A Small-Cap Retailer's Bracing Shakeup

 | Jun 11, 2012 | 2:30 PM EDT
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Things are starting to heat up at Tuesday Morning (TUES), a closeout retailer that I've referred to as a "rich man's dollar store." Last Wednesday, the company fired president and CEO Kathleen Mason after three years on the job. Interestingly, Mason's firing happened just after activists Becker Drapkin revealed a 5.02% stake in Tuesday Morning and sent a letter to the board that was very critical of Mason, accusing her of destroying shareholder value.

Indeed, it's been a strange road for this name, which was a $35 stock in 2005. It was downhill from there, all the way to the $0.50 range in early 2009. But it never appeared that Tuesday Morning was in any danger of going under. The company has typically had a very clean balance sheet with little or no debt, and it was in the black or near break-even on an annual basis throughout the dark days of the last recession. After hitting the $0.50 mark, it peaked in the $8.50 range.

I've owned Tuesday Morning a couple of times, and it's been a profitable name for me over the years. I call it a "throw the baby out with the bathwater" name, because during the market purges, it is typically punished well beyond what it deserves. Investors are often quick to discard such smaller names as they raise cash, creating opportunities for the trash-pickers among us.

One reason Tuesday Morning is still on my radar is that it's been a net-net, trading below net current asset value, for much of the past four years. Following last week's 15% rise, courtesy of Becker Drapkin's activist involvement, the company has been at least temporarily extricated from net-net land, and it now trades at 1.07x NCAV and 0.74x tangible book value. There was about $1 per share in cash on the books and no debt as of the end of the third quarter. I'd expect cash to decline in the fourth quarter.

The question moving forward for Tuesday Morning is whether the 852-store chain can show some forward progress on the revenue and earnings front. Sales have been fairly flat for the past three years, and last week management cut full-year guidance for this year to the $810 million to $815 million range (down from $828 million to $834 million). Earnings guidance was also cut way down to $0.11 to $0.15 a share, from $0.22 to $0.26.

But there will ultimately be a new sheriff in town as the CEO search begins. There will also be pressure from Becker Drapkin, whose average cost in the name is $4.04 per share. The firm is expected to seek board representation, and it will likely exert its influence in the proceedings.



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