UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2002
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-19658
Tuesday Morning Corporation
(Exact name of registrant as specified in its charter)
| Delaware (State of incorporation) |
75-2398532 (IRS Employer Identification Number) |
14621 Inwood Road
Addison, Texas 75001
(972) 387-3562
www.tuesdaymorning.com
(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: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required 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 ý No o
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ý
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
The aggregate market value of shares of the registrant's common stock held by non-affiliates of the registrant at June 30, 2002 was approximately $345,339,000, based upon the closing sale price on the Nasdaq National Market reported for such date.
At February 28, 2003, there were 40,310,310 outstanding shares of the registrant's Common Stock.
Documents Incorporated By Reference:
Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 20, 2003 are incorporated herein by reference to the extent indicated in Part III of this Form 10-K.
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. 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 carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or state other "forward-looking" information based on currently available information. The factors listed below under the heading "Business—Risk Factors" and in the 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.
The forward-looking statements made in this Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
The terms "Tuesday Morning," "we," "us," and "our" as used in this Form 10-K refer to Tuesday Morning Corporation and its subsidiaries.
Overview
We are a leading closeout retailer of upscale home furnishings, gifts and related items in the United States. We opened our first store in 1974 and currently operate 526 stores in 43 states. Our stores operate during periodic "sales events," each of which lasts from three to five weeks. We are closed predominantly for the months of January and July, which are traditionally weak months for retailers, and during short intervals between sales events to stock merchandise for the next sales event. We purchase first quality, brand name merchandise at closeout and sell it at prices 50% to 80% below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars or factory rejects.
We believe that our well recognized, first quality brand name merchandise and value-based pricing have enabled us to establish and maintain strong customer loyalty. Our customers, who are predominantly women from middle and upper-income households, are brand savvy, value-conscious customers seeking quality products at discount pricing. While we offer our customers consistent merchandise categories, each sales event features limited quantities of new and appealing products within these categories, creating a "treasure hunt" atmosphere in our stores. Our closeout merchandise has included brand name items such as Waterford crystal, Steinbach and Hummel collectibles, Royal Doulton and Wedgwood china and giftware, Martex bath towels, Samsonite luggage, Madame Alexander dolls, Calphalon cookware, Krups, KitchenAid and Cuisinart appliances and Wallace flatware.
In 2002, we recorded sales of $728.8 million and operating income of $85.7 million, each representing compound annual growth of 17% and 18% respectively since 1998. Since our initial public offering in April 1999, we have expanded from 354 stores in 36 states to 526 stores in 43 states as of March 2003.
2
Key Operating Strengths
Our success is based on the following operating strengths:
3
inventory by $47 million during 2001 and completed the closure during that same year of all 16 third party regional distribution centers previously used to warehouse inventory. During 2002 our inventory per store declined slightly due to continued refinement of these initiatives. We have also doubled our shipping and sorting capacity at our main distribution center from approximately 400 to 800 stores to allow for future growth.
Growth Strategy
Our growth strategy is to continue to build on our position as a leading closeout retailer of upscale home furnishings, gifts and related items in the United States by:
Industry Trends
As a leading closeout retailer of home furnishings, gifts and related items, we believe that we are benefiting from broad consumer trends. During the 1990s, the home furnishings market grew rapidly as aging baby boomers became homeowners and increasingly invested in their home. This trend was further reinforced by a strong mortgage refinancing cycle in 1998 and 1999, resulting in approximately $18 billion devoted to home improvement and related spending, according to Federal Reserve surveys. We believe a second mortgage refinancing cycle took place at the end of 2001 and continued throughout 2002. Based on historical trends, this is expected to result in additional spending for home furnishings. A growing emphasis on value has also resulted in fast growing retail sales for discount retailers such as ourselves.
In addition, as a closeout retailer of first quality, brand name merchandise, we benefit from attractive fundamentals in the closeout industry. Closeout merchandise is generally available to closeout
4
retailers at low prices for a variety of reasons, including the inability of a manufacturer to sell merchandise through regular channels, the discontinuance of merchandise due to a style or color change, the cancellation of orders placed by other retailers and the termination of business by a manufacturer or wholesaler. Occasionally, the closeout retailer may be able to purchase closeout merchandise because a manufacturer has excess raw materials or production capacity. Typically, closeout retailers have lower merchandise costs, capital expenditures and operating costs, allowing them to sell merchandise at lower prices than other retailers.
Finally, we benefit from several trends in the retailing industry. The increase in "just-in-time" inventory management techniques and the rise in retailer consolidation have both resulted in a shift of inventory risk from retailers to manufacturers. In response to an increasingly competitive market, manufacturers are introducing new products and new packaging more frequently. We believe that these trends have helped make the closeout retailer an integral part of manufacturers' overall distribution strategies. As a result, we believe manufacturers are increasingly looking for larger, more sophisticated closeout retailers such as Tuesday Morning that can purchase larger and more varied quantities of merchandise and can control the distribution and advertising of specific products in order to minimize disruption to the manufacturers' traditional distribution channels.
Products
We sell upscale home furnishings, gifts and related items. We do not sell seconds, irregulars or factory rejects. Our merchandise primarily consists of lamps, rugs, crystal, dinnerware, silver serving pieces, gourmet housewares, bathroom, bedroom and kitchen accessories, linens, luggage, Christmas trim, toys, stationery and silk plants. We specialize in well-recognized, first quality, brand name merchandise, which has included Waterford crystal, Steinbach and Hummel collectibles, Royal Doulton and Wedgwood china and giftware, Martex bath towels, Samsonite luggage, Madame Alexander dolls, Calphalon cookware, Krups, KitchenAir and Cuisinart appliances, Wallace flatware and many others.
We differ from discount retailers in that we do not stock continuing lines of merchandise. Because we offer a continuity of merchandise categories with ever-changing individual product offerings, we provide our customers a higher proportion of new merchandise items than general merchandisers. We are continually looking to add new complementary merchandise categories that appeal to our customers.
Purchasing
Since our inception, we have not experienced any significant difficulty in obtaining first quality, brand name closeout merchandise in adequate volumes and at attractive prices. As industry trends such as "just-in-time" inventory management, retailer consolidation and more frequent order cancellations by retailers place more inventory risk on manufacturers, we believe we will see an increase in the number of vendors looking for effective ways to reduce excess inventory. In addition, as we continue to increase our number of stores and distribution capacity, we believe our purchasing capacity will continue to increase and enable us to acquire larger quantities of closeout merchandise from individual vendors and manufacturers. Improvements in our distribution processes also allow us to put acquired merchandise in our stores more quickly, which increases our purchasing flexibility. As a result of these trends and initiatives, we believe we will be able to take advantage of more, and often larger, buying opportunities as well as offer an enhanced selection of products to our customers. In 2002, our top ten vendors accounted for approximately 14.3% of total purchases, with no one vendor accounting for more than 2.3%.
5
Pricing
Our pricing policy is to sell all merchandise at 50% to 80% below the retail prices generally charged by department and specialty stores. Prices are determined centrally and are uniform at all of our stores. Once a price is determined for a particular item, labels displaying three-tiered pricing are affixed to the product. A typical price tag displays a competitor's "regular" price, a competitor's "sale" price and the Tuesday Morning closeout price. Our management and buyers verify retail prices by reviewing prices published in advertisements and catalogues and manufacturers' suggested retail price lists and by visiting department or specialty stores selling similar merchandise. Our management information systems provide daily sales and inventory information, which enables us to mark down unsold merchandise on a timely and systematic basis and thereby effectively manage inventory levels.
Advertising
We plan and implement an advertising program for each sales event. Prior to each sales event, we initiate a direct mailing to customers on our mailing list, which consists of over 7 million customers who have previously visited our stores and requested mailings. These direct mailings alert customers to the opening of a sales event and the merchandise and prices we offer. After the first two days of each sales event, we commence an advertising campaign in local newspapers in each of our markets. We also communicate with customers through our web site and our e-mail program. We currently maintain over 200,000 customer e-mail addresses.
While we believe our direct mailings and newspaper and print advertising remain effective, we believe radio and television advertising may also provide an effective means to attract new customers as well as to encourage repeat visits by existing customers. We recently initiated the use of radio in some of our markets and, based on preliminary results, believe that radio advertising may allow us to expand our customer base and also to increase consumer awareness of Tuesday Morning. We are planning to expand our use of television advertising in select markets in 2003.
Stores and Store Operations
Site Selection. We increased our store base by 46 stores in 2002 and currently plan to increase our square footage by approximately 10% in 2003 by opening stores in both new and existing markets. We expect our new stores to be similar in appearance and operation to our existing stores. Based on information prepared for us by a major retail site selection and market research firm, we believe there is potential for at least an additional 300 store locations in areas with similar customer demographics in the United States.
We believe that our customers are attracted to our stores by our advertising and direct mail program that emphasizes the limited quantities of first quality, brand name merchandise which we offer at attractive prices, rather than by location. This has allowed us to open our stores in secondary locations of major suburban markets, such as strip malls and warehouse zones, near our middle and upper-income customers. We are able to obtain favorable lease terms because of our flexibility in site selection and our no-frills format, which allows us to effectively use a wide variety of space configurations. As a result of this opportunistic approach to site selection, our real estate costs are lower than those of other retailers.
Store Leases. Our annual rent per store is slightly over $76,000 and store rent, as a percent of net sales, was 5.0% for 2002. Some of our leases also provide for contingent rent based upon store sales exceeding stipulated amounts, but we have historically incurred the contingent rent obligations in only about one-third of those leases.
Our store leases typically include "kick clauses," which allow us, at our option, to exit the lease 18 to 24 months after entering into the lease. These kick clauses, when combined with our inexpensive and
6
portable store fixtures, provide us with significant flexibility in opening new stores by allowing us to quickly and cost-effectively vacate a site that does not meet our sales expectations. As a result, we seldom operate locations with store level operating losses.
Store Layout. Our opportunistic site selection and "no-frills" approach to presenting merchandise allow us to use a wide variety of space configurations. The size of our stores generally ranges from 5,000 to 12,000 square feet and averages approximately 8,700 square feet. We have designed our stores to be functional, with little emphasis placed upon fixtures and leasehold improvements. We display all merchandise at each store by type and size on racks or counters, and we maintain a minimum inventory in stockrooms.
Store Operations. We operate our stores during periodic "sales events," each of which lasts from three to five weeks. We are closed predominantly for the months of January and July, which are traditionally weak months for retailers. We also close during the intervals between sales events to stock merchandise for the next event. We have recently increased the frequency of shipments of new merchandise during a sales event, which has resulted in improved efficiency of merchandise receiving and restocking activities at our stores.
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 company guidelines and established procedures. Store managers are full-time employees. When sales events are not in progress, these employees review store inventory and supervise restocking activities in preparation for the next sales event. We employ temporary employees at each Tuesday Morning store to serve as cashiers and to assist in stocking during sales events. These temporary employees generally return to work in subsequent sales events, reducing the need for new hiring prior to each sales event. Typically, we employ more temporary employees during the first few days of a sales event, when customer traffic is highest.
Members of our management visit selected stores while sales are in progress to review inventory levels and presentation, personnel performance, expense controls, security and adherence to company procedures. In addition, regional managers periodically meet with management to review store policies and to discuss purchasing, merchandising and advertising strategies for future sales events.
Store Locations. We currently operate 526 stores in 43 states as of March 2003. Specific store locations can be accessed through our web site www.tuesdaymorning.com.
Distribution
An important aspect of our success involves our ability to sort and distribute inventory quickly and efficiently. All of our merchandise is ordered, received, inspected, counted, priced, ticketed and designated for individual stores at our central distribution center in the Dallas, Texas metropolitan area. As a general rule, we carry similar products in each of our stores, but the amount of inventory each store is allocated varies depending upon size, location and sales projections for that store. Consistent with our sales event strategy, we ship most of our merchandise to our stores within a few weeks of its arrival at our distribution center. We generally do not replenish existing merchandise during a sales event.
In 2001, we improved our automation systems, reconfigured and expanded our distribution equipment and facilities and installed truck loading equipment in order to increase our processing, sorting and shipping capacity and provide growth capacity for the next several years. We have also cut the time merchandise remains in our distribution center from several months to just a few weeks and have increased store deliveries from 14 to 28 times per year, all of which has allowed us to significantly reduce the amount of inventory stored at our distribution center and maintain more consistent in-store inventory levels. The increased number of shipments also allows our stores to process shipments more
7
effectively and restock their shelves with new merchandise during sales events. In 2002, we continued these initiatives and purchased a previously leased distribution building and expanded it in order to reduce our handling costs.
We use a bar-coded location system to track inventory from the time it is received until it is shipped to our stores. This system allows us to locate, price, sort and ship merchandise efficiently from our central distribution center.
We use common and contract carriers to distribute merchandise to our stores.
Management Information Systems
We have invested significant resources in computers, bar code scanners and radio frequency terminals, software programming and related equipment, technology and training, and we will continue to update these systems as necessary. We maintain a corporate local area network computer system, which integrates purchase orders, imports, transportation, distribution, point of sale and financial systems and enables us to efficiently control and process our inventory.
At the store level, we have IBM computer-based registers that capture daily sales data at the SKU level. Sales information, inventory information, open to buy, and other operational data is distributed daily to all levels of management and to the individuals or groups that have responsibility for specific segments of the business.
Competition
We believe the principal factors by which we compete are price and product offering. We believe we compete effectively by pricing the merchandise we sell at 50% to 80% below department and specialty store prices and by offering a broad assortment of high-end, first quality, brand name merchandise. We currently compete against a diverse group of retailers, including department and discount stores and specialty and catalog retailers, which sell, among other products, home furnishing 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 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.
We are distinguishable from our competitors in several other respects. Unlike our competitors, which primarily offer continuing lines of merchandise, we offer changing lines of merchandise depending on availability at suitable prices. Most retailers in the closeout retailing industry are either general merchandisers or focus on apparel, while our focus is on upscale home furnishings and related items. In addition, most closeout retailers focus on lower and middle-income consumers, while we generally cater to middle and upper-income customers. Finally, unlike other closeout retailers, which operate on a year-round basis, we operate on a sales event basis. We believe that our periodic schedule of openings and closings creates a sense of urgency and excitement on the part of our customers because they know that the availability of merchandise during a sales event is limited.
Employees
At February 28, 2003, we employed 1,734 persons on a full-time basis and 5,797 individuals on a part-time basis. Our employees are not represented by any union. We have not experienced any work stoppage due to labor disagreements and we believe that our employee relations are good.
Trademarks and Tradenames
We have registered the name "Tuesday Morning" as a service mark with the United States Patent and Trademark office.
8
Corporate Information
Tuesday Morning Corporation is a Delaware corporation incorporated in 1991. Our principal executive offices are located at 14621 Inwood Road, Addison, Texas 75001, and our telephone number is (972) 387-3562. Our SEC filings can be accessed, free of charge, through our web site, www.tuesdaymorning.com. We post our SEC filings as soon as reasonably possible through our web site, www.tuesdaymorning.com, in Investor Relations.
Risk Factors
The value of our business is subject to the significant risks inherent in our business. You should carefully consider the risks and uncertainties described below and the other information in this Form 10-K. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also affect our business operations. 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. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose all or part of your investment.
Risks Related to Our Business
We face a number of risks in opening new stores.
As part of our growth strategy, we intend to continue to increase our total number of stores. To do so successfully, we must open stores in new and existing markets and operate these stores on a profitable basis. We increased our store base by 49 in 2000, 38 in 2001, and 46 in 2002 and currently plan to increase our square footage by approximately 10% in 2003. We cannot assure you that we will be able to achieve our expansion goals or that we will be able to operate our new stores profitably. Further, we cannot assure you that any new store will obtain similar operating results to those of our existing stores or that new stores opened in markets in which we operate will not have a material adverse effect on the revenues and profitability of our existing stores. The success of our planned expansion will be dependent upon numerous factors, many of which are beyond our control, including the following:
We opened our first stores in the Daytona Beach, Florida and Modesto, California markets during 2002 and intend to enter into additional new markets in 2003 and beyond. These markets may have
9
different competitive conditions, consumer trends and discretionary spending patterns than our existing markets, which may cause our new stores in these markets to be less successful than stores in our existing markets.
Poor economic conditions affect consumer spending and may significantly harm our business.
The success of our business depends to a significant extent upon the level of consumer spending. A number of factors affect the level of consumer spending on merchandise that we offer, including, among other things:
The merchandise we sell generally consists of discretionary items. Reduced consumer confidence and spending may result in reduced demand for our 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 discretionary items could have a material adverse effect on our business, results of operations and financial condition.
Our business and results of operations are subject to a broad range of uncertainties arising out of world events.
Our business and results of operations are subject to uncertainties arising out of world events. These uncertainties may include the potential worsening or extension of the current global economic slowdown, changes in consumer spending or travel and the economic consequences of military action or additional terrorist activities. We sell luggage and other travel related merchandise, and we experienced a decrease in sales of these products as airline travel decreased following the terrorist attacks of 9/11/2001. The terrorist attacks had an adverse impact upon our results of operations during the fourth quarter of 2001 and any future events arising as a result of terrorist activity or other world events may have a material impact on our business, results of operations and financial condition in the future.
Our business is intensely competitive and increased or new competition could have a material adverse effect on us.
The retail home furnishings industry is intensely competitive. As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, which sell, among other products, home furnishing 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 products that we sell. Many of these competitors have substantially greater financial resources that may allow them 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 and financial condition, including:
10
We cannot assure you that we will be able to continue to compete successfully with our existing or with new competitors, or that prolonged periods of deep discount pricing by our competitors will not materially harm our business.
We must continuously attract buying opportunities for closeout merchandise and anticipate consumer demand as closeout merchandise becomes available.
By its nature, specific closeout 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 are often for large quantities. Although we have many sources of merchandise and do not foresee any shortages of closeout merchandise in the near future, we cannot assure you that manufacturers or vendors will continue to make closeout merchandise available to us in quantities or on terms acceptable to us 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 significantly overstock unpopular products and be forced to take significant markdowns and miss opportunities to sell more popular products. Our inability to acquire suitable merchandise in the future or to accurately anticipate consumer demand for such merchandise would have a material adverse effect on our business, results of operations and financial condition.
The loss of, or disruption in, our centralized distribution center would have a material adverse effect on our business and operations.
All of our inventory is shipped directly from suppliers to our centralized distribution center in the Dallas, Texas metropolitan area, where the inventory is then processed, sorted and shipped 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 the distribution center. Although we believe that our receiving and distribution process is efficient and well positioned to support our expansion plans, we cannot assure you that we have anticipated all of the changing demands which our expanding operations will impose on our receiving and distribution system or that events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, will not result in delays in the delivery of merchandise to our stores.
Although we maintain business interruption and property insurance, we cannot assure you that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event our distribution center is shut down for any reason or if we incur higher costs and longer lead times in connection with a disruption at our distribution center.
The loss or departure of one or more members of our senior 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, particularly Kathleen Mason, our Chief Executive Officer, and our other key employees, including our buyers. The loss of service of these persons could have a material adverse effect on our
11
business and future prospects. We do not maintain key person life insurance for Ms. Mason or our other senior management.
We are dependent on external funding sources, which may not make available to us sufficient funds when we need them.
We, like other retailers, rely significantly on external funding sources to finance our operations and growth. We currently believe that our cash flow from operations and funds available under our revolving credit facility will satisfy our capital requirements for at least the next 12 months. Our ability to obtain additional debt is dependent upon our future operating performance, general economic and competitive conditions and financial, business and other factors, many of which we cannot control.
An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.
We purchase imported products to sell in our stores. Merchandise imported directly and indirectly from overseas manufacturers accounts for a large proportion of our total purchases. A disruption in the shipping of our 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:
The products we buy abroad are often priced in foreign currencies and, therefore, we are affected by fluctuating exchange rates. In the past, we have entered into foreign currency exchange contracts with major financial institutions to hedge these fluctuations. 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. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk" for more information about our foreign currency exchange rate exposure and hedging activities.
Risks Related to Our Common Stock
Our results of operations are subject to seasonal and quarterly fluctuations, which could have a material adverse effect on the market price of our common stock.
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated during the fourth quarter, which includes the holiday shopping season (see "Quarterly Results and Seasonality" in Management Discussion and Analysis). Net sales in the fourth
12
quarters of 2000, 2001 and 2002 accounted for 37.9% and 39.8% and 38.4%, respectively, of annual net sales for such years. Operating income for the fourth quarters of 2000, 2001 and 2002 accounted for 44.1%, 66.7% and 62.2%, respectively, of annual operating income for such years. Because a significant percentage of our net sales and operating income are generated in the fourth quarter, we have limited ability to compensate for shortfalls in fourth quarter sales or earnings by changes in our operations or strategies in other quarters. A significant shortfall in results for the fourth quarter of any year will have a material adverse effect on our annual results of operations. Our quarterly results of operations also may fluctuate significantly based on such factors as:
A failure to grow or maintain our comparable store sales may adversely affect our stock price and impact our results of operations.
A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:
Our comparable store sales results have fluctuated in the past, and we believe such fluctuations may continue. Our comparable store sales increased 8.8% in 2000, declined 0.3% in 2001 and increased 4.3% in 2002. The unpredictability of our comparable store sales may cause our revenue and results of operations to vary from quarter to quarter, and an unanticipated decline in revenues or operating income may cause our stock price to fluctuate significantly. A failure to grow or maintain our comparable store sales results could cause the price of our common stock to decrease significantly and could have a material adverse effect on our results of operations.
Our largest stockholder controls us, which substantially limits the rights of other stockholders.
Madison Dearborn owns a majority of our shares of voting stock and, accordingly, has the power to elect all of our directors and approve any action requiring the approval of our stockholders, including the adoption of amendments to our certificate of incorporation and the approval of mergers or sales of substantially all of our assets. The interests of Madison Dearborn may conflict with the interests of other holders of our common stock.
13
Future sales of our common stock on the public market could depress our stock price.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Such sales might make it more difficult for us to sell equity or equity-related securities in the future. Madison Dearborn beneficially owns 21,363,526 shares of common stock, or approximately 53% of outstanding shares. Madison Dearborn has advised us that it expects to continue to reduce its ownership interest in our company over time, subject to prevailing market conditions. We have granted Madison Dearborn certain rights with respect to the registration of shares of our common stock held by it, including the right to require that we register the sale of all or part of the shares it holds.
Provisions of our certificate of incorporation could discourage potential acquisition proposals and could deter or prevent a change in control.
Our certificate of incorporation authorizes our board of directors, subject to any limitations prescribed by law, to issue shares of preferred stock in one or more series without stockholder approval. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of our outstanding common stock.
Stores. We lease all of our stores from unaffiliated third parties, except that we own one store located adjacent to our distribution facility. At December 31, 2002, the remaining terms of our store leases ranged from three months to approximately ten years. The average initial term of a store lease is approximately five years. We intend to lease all of our new stores from unaffiliated third parties. See also "Business—Stores and Store Operations" above.
Distribution Facilities and Corporate Headquarters. We own approximately 1,431,000 square feet of building space in the Dallas, Texas metropolitan area. This space includes a 79,000 square foot building acquired in September 2002 for approximately $4 million, which will house our corporate offices. The distribution space includes 282,000 square feet that we acquired in January 2002 for approximately $11 million and expanded during 2002. This space houses our distribution center and one store. We also lease an additional 281,000 square feet of warehouse space near the distribution center. The leases related to this warehouse space expire in October 2003. We believe our current distribution facilities are adequate to meet our requirements for the next several years. We, however, will need to acquire or lease additional warehouse space in approximately four to five years to accommodate our distribution requirements as our store base grows.
We are not aware of any legal proceedings pending or threatened against us that we expect would have a material adverse effect on our financial condition or results of operations.
During 2000 and 2001, Tuesday Morning was named as a defendant in three complaints filed in the Superior Court of the State of California in and for the County of Los Angeles. The plaintiffs are seeking to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs are also seeking attorney's fees and costs. We intend to vigorously defend these actions. We do not believe this or any other legal proceedings pending or threatened against us would have a material adverse effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the quarter ended December 31, 2002.
14
Item 5. Market Price of Registrant's Common Stock and Related Shareholder Matters
Our common stock has traded on the NASDAQ National Market since our initial public offering on April 22, 1999, under the symbol "TUES." The following table sets forth for the periods indicated the high and low sales prices per share as reported on the NASDAQ National Market.
| |
High |
Low |
|||||
|---|---|---|---|---|---|---|---|
| Year Ended December 31, 2000 | |||||||
| First quarter | $ | 18.22 | $ | 9.63 | |||
| Second quarter | $ | 15.13 | $ | 7.88 | |||
| Third quarter | $ | 15.00 | $ | 7.06 | |||
| Fourth quarter | $ | 7.94 | $ | 3.50 | |||
| Year Ended December 31, 2001 | |||||||
| First quarter | $ | 10.31 | $ | 5.06 | |||
| Second quarter | $ | 14.36 | $ | 9.06 | |||
| Third quarter | $ | 14.18 | $ | 8.76 | |||
| Fourth quarter | $ | 20.80 | $ | 8.55 | |||
| Year Ended December 31, 2002 | |||||||
| First quarter | $ | 22.87 | $ | 13.60 | |||
| Second quarter | $ | 28.88 | $ | 17.56 | |||
| Third quarter | $ | 19.43 | $ | 13.61 | |||
| Fourth quarter | $ | 21.40 | $ | 15.19 | |||
| Year Ended December 31, 2003 | |||||||
| First quarter (through February 28, 2003) | $ | 19.45 | $ | 15.10 | |||
On February 28, 2003, the last reported sale price for our common stock on the NASDAQ National Market was $17.21 per share. As of March 3, 2003, there were 18 holders of record and an estimated 4,500 beneficial owners of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all earnings for the operation and expansion of our business and do not anticipate paying any dividends on our common stock at the present time. In addition, our senior credit facility prohibits the payment of dividends and the indenture governing our senior subordinated notes limits the payment of dividends.
Equity Compensation Plan Information
(in thousands)
| Plan Category |
Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (in thousands) (a) |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a) (c) |
||||
|---|---|---|---|---|---|---|---|
| Equity Compensation Plans Approved by Security Holders | 2,304 | $ | 11.47 | 667 | |||
| Equity Compensation Plans Not Approved by Security Holders | N/A | N/A | N/A | ||||
15
Item 6. Selected Consolidated Financial and Operating Data
The following table sets forth the selected consolidated financial and operating data for, and as of the end of, each of the five years ended December 31, 2002. The statement of operations data for the years ended December 31, 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 are derived from our audited consolidated financial statements that appear herein. The statement of operations data for the years ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 are derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this Form 10-K.
| |
Year Ended December 31, |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1998 |
1999 |
2000 |
2001 |
2002 |
||||||||||||
| |
(In thousands, except per share and operating data) |
||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||
| Net sales | $ | 396,095 | $ | 488,866 | $ | 586,867 | $ | 642,398 | $ | 728,846 | |||||||
| Cost of sales | 257,037 | 312,106 | 389,967 | 421,703 | 461,317 | ||||||||||||
| Gross profit | 139,058 | 176,760 | 196,900 | 220,695 | 267,529 | ||||||||||||
| Selling, general and administrative expenses | 94,972 | 111,173 | 134,063 | 152,119 | 181,810 | ||||||||||||
| Operating income | 44,086 | 65,587 | 62,837 | 68,576 | 85,719 | ||||||||||||
| Net interest and other income (expense) | (22,726 | ) | (20,164 | ) | (23,537 | ) | (18,505 | ) | (13,783 | ) | |||||||
| Income before income taxes and extraordinary item | 21,360 | 45,423 | 39,300 | 50,071 | 71,936 | ||||||||||||
| Income tax expense | 8,208 | 17,164 | 14,733 | 19,127 | 27,855 | ||||||||||||
| Income before extraordinary item | 13,152 | 28,259 | 24,567 | 30,944 | 44,081 | ||||||||||||
| Extraordinary item related to debt extinguishment net of tax | — | (3,048 | ) | — | — | — | |||||||||||
| Income before preferred dividends | 13,152 | 25,211 | 24,567 | 30,944 | 44,081 | ||||||||||||
| Preferred dividends | (10,966 | ) | — | — | — | — | |||||||||||
| Net income available to common shareholders | $ | 2,186 | $ | 25,211 | $ | 24,567 | $ | 30,944 | $ | 44,081 | |||||||
| Earnings per share: | |||||||||||||||||
| Basic | $ | 0.08 | $ | 0.49 | $ | 0.63 | $ | 0.78 | $ | 1.10 | |||||||
| Diluted | 0.08 | 0.46 | 0.61 | 0.76 | 1.07 | ||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||
| Basic | 26,369 | 34,958 | 39,278 | 39,673 | 40,037 | ||||||||||||
| Diluted | 27,825 | 36,750 | 40,492 | 40,730 | 41,238 | ||||||||||||
| Operating Data: | |||||||||||||||||
| Number of stores: | |||||||||||||||||
| Beginning of period | 315 | 347 | 382 | 431 | 469 | ||||||||||||
| Opened during period | 35 | 44 | 54 | 43 | 56 | ||||||||||||
| Closed during period | (3 | ) | (9 | ) | (5 | ) | (5 | ) | (10 | ) | |||||||
| Open at end of period | 347 | 382 | 431 | 469 | 515 | ||||||||||||
| Comparable store sales increase (decrease)(1) | 12.1 | % | 13.3 | % | 8.8 | % | (0.3 | )% | 4.3 | % | |||||||
| Average sales per store(2) | $ | 1,171,000 | $ | 1,319,000 | $ | 1,416,000 | $ | 1,402,000 | $ | 1,456,000 | |||||||
Inventory turnover(3) |
2.01 |
2.09 |
1.97 |
2.43 |
3.02 |
||||||||||||
16
| |
As of December 31, |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1998 |
1999 |
2000 |
2001 |
2002 |
||||||||||
| |
(In thousands) |
||||||||||||||
| Balance Sheet Data: | |||||||||||||||
| Working capital | $ | 70,507 | $ | 89,504 | $ | 113,772 | $ | 90,772 | $ | 75,195 | |||||
| Inventories | 96,743 | 141,534 | 174,813 | 127,843 | 134,947 | ||||||||||
| Total assets | 155,319 | 203,716 | 243,147 | 259,007 | 245,294 | ||||||||||
| Total debt, including current portion | 205,197 | 175,792 | 187,025 | 166,205 | 73,224 | ||||||||||
| Senior exchangeable redeemable preferred stock | 28,231 | — | — | — | — | ||||||||||
| Junior redeemable preferred stock | 85,998 | — | — | — | — | ||||||||||
| Junior perpetual preferred stock | 1,930 | — | — | — | — | ||||||||||
| Total shareholders' equity (deficit) | (217,623 | ) | (35,948 | ) | (11,157 | ) | 20,054 | 69,175 | |||||||
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 "Selected Consolidated Financial and Operating Data" and our consolidated financial statements and related notes included elsewhere in this Form 10-K.
Overview
We are a leading closeout retailer of upscale home