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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to Tuesday Morning Third Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host, Jennifer Robinson, Chief Financial Officer at Tuesday Morning. Over to you.
Good morning. I would like to welcome you to the Tuesday Morning’s third quarter fiscal 2022 earnings call. Joining me on the call today is Fred Hand, our Chief Executive Officer and Marc Katz, our Chief Operating Officer.
Before we begin today's prepared remarks, I would like to remind you that some of the information presented may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information regarding the company's risk factors was included in our press release and in our Form 10-K and other SEC filings. Any forward-looking statements made during this call speaks only as of the date of this call.
Today's presentation will also include certain non-GAAP financial measures, including EBITDA and adjusted EBITDA. A reconciliation of the non-GAAP financial measures used in this presentation to the most directly comparable GAAP financial measures may be found in the Investor Relations section of the Tuesday Morning website @tuesdaymorning.com.
I will now turn the call over to Fred.
Thank you, Jennifer. Good morning, everyone. And thank you for joining us for our third quarter fiscal 2022 conference goal. I will begin my remarks this morning by highlighting our recent debt transaction and then providing an update on our progress on three key strategic initiatives since our last conference call. Next, I will provide a brief review on third quarter sales, which we noted in the release were negatively impacted by macro headwinds in March. And then finish with an update on our store experience before turning it over to Jennifer, who will discuss our financial results and outlook in more detail.
First, I'd like to take a moment to highlight the current business climate and our response. In light of the many macro headwinds, we are very fortunate to have an experienced leadership team who remain vigilant on expense controls while continuing to make progress on our priorities. Moreover, as I will discuss in more detail later, times like these historically has been a positive for off-price. And we haven't experienced off-price buying team to take advantage of the opportunity. With that, I'm pleased to inform you that we completed a debt transaction that resulted in sufficient liquidity to support us, at least through the next 12-months. In addition, based on negotiating favorable financial terms, we reduced our ABL borrowing rate by approximately 100 basis points, reduction of $5 million on our term loan, received forgiveness on accrued interest for that $5 million and extended our ABL at least through September 2024.
Now that we've obtained this additional liquidity, we are laser focused on moving forward on our strategic initiatives. Our first major strategic initiative is our DC network design project. On the last call, we mentioned that we had engaged a third party who specializes in developing supply chain network strategies to help us identify an optimal distribution network. This study includes everything from the location, size, and number of distribution centers, to the design of the building, the pool point strategy to support our entire network and evaluation of startup and ongoing costs for each scenario. They are evaluating one and two distribution center networks to determine which would be the best option to support both the growth and storage assumptions through 2028.
This work incorporates minimizing labor, and inbound and outbound transportation costs, as well as maximizing speed to store. The initial findings indicate that a two DC network with a West Coast and East Coast presence would eliminate a significant amount of redundant miles created with a one DC network. This transportation savings coupled with efficiency savings, based on DC’s built for the off-price model, are suggesting an attractive internal rate of return on the investment. Obviously, this is a multiyear initiative that would be accomplished in phases. We expect to be operating our Dallas DC at least through June of 2024. We have more work to do to finalize this analysis, but are very encouraged by the initial findings. The second major strategic initiatives is the thorough review of our real estate footprint. As we mentioned, on the last call, we engaged another third party that focuses on using a comprehensive analytical approach to evaluate store locations.
This database insight is intended to ensure that we make the right decisions in either extending existing leases, or identifying better real estate within the market for every location. This review also provided a seed point strategy for new store growth. Identifying those locations across the country that provide the best demographics for a successful Tuesday Morning location. We are excited to announce that our data driven seed point strategy now indicates that Tuesday Morning, over the long term can grow to approximately 700 store locations within the United States. In addition, we have partnered with three master real estate brokers to assist us in building and executing our overall real estate strategy. With one based in the East, one in Central and one in the West Coast. We will utilize their large networks of local brokers to identify market opportunities and help negotiate 174 fiscal year 2023 lease expirations, which includes relocation opportunities, in addition to our new stores. As I mentioned on the last call, our new stores going forward will be approximately 10,000 gross square feet. Finally, our third strategic initiative is related to our information system and infrastructure. During the quarter, we completed a system enhancement that aligned our merchandising and financial calendars. I cannot tell you how important it is for our entire company to be looking at the business in the exact same way. This require touching virtually all of our systems and making some type of change. This successful implementation gives us confidence in our abilities to continue to address our existing systems and infrastructure, which we believe can create efficiencies to simplify the business, reduce manual work and improve our decision making processes.
With respect to sales during the third quarter, we were running in line with our expectations through February while our third quarter comp guide contemplated the Easter shift and prior year stimulus payments, it did not incorporate the disruption in Europe, an incremental impact on inflation, notably gas prices. March was a very difficult month, which negatively impacted our quarterly comp significantly. The 0.6 comp increase was driven entirely by our merchandising strategy focused on driving higher average unit retail categories. In terms of inventory availability, in the last 30 days, we have seen an incredible amount of availability. And the product we've been offered is priced as aggressively as we have seen in the last two years. In addition, the oversupply of inventory is allowing us to open up new vendors which is also very important as it contributes to us having broader assortments. Long story short, the current environment is conducive to off-price buying.
Turning next to our stores. The stores have continued to make great progress on improving execution and simplifying the shopping experience. As I mentioned last quarter, we recently rolled out a new customer survey program. We received feedback from over 20,000 customers during the third quarter. And our overall satisfaction score was 900 basis points higher than the retail average. Our store teams far exceeded retail benchmarks in the areas of friendliness and helpfulness. We look forward to using this feedback tool to assist our store teams on improving the customer experience. And finally, I am very pleased to announce that on April 30, we kicked off a month long campaign to collect funds in each of our stores and online to support the efforts of the American Heart Association. This is the first ever national charitable effort we've conducted at Tuesday Morning. One in three women are diagnosed with heart disease, and it is the top cause of death for both men and women. Our teams are incredibly excited to have this opportunity to support an organization that can help so many.
I would now like to turn it over to Jennifer to discuss our financial results. Jennifer?
Thank you, Fred. And good morning, everyone. I will begin by discussing our third quarter financial results. And we'll focus on year-over-year comparisons as we have now anniversary the elimination of promotional events, as well as the actions the company took related to a three organization under Chapter 11 and the impact related to COVID-19. In addition, our shift toward a more typical retail calendar, driven by weeks, starting on Sunday and ending on Saturday resulted in us revising comparable store sales for both this year and last year to ensure consistency. We delivered net sales of $159.6 million compared to $153.3 million in the third quarter of fiscal 2021. The third quarter of fiscal 2022 included two additional days when compared to Q33 of fiscal 2021 due to the fiscal calendar change. During the quarter, two stores were closed, and we ended the quarter with 490 stores, which was comparable to the end of the third quarter of fiscal 2021. Compared to Q3 of 2021, we delivered comp store sales growth of 0.6% in Q3 of fiscal 2022. As Fred noted, the comp increase was entirely driven by the increase in AUR and was materially impacted by the slowdown we experienced in March. Obviously, our comp store sales calculation is based on the same number of days for both this year and last year. Gross margin was $38.9 million, compared to $48.2 million for the third quarter of fiscal 2021. Gross margin rate in the third quarter of fiscal 2022 declined to 24.4% compared to 31.4% in the third quarter of fiscal 2021.
We estimate that our gross margin was negatively impacted by the recognition of capitalized supply chain and freight cost of approximately 390 basis points, or $6 million driven by the elevated costs encountered earlier this year. Moving to SG&A, SG&A was $55.6 million in Q3 of fiscal 2022 compared to $59.2 million in the same period of fiscal 2021. As a percentage of net sales, SG&A decreased to 34.8% from 38.6% in the same period of fiscal 2021, driven by leveraging store occupancy cost. Our operating loss was $16.4 million, compared to a loss of $12 million in Q3 of fiscal 2021. Our net loss was $18.2 million, or $0.21 per share for Q3 of fiscal 2022. That's compared to net loss of $37.1 million or $0.55 per share for the third quarter of fiscal 2021. Adjusted EBITDA, a non-GAAP measure was a loss of $11.9 million for the third quarter of fiscal 2022 compared to a loss of $6.9 million for the same period of fiscal 2021.
As we look at the first nine months of fiscal 2022, adjusted EBITDA was negative $8.2 million, compared to negative $12.1 million in the first nine months of fiscal 2021.
Turning now to the balance sheet, we ended the quarter with an inventory position of $176.6 million, an increase of 29% compared to Q3 2021. We had planned inventory up year-over-year. However, it ended higher than our plan due to the incremental deceleration in top line performance, beginning in March, as well as earlier than expected timing of receipt. Given that the majority of our buys are made in season, we have been able to quickly adjust our Q4 receipt flow. In addition, we will be taking above planned markdowns in Q4 as we aim to exit the fiscal year with a clean inventory position so that we can take advantage of the tremendous supply of merchandise available in the marketplace.
Total liquidity as of the end of Q3 was $35 million, including $26.6 million of availability in our post emergence ABL facility. As fiscal quarter end, we had $54.1 million in borrowings outstanding and our line of credit compared to zero borrowings at the end of Q3, 2021. As Fred discussed, we successfully completed a debt transaction, which will provide us with sufficient capacity to cover our obligations and meet our plans for at least the next 12-months.
With respect to our outlook, given the continued macro headwinds, we now expect fourth quarter comparable sales to decline by 3% to 5%. Given this lower Q4 guidance, coupled with our lower than expected Q3 sales, as well as the incremental Q4 markdowns, we now expect a full year adjusted EBITDA loss to be between $26 million and $29 million.
I will now turn the call back over to Fred for some concluding remarks. Fred?
Thank you, Jennifer. You all very aware of the many macro issues all retailers are facing ranging from decade high inflation rates to continued disruptions in Europe, to COVID lockdowns in China. In the short term, while we don't know exactly how this will impact the consumer, we do know the importance of delivering value, and that any type of dislocation or economic downturn can be very beneficial for the off-price model. This is a time when inventory availability becomes abundant, which we have started to see over the last 30 days. Fortunately, we have an experienced off-price buying organization. And they've all been through this before. In the long term, I shared the progress we're making with our DC network study, and are very encouraged by the initial findings. Moreover, we now have comprehensive data behind our ability to grow to a 700 store location retailer. I remain encouraged by both the short term and long-term opportunities at Tuesday Morning, and I'm excited to continue on our transformation to become a world class off- price retailer.
In closing, I want to thank the entire Tuesday Morning team for the dedication and execution during the third quarter. The team is working with a sense of urgency on executing our initiatives. In addition, I would like to thank the vendor community for their continued partnership and support. We will now open the call up for questions.
[Operator Instructions]
Our first question comes from Hamed Khorsand with BWS Financial.
Good morning. Could you first talk about a little bit more detail about what happened in March? Was it related to merchandise? Or is the consumer just completely retracting from spending? And how has that transcended into what you're seeing now? We're now in May, two months later.
Good morning, Hamed. Thank you for the question. As I mentioned in the prepared remarks, our comp sales through February, were in line with our expectations. And in March, what we had expected, we were going to have the lapping of the stimulus. We had expected, obviously, the Easter shift. But we have not expected the disruption that happened in Ukraine, the war and then the inflationary issues. And I will tell you that a lot of that, I think was external factors, the traffic really slowed down in our stores, starting back in week two of March. And that's the reason why we had such a tough month in the month of March.
As far as the quarter that we're in, I will tell you that business has gotten better. And we're tracking towards the favorable side of our guidance, which is good to see. And we're very focused on making sure that we're doing everything we can within our control. So the ones that customer comes into our buildings are still able to find great product, great value and great presentation and friendly store. So we're managing the business as best as we can. And as far as the product is concerned, as Jennifer talked about, we'll also try to address some of the product categories, the age product that we have based on the slowdown in sales. But I wouldn't say that that was the reason why the business was tough. I would say majority of it was macro issues.
The positive sales that you're seeing now in the quarter, I would say positive in a matter you're speaking is that because you're doing more promotions? Or is that because the consumer is just coming back to the stores?
No, as I said, we're trending towards the favorable side of our guidance. But there's no promotions whatsoever. And remember that we anniversaries all of our promotional events last December, so we have no promotions at all. That's basically anti off-price models. So I will tell you that what we're seeing is ever so much increased traffic versus what we had in March. And I think, again, we're focused on value, we're focused on making sure that we offer the best product that we can, and maintaining the value gap versus our competition. That's really our focus. And that I would tell you that people are just coming back to Tuesday Morning because of the value offer that we have. And I think I would tell you, our customer service in the stores has really improved. Our team has done a very nice job of focusing on the service aspects. If you recall, my comments in the past have been to try to simplify the store experience for both for our associates and our customers.
And I think that's resonating with our customer. I think our customer sees that they can find the product that they're looking for. They don't have to fight through a lot of goods. All of those things is culminating in what we're seeing, hopefully as we transition out of March and April into the rest of the fourth quarter.
Just to piggyback on that, Hamed, this this is Marc. And as you think about the quarter that we're in now, numbers as you get through with April we too then you had last, you've been through the Easter shift. And you've also getting well past the big March stimulus payment that happened. So that was -- what was happening in stimulus is far less than it was, back in the prior March. So you're through those things. And when we talk about taking above playing markdowns, these are permanent markdowns we're taking, this is not a POS event. These are permanent markdowns, we're taking on the goods that every off-price retailer does eventually clear them out. And that's what we're starting to do. And that's what we're talking about. So this is not a POS event, we're buying goods specifically for like a green card that was done in the past. Again, permanent markdowns to clearing goods.
Got it, that's helpful. And then as far as the credit facility is concerned, could just provide a little bit more color on that and what your intentions are with the increase in working capital over the next 12-months.
Sure, absolutely, Hamed. Good morning. So as Fred mentioned, we are very happy to announce that we were able to replace our existing ABL with a new ABL and FILO facility. The benefits of the new debt include the borrowing rate improvement of approximately 100 basis points, as well as extending the maturity of that facility. Our prior ABL matured in December 2023. This new facility has a maturity currently as of September 2024. However, there is a springing maturity to make 2027 once the term loan is addressed. And then as Fred also mentioned, we were able to around $5 million of our term loan facility and had approximately $1 million of interest expense forgiven. The $10 million FILO has an approximate interest rate of 7% compared to the 14% that the term loan facility has. So despite technically having about $5 million more in total debt. Due to the favorable interest rates, we do expect to see a slightly lower interest expense under the new revised facilities. We anticipate that incremental liquidity generated from this transaction is approximately $7 million vary slightly by month and eligible assets. But it's roughly $7 million. And that excludes the FILO committed accordion of $5 million. That's available after November of this year.
And then lastly, the transaction also included a financial covenant with a net leverage ratio that we will begin to measure in September 2023. Given that our current term loan matures in December of ‘24, we expect to look for alternatives about 15 months prior to that. So that would ensure that we have a solution on the term loan by December 2023, in order to prevent the term loan from becoming current on our balance sheet. So long story short, we view the timing of that covenant to be commensurate with our need to replace the term loan in normal practice.
Okay, and then, Fred, it's approaching about a year, since you've joined. Obviously, the stock is telling it's been a very difficult year, have you been able to achieve what you want doing this year other than what the stock has done?
Yes, it's have really been an interesting year, let me put it that way. But we've definitely made headway in progress on the initiatives that we put forth, internally within the four walls of a company. We're making progress as I made in my prepared remarks on our DC study, we have a good roadmap, as we have finalizing our study when it comes to our stores, and we're making progress and I will tell you that the calendar change for us was a huge win. Because it really gives us confidence that we're able to make the progress that we need to make and the improvements on our systems and infrastructure. And I will most importantly tell you that I feel great about our team. The team that we put together is very well versed in off-price, not just the senior leadership team but our merchandising team. And this is a great opportunity for our price retailers any disruption of any kind be as weather issues or global issues or supply chain, it just creates opportunity for off-price and we're very excited to be able to pounce on those opportunities as we go forward. So my response to you in a long winded way would be, yes, I feel good about the progress we've made. I'm very energized and motivated about short term and long-term progress. And our mode of operation, frankly is we can't control the macro issues and the external issues. We're laser focused on what we can execute within the four walls of our company, and our team is very much motivated to get that done.
Okay, and then as far as the inventory is concerned, your comments about holding off purchases in June quarter? Is that going to -- how are you going to realign that balance? Is it -- are you going to hold the same kind of inventory as you go into the holiday season, are you going to increase it and what's the mix going to be like, as far as the product is concerned and merchandise?
Yes, just to be clear on that, again, this is Marc, when we talk about reducing receipts, we're talking our store inventory levels. So we obviously, Q3 was bumpy. And we expect Q4 to be bumpy. And as a result of that we've lowered our sales, as we've talked about, when you lower your sales, you lower your receipts. So our store inventories are going to be lower doesn't necessarily mean our total inventories will be lower, because there's a lot of available merchandise available in the market. So we don't want to do is just send goods to the store because we can, we want that to match the traffic levels we expect to see in the stores. So it's the store inventories that will be down. But again, based on merchandise available in the market, this is why we have DC reserve locations. This is one of the beauties of the off-price model is a highly desirable brand at a great value, or a highly desirable trend at a great value is never a bad buy. So to the extent those are out there, we'll take advantage and that's why we have DC reserve locations.
Thank you. This concludes our question and answer session. I'd like to hand the call back to Fred Hand for any closing remarks.
Thank you for joining us for this earnings call. We look forward to speaking to you with our fourth quarter earnings call. Have a great day everyone.
This concludes today's conference. Thank you very much for your participation. You may now disconnect.