How excited I got over the weekend on my weekly search for net/nets (companies trading below their net current asset value), when I discovered an additional name gracing the very short list of qualifiers. That excitement was short-lived, however.
That new net/net is specialty retailer Tuesday Morning (TUES) , a 720-store chain that is yet another name in the retail space that is struggling. This is not the company's first trip to net/net land; it was qualifier after the 2008-2009 market meltdown, but things were a bit different then. Like many names at that time, it was hammered well beyond what it deserved, was still profitable and was legitimately cheap. It was a net/net that I owned for a time, and it was a profitable trade. Indeed, from February 2009 to December 2014, TUES shares rose from less than a buck to nearly $22. It has been mostly downhill ever since, with TUES currently trading in the $2.30 range
Fast forward and the retail space has changed a great deal. It is downright scary for many of the bricks-and-mortar chains, and there are a number of them that may be in a death spiral -- some fast, and others slower.
For Tuesday Morning, third-quarter revenue fell $8.4 million to $203 million, while same-store sales fell 2.7%. The company missed on both revenue ($203 million versus $206.9 million consensus) and earnings per share (34-cent loss versus a 31-cent consensus). Granted, the third quarter is not typically one of Tuesday Morning's stronger quarters, but consensus estimates are calling for losses for full years 2017 and 2018.
The company is not sitting still, and has been relocating stores to what it believes will be better, more profitable locations. That said, I am waiting for the day that that our closest location closes. I usually hit that store twice a year, and am typically one of just two or three people there. Not sure I've ever made a purchase there, either. It is one of those stores that's fun to walk through.
At first glance, Tuesday Morning shares may appear cheap, currently trading at 0.94x net current asset value and 0.47x tangible book value per share. However, the quality of current assets is not great. They are comprised primarily of inventory -- not surprising, given that it is a retailer -- but there is little in the way of cash ($3.7 million). Total debt stood at $41 million. For comparative purposes, at year-end 2015, the company had $45 million in cash and no debt.
I don't know if TUES can turn things around, but it is operating within an environment that is challenging at best for retailers, and this time around I am passing on the name. At these levels, Tuesday Morning is trading like an option on company survival. That means that if TUES can deliver even some mildly positive news, shares would likely get a nice bump. I'm just not reasonably sure that will happen.
Retailers historically have shown mixed results once they become net/nets; for every success story, there's also a failure, and there's just not enough margin of safety here for me.
TUES joins Sears Hometown and Outlet Stores (SHOS) among net/net retailers; that's a name for which I have little hope.