Tuesday Morning Corporation

May 27, 2020

Dallas-based Tuesday Morning Corporation ($TUES) is 80% open now — just in time to start closing 230 of its brick-and-mortar locations (132 in a first phase and 100 more in a follow-up phase) and commence liquidations sales while in bankruptcy. This, in a nutshell, ladies and gentlemen, sums up the plight of retail today.

If you tune in to CNBC or Bloomberg, one could be forgiven for thinking that a retailer like TUES might actually do relatively well during shelter-in times. It specializes in upscale home furnishings, textiles and housewares for crying out loud. According to the talking heads, everyone is spending time at home judging the inadequacy of their living accommodations — a process that ought to serve as a real boost to home furnishing specialists ((e.g., Restoration Hardware Inc. ($RH)) and home improvement companies ((e.g., Home Depot Inc. ($HD) and Lowe’s Companies Inc. ($LOW)). Not so much for TUES, apparently: the total lack of online presence and the company’s 100% reliance on in-store sales certainly didn’t help matters. The pandemic and related fallout “…resulted in a near-total cessation of new revenue beginning in March 2020.” Repeat: Near. Total. Cessation. Yikes.

Indeed, the debtors’ website serves a very limited purpose: it has a store locator. One literally cannot transact on the site. That said, there does appear to be pent up demand: the company reports that since re-opening its stores on April 24, comp store sales for the reopened stores have been approximately 10% higher than the same period in fiscal ‘19. Perhaps people DID, in fact, identify a lot of things they wanted to remedy at home! And they’re clamoring for that “treasure hunt” experience, y’all!!

What’s somewhat sad about that is, looking at the debtors’ list of top 40 unsecured trade creditors, nearly every vendor they do business with is US-based. In fact, the debtors source 80% of their inventory from US vendors. These store closures and the attendant loss of volume will cascade through the economy. Sigh.

Anyway, we previously wrote about the company in February upon the company’s Q2 ‘20 earnings report. We noted:

Quick coverage of this Dallas-based off-price retailer because, well, it’s performing like dogsh*t. The company reported Q2 ‘20 numbers last week. They. Were. Not. Good.

Nope. Like, not at all. Here are some highlights:

- A 4.1% decrease in net sales YOY driven primarily by a 3% decrease in comp store sales;

- A 3.7% decrease in the size of the average ticket, offset only somewhat by a 0.7% increase in customer transactions (read: more people buying less stuff — not exactly a testament to inventory quality);

- Declining gross margin (down 1.9%);

- Operating income down $5.2mm for the Q and $6.3mm for the 1H of fiscal ‘20;

- Cash is burning, down $6.5mm from June 2019.

The company blamed this piss poor performance on the shortened holiday calendar (how predictable) and uber-competition within that period that resulted in heavy promotions.

We further noted that the company had 175 leases rolling off in the next 12 months and, therefore, “…this is more a lease story than a bankruptcy story.” Whoops. Our crystal ball didn’t pick up on COVID-19. We further noted:

The company has no maturities prior to 2024 and has significant room under its $180mm revolving credit facility ($91.4mm of availability). Still, this thing needs its performance to turn around or it will be dancing with several other distressed retailers soon enough.

“Soon enough” came quicker than we anticipated.

The problem is that not only did the shut-down completely shut the revenue spigot, it also led the debtors to default, as of March 2020, under their revolving credit facility (“RCF”). The RCF Credit Agreement had a provision prohibiting the debtors from “suspend[ing] the operation of its business in the ordinary course of business.” Ever since, they have been in a state of continued negotiation and forbearance with their RCF enders, JPMorgan Chase Bank NA ($JPM), Wells Fargo Bank NA ($WFC), and Bank of America NA ($BAC).

That negotiation has borne fruit. The debtors obtained a DIP financing commitment of $100mm which will consist of some new money as well as a “gradual” roll-up of pre-petition funded debt ($47.9mm + $8.8mm LOCs). The debtors will pay a 2% upfront fee, a 0.5% unused commitment fee and customary letter of credit fees. “The interest rate under the DIP Documents is, either (at the Debtors’ option), (a) a 3 month LIBO Rate (2.0% floor) + 3.00% per annum or (b) CBFR (2.0% floor) + 2.0% per annum, payable on each applicable Interest Payment Date, in cash, provided that no Interest Period may extend beyond the Maturity Date.”

So what now? The debtors main assets are their inventory, a Dallas distribution center and corporate office, and equipment; they also have upwards of $100mm in net operating losses. There isn’t a lot of debt on balance sheet: this is not an example of a private equity firm coming in and dividending all of the value out of the enterprise. Rather, the crux of this case in the near-term will be, as we noted back in February, about the rejection of hundreds of leases and the stream-lining of the debtors’ footprint to a leaner operation. The crux longer-term, however, will be whether there’s any reason for this business to exist. Will the lenders enter into an exit facility? Will there be a plan of reorganization that will allow the debtors to emerge as reorganized debtors? Will there be a sale of substantially all of the assets? The chapter 11 bankruptcy process will be used to hopefully find answers to these questions.

• Jurisdiction: N.D. of TX (Judge Hale)

• Capital Structure: $47.9mm funded RCF + $8.8mm LOCs

• Professionals:

  • Legal: Haynes and Boone LLP (Ian Peck, Stephen Pezanosky, Jarom Yates)

  • Financial Advisor: AlixPartners LLP (Barry Folse, Ray Adams, Wilmer Cerda, JR Bryant)

  • Investment Banker: Stifel Nicolaus & Co. Inc. & Stifel Nicolaus-Miller Buckfire & Co. LLC (James Doak)

  • Real Estate Advisor: A&G Realty Partners LLC

  • Liquidation Consultant: Great American Group LLC

  • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Agent: JPMorgan Chase Bank NA

    • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman)

  • Official Committee of Unsecured Creditors

    • Legal: Montgomery McCracken Walker & Rhoads LLP (Edward Schnitzer, Gilbert Saydah Jr., David Banker) & Munsch Hardt Kopf & Harr PC (Kevin Lippman, Deborah Parry)