the underlying assets for the respective lease terms.

The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.

Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease.

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 $0.5 million for workers’ compensation, $0.3 million for general liability, and $0.2 million 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 by third-party actuaries.

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 $7.3 million, $1.2 million, and $1.0 million, respectively, at June 30, 2021 and $8.4 million, $1.3 million, and $0.9 million, respectively, at June 30, 2020.

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 $1.4 million, $3.7 million and $7.8 million, respectively, for the fiscal year ended June 30, 2021; $2.7 million, $3.3 million and $8.7 million, respectively, for the fiscal year ended June 30, 2020; and $2.1 million, $2.3 million and $7.9 million, respectively, for the fiscal year ended June 30, 2019.

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 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 have no off-balance sheet arrangements as of June 30, 2021.

 

Contractual Obligations

We have 490 stores with total rent expense for fiscal 2021 of $73.5 million compared to rent expense of $118.3 million in fiscal 2020. The decrease is due to the closure of 197 stores and our negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and remeasurement recorded in fiscal 2021. See Notes 1, 2 and 8 to our consolidated financial statements for further discussion. Our distribution center rent for fiscal 2021 was $9.6 million compared to $7.3 million in fiscal 2020. The increase is due to our having sold our corporate office and Dallas distribution center properties and land, in a sale-leaseback transaction and the additional rent incurred by that change and partially offset by a decrease in rent associated with Phoenix distribution center.  

28


 

Contractually required payments for maintenance, insurance and taxes on our leased properties are estimated 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 corporate office and Dallas distribution center properties. See Note 8 to our consolidated financial statements for further discussion.

We do not consider most merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order.

On December 31, 2020, the Company and its subsidiaries entered into the New ABL Credit Agreement. Outstanding principal as of June 30, 2021 was approximately $12.0 million. The New ABL Facility matures on December 31, 2023.

On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into the Term Loan Credit Agreement, which provided for a Term Loan of $25.0 million to the Company.

Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at prepayment price equal to the greater of (1) the original principal amount of the Term Loan plus accrued interest thereon, and (2) 125% of the original principal amount of the Term Loan. The Term Loan is subject to mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of June 30, 2021, the outstanding principal balance of the Term Loan was $26.4 million, net of debt issuance costs.  For additional information regarding the New ABL Facility and the Term Loan, see Note 3 to our consolidated financial statements.

Though our 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."

Seasonality

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, 2020, 2019, and 2018 accounted for approximately 29%, 37% and 34% of our annual net sales for fiscal years 2021, 2020 and 2019, respectively.  The rate for fiscal 2021 is impacted by store closures during the first quarter of fiscal 2021.

Recent Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements.

 

 

29


 

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, such as interest rates. Based on our market risk sensitive instruments outstanding as of June 30, 2019, as described below, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Borrowings under our New ABL facility bear a floating rate of interest. As of June 30, 2021, the outstanding borrowings under the New ABL facility were $12.0 million. At June 30, 2021, The effect of a one percentage point change in interest rate would result in an approximate $0.1 million change in annual interest expense on our ABL borrowings.

 

Item 8.  Financial Statements and Supplementary Data

 

30


 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of Tuesday Morning Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Tuesday Morning Corporation (the Company) as of June 30, 2021 and 2020, the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 30, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

 

Valuation of operating lease right-of-use assets and operating lease liabilities

Description of

the Matter

As discussed in Note 1 and Note 8 in the consolidated financial statements, the Company recorded noncurrent operating lease right-of-use assets, current operating lease liabilities and noncurrent operating lease liabilities of $193.2 million, $54.6 million and $156.2 million, respectively, as of June 30, 2021. The Company’s reported operating lease liabilities utilize discount rates to calculate the estimated present value of future lease payments. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on the information available at the lease commencement date in determining the present value of future lease payments.

 

The computation of the IBR required significant management judgment based on the selection of inputs, including the determination of the appropriate credit rating, credit spread and adjustments for the impacts of collateralization used to determine the rate.  Evaluating the appropriateness of the selection by management of the key inputs involved a high degree of auditor judgment and an increased extent of effort, including the involvement of our valuation specialists.

31


 

How We

Addressed the

Matter in Our

Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of the methodology, inputs and assumptions used to determine the Company’s selection of the IBR.

 

With the assistance of our valuation specialists, we evaluated (i) the reasonableness of the methodology used to estimate the IBR; (ii) the significant inputs used to derive the IBR; and (iii) the mathematical accuracy of the computation of the IBR. Additionally, with the assistance of our valuation specialists, we created independent estimates of the IBR and compared the results to the Company’s IBR.  

 

 

Liquidity and going concern

Description of

the Matter

As described in Note 1 to the consolidated financial statements, the COVID-19 pandemic had an adverse impact on the Company’s business operations and liquidity. During the current fiscal year, management took action to improve liquidity by (i) closing underperforming stores; (ii) closing a distribution center; (iii) renegotiating store leases; (iv) executing a sale-leaseback transaction; and (v) executing capital markets transactions, including debt issuances and equity sales. Based on these actions and considering the Company's available liquidity, management concluded there was sufficient liquidity to meet minimum liquidity requirements, fund operations, and satisfy the Company's obligations for the twelve-month period following the issuance date of the consolidated financial statements.

 

Auditing the evaluation and disclosure of liquidity and going concern was challenging because of the subjectivity used by management when evaluating whether the Company will meet its obligations as they come due and be in compliance with debt covenants for at least twelve months from the issuance date of these financial statements. A high degree of auditor judgment was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasted future financial results.

How We

Addressed the

Matter in Our

Audit

We obtained an understanding, evaluated the design, and tested controls over the Company's going concern assessment process. We tested controls over management’s process to forecast financial results and liquidity for one year after the date the financial statements are issued, including management's review of significant assumptions and the completeness and accuracy of underlying data used in the forecast.

 

We evaluated the sensitivity and impact of reasonably possible changes in the key assumptions and estimates included in management's cash flow forecasts and liquidity position and compared those results to the sensitivity analyses performed by management. We also evaluated management's liquidity disclosure in the consolidated financial statements.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002

 

Dallas, Texas

September 13, 2021

32


 

Tuesday Morning Corporation

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,534

 

 

$

46,676

 

Restricted cash

 

 

22,321

 

 

 

 

Inventories

 

 

145,075

 

 

 

114,905

 

Prepaid expenses

 

 

5,486

 

 

 

6,353

 

Other current assets

 

 

3,385

 

 

 

7,210

 

Total Current Assets

 

 

182,801

 

 

 

175,144

 

Property and equipment, net

 

 

37,784

 

 

 

68,635

 

Operating lease right of-use assets

 

 

193,244

 

 

 

258,433

 

Deferred financing costs

 

 

2,459

 

 

 

 

Other assets

 

 

1,596

 

 

 

3,178

 

Total Assets

 

$

417,884

 

 

$

505,390

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

      Debtor-in-possession financing

 

$

-

 

 

$

100

 

Accounts payable

 

 

45,930

 

 

 

5,514

 

Accrued liabilities

 

 

46,454

 

 

 

33,942

 

Operating lease liabilities

 

 

54,632

 

 

 

 

Total Current Liabilities

 

 

147,016

 

 

 

39,556

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities —  non-current

 

 

156,240

 

 

 

 

Borrowings under revolving credit facility

 

 

12,000

 

 

 

 

Long term debt (see Note 3 for amounts due to related parties)

 

 

26,374

 

 

 

 

Asset retirement obligation — non-current

 

 

1,021

 

 

 

1,213

 

Other liabilities — non-current

 

 

3,432

 

 

 

1,347

 

Total Non-Current Liabilities

 

 

346,083

 

 

 

42,116

 

Liabilities subject to compromise

 

 

 

 

 

456,339

 

Total Liabilities

 

 

346,083

 

 

 

498,455

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; none issued

   or outstanding

 

 

 

 

Common stock, par value $0.01 per share, authorized 200,000,000 shares at June 30, 2021 and authorized 100,000,000 shares at June 30, 2020;  87,988,233 shares issued and 86,204,572 shares outstanding at June 30, 2021 and 49,124,313 shares issued and 47,340,652 shares outstanding at June 30, 2020

 

 

862

 

 

 

455

 

Additional paid-in capital

 

 

305,498

 

 

 

244,021

 

Retained deficit

 

 

(227,747

)

 

 

(230,729

)

Less: 1,783,661 common shares in treasury, at cost, at June 30, 2021 and at June 30, 2020, respectively

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

71,801

 

 

 

6,935

 

Total Liabilities and Stockholders’ Equity

 

$

417,884

 

 

$

505,390

 

 

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

33


 

Tuesday Morning Corporation

Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

Fiscal Years Ended June 30,

 

 

 

2021

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

690,790

 

 

$

874,895

 

 

$

1,007,246

 

Cost of sales

 

 

484,788

 

 

 

590,025

 

 

 

654,931

 

Gross margin

 

 

206,002

 

 

 

284,870

 

 

 

352,315

 

Selling, general and administrative expenses

 

 

244,155

 

 

 

330,572

 

 

 

362,840

 

Restructuring, impairment, and abandonment charges

 

 

10,834

 

 

 

113,492

 

 

 

 

Operating loss before interest, reorganization and other income/(expense)

 

 

(48,987

)

 

 

(159,194

)

 

 

(10,525

)

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,169

)

 

 

(3,845

)

 

 

(2,461

)

Reorganization items, net

 

 

60,015

 

 

 

(3,619

)

 

 

 

Other income, net

 

 

414

 

 

 

551

 

 

 

792

 

Earnings/(loss) before income taxes

 

 

3,273

 

 

 

(166,107

)

 

 

(12,194

)

Income tax provision

 

 

291

 

 

 

221

 

 

 

246

 

Net earnings/ (loss)

 

$

2,982

 

 

$

(166,328

)

 

$

(12,440

)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings/(loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

(3.68

)

 

$

(0.28

)

Diluted

 

$

0.05

 

 

$

(3.68

)

 

$

(0.28

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

60,584

 

 

 

45,208

 

 

 

44,719

 

Diluted

 

 

61,689

 

 

 

45,208

 

 

 

44,719

 

 

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

34


 

Tuesday Morning Corporation

Consolidated Statements of Stockholders’ Equity

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Stock

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

45,865

 

 

$

469

 

 

$

237,957

 

 

$

(51,360

)

 

$

(6,812

)

 

$

180,254

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,440

)

 

 

 

 

 

(12,440

)

Shares issued or canceled in connection with employee stock incentive plans and related tax effect

 

 

815

 

 

 

(4

)

 

 

5

 

 

 

 

 

 

 

 

 

1

 

Shares issued in connection with exercises of employee stock options

 

 

3

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Share-based compensation expense

 

 

 

 

 

 

 

 

3,488

 

 

 

 

 

 

 

 

 

3,488

 

Balance at June 30, 2019

 

 

46,683

 

 

 

465

 

 

 

241,456

 

 

 

(63,800

)

 

 

(6,812

)

 

 

171,309

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(166,328

)

 

 

 

 

 

(166,328

)

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

(601

)

 

 

 

 

 

(601

)

Shares issued in connection with exercises of employee stock options

 

 

658

 

 

 

(10

)

 

 

10