Nt4.zacks.com



June 29th, 2005

Analyst: Naveen Sikka

Ian Madsen, MBA, CFA, Editor

1-800-767-3771 ext. 417; imadsen@

155 North Wacker Drive ( Chicago, IL 60606

Tuesday Morning (TUES-NSDQ) $31.59

Overview

Tuesday Morning Corporation operates as a closeout retailer of upscale home furnishings, gifts, and related items in the United States. The company’s 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. As of May 18, 2005, it operated 673 stores in 43 states. The company was incorporated in 1991, employs 1800 people, and is headquartered in Dallas, Texas. For more information about the Company, visit its website at .

Analysts have identified the following factors for evaluating investment merits of TUES.

|Key Positive Arguments |Key Negative Arguments |

|Company recently instituted an annual dividend of $0.65/share, the first in |Company faces difficult comps in the Q2’05 |

|its history, as management is confident FCF generation will support the |Home furnishings environment remains challenging |

|payout over the longer-term |Analysts were surprised with management’s conservative guidance (unchanged) |

|Analysts are expecting favorable operating trends in the 2H’05 |for the remainder of 2005 (during the Q1 CC) |

|Company’s versatile business model allows them to react quickly to demand | |

|trends | |

|Company is experienced noted success in garnering youth interest in its | |

|stores (non baby boomers) | |

Analysts are generally positive about the Company’s prospects moving forward. The Company recently instituted an annual dividend (a first in the corporations history), which many attribute to a stronger balance sheet and expectations for accelerated FCF generation going forward. TUES continues its strategy of expanding its store base and improving its infrastructure while reducing inventories to a more manageable level. The Company faces difficult comps in Q2’05 as successful promotions in the year-ago period led to higher sales. Heavy promotion and/or discounting may be needed to offset the negative comps in this year’s Q2. That being said, a majority of analysts expect business trends to pick up in the back half of the year, with long-term prospects remaining solid.

Revenues

Total Net Sales

|Fiscal Year Ends: December |Q1’05A |Q2’05E |Q3’05E |Q4’05E |FY2005E |FY2006E |

|$ in millions | | | | | | |

|Digest High |185.6 |249.7 |225.3 |386.9 |1030.1 |1174.2 |

|Digest Low |185.6 |225.8 |208.0 |378.3 |1002.9 |1118.7 |

|Digest Average |185.6 |231.6 |213.1 |382.7 |1013.0 |1147.5 |

|Digest Average YoY Growth |10.08% |9.90% |14.51% |15.14% |12.83% |13.28% |

The Company recently reported Q1’05 sales of $185.6MM on a same-store sales decrease of 0.3% versus last year’s 1.7% increase. The average ticket was flat and traffic improved throughout the quarter but still finished down slightly from last year by about 0.3%. The analysts from (Friedman, Billings) notes that seasonal categories (such as lawn & garden) performed particularly well in the latest quarter, while the broader home furnishing market remained under pressure. The Company faces difficult sales comps in Q2, with most analysts predicting ~3% declines, however, the trend beyond Q2 is expected to turn positive as analysts are forecasting a stronger operating environment in the back half of the year.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

| |FY2004A |FY2005E |FY2006E |

|Gross Margin |38.00% |38.10% |38.38% |

|Operating Margin |11.60% |11.72% |12.33% |

The Company reported Q1’05 gross margins of 39.10%, down 5bps from the year-ago period. Gross margins were under pressure due to lower same-store sales performance in the quarter. The operating margin was down 30 bps to 7.7% in the quarter. Operating expenses increased 230bps to 33.5% of sales in the quarter, which includes a $0.06 charge for the change in lease accounting practices. Excluding the one-time item, SG&A expenses increased by 20bps, the result of higher occupancy costs according to (Friedman, Billings). Analysts are forecasting an up-trend in margins for the remainder of the year, as the Company should benefit from fewer forecasted markdowns, leaner inventory levels, and improved productivity/distribution efficiencies.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings Per Share

|Fiscal Year Ends: December |1Q05A |2Q05E |3Q05E |4Q05E |FY2005E |FY2006E |

|$ in millions | | | | | | |

|Zacks consensus |0.22 | | | | | |

|Digest High EPS |0.22 |0.26 |0.24 |1.11 |1.80 |2.16 |

|Digest Low EPS |0.16 |0.23 |0.21 |1.06 |1.71 |1.98 |

|Digest Average |0.21 |0.25 |0.23 |1.08 |1.77 |2.07 |

|Digest Average YoY Growth |4.6% |3.4% |26.8% |23.0% |26.4% |17.0% |

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Target prices for TUES range from $30 to $36 with an average of $32.86. The most commonly used valuation method is a 15-20X multiple applied to forward EPS estimates. (BB&T, Piper Jaffray) use FY’05 estimates, while (Lehman) uses FY’06 estimates. Of the 11 firms covering the stock, 6 have positive ratings, 4 have neutral ratings, and 1 does not provide a rating.

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Upcoming Events

|COMPANY EVENT |DATE |

|Q2 Earnings Release |First week of August |

|Company Conference Call |First week of August |

Other Discussion/Capital Structure/Cash Flow/Solvency/Governance

The analyst from (JMP Sec.) predicts the Company will generate in excess of $60M in FCF for FY2005, with capital expenditures in the $18M range. Management recently instituted a cash dividend of $0.65/share, which was payable on June 20th, 2005. They intend to issue an annual dividend going forward, funded by working capital and existing revolving debt. Analysts believe the significant FCF potential of the Company over the next several years will more than fund the annual dividend.

Long-Term Growth

Long term growth rates for TUES range from 17% to 20%. Analysts believe TUES is well positioned as a leading closeout retailer. An expanding store base and increased square footage will lead to higher same-store sales numbers, and therefore higher growth. The Company is conducting research to identify customer’s changing trends, and as such is adding more contemporary merchandise. A successful shift in product mix aimed at addressing changing preferences will be critical in achieving targeted growth rates. The Company’s focus will likely continue to be on the baby-boomer generation, however, a younger customer base is showing signs of interest in the Company’s products and traffic is expected to increase going forward for this age demographic. The analyst from (Southwest Sec.) believes a balanced approach of servicing both age groups will benefit the Company in the long run.

Individual Analyst Opinions

POSITIVE RATINGS

BB&T – Buy ($36 price target): 04/21/05 – Analyst notes that TUES remains their top pick in the Better Homes/Home Furnishings retail sector. They feel the Company’s higher unit growth potential and operating margins (relative to the peer group) justify a premium valuation.

D.A. Davidson – Buy ($31 price target): 04/21/05 – Analyst believes the stock may be pressured in the near-term due to difficult Q2’05 comps, however, the 2H’05 looks much more promising for both the Company and the stock.

Jefferies – Buy ($35 price target): 04/21/05 – Analyst believes the stock will trade sideways in the near-term followed by price appreciation in the 2H’05.

JMP Sec. – Market Outperform ($34 price target): 04/21/05 – Analyst continues to find TUES’ valuation attractive, and advises investors to look beyond the difficult Q2.

Piper Jaffray – Outperform ($32 price target): 04/21/05 – Analyst maintains a bullish rating but reduced the price target from $36 due to the application of a lower forward multiple on the shares.

Wachovia – Outperform ($35-$41 price target range): 06/23/05

NEUTRAL RATINGS

Bear Stearns – Peer Perform (no price target given): 04/22/05

Friedman, Billings – Market Perform ($32 price target): 04/21/05 – Analyst believes that despite the expected short-term hiccups in the business, the long-term thesis remains intact.

Lehman – Equal Weight ($30 price target): 04/22/05 – Analyst is cautious on the shares near-term, however, believes valuation is relatively attractive given the Company’s leadership position as a closeout retailer.

Southwest Sec. – Neutral (no price target given): 04/21/05

NO RATINGS

SG Cowen – (no rating or price target given): 04/22/05 – Analyst expects the stock to outperform the market by 15-20% over the next 12 months given the Company’s sector-leading ROIC and conservative FY’05 EPS guidance.

-----------------------

Research Digest

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download