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Operator: 00:02 Greetings, and welcome to Tuesday Morning Q2 Fiscal 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow formal presentation. . As a reminder, this conference is being recorded. 00:29 I'd now like to turn the conference over to your host Jennifer Robinson, Chief Financial Officer at Tuesday Morning. Over to you.

Jennifer Robinson: 00:38 Good morning. I would like to welcome you to the Tuesday Morning’s second 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. 00:56 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. 01:36 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 at tuesdaymorning.com. 02:04 I will now turn the call over to Fred.

Fred Hand: 02:08 Thank you, Jennifer. Good morning, everyone. And thank you for joining us for our second quarter fiscal 2022 conference call. 02:18 As noted in our release this morning, we are pleased with our overall execution and the fact that we were able to achieve positive comparable store sales versus fiscal 2020, despite ending with 26% less store inventory and dean up against 14 promotional events. 02:40 My remarks this morning will focus primarily on the second quarter and the strategic initiatives I discussed on prior calls. I will then turn the call over to Jennifer, who will discuss our financial results and outlook in more detail. 02:59 First, with respect to sales during the the second quarter, our comp sales increase was driven entirely by our merchandising strategy, focused on driving higher average unit retail categories. We began second quarter with store inventories down 42% versus fiscal 2020. By delivering fresh receipts to our stores consistently throughout the quarter, we were able to end the season with store inventories down 26%, which was in line with our plan. 03:34 In addition, the freshness of our inventories was at all-time highs. We measured this based on the percent of our store inventories that were made up of the current month’s receipts. We believe this was a key contributor to our significant improvement in inventory turnover for the quarter. 03:57 Our seasonal merchandise had strong sell through rates, with 91% sold through before taking a markdown. For the first time, we executed a successful gift-giving initiative, which included special products in unique packaging across families of businesses. While we were pleased with our first year results, we have many learnings to be applied for next year. 04:26 While we will not develop the habit of talking about monthly sales performance, much has been said across the retail sector about sales softness starting in December due to the Omicron variant. And continuing into January as we locked last year's stimulus. We were not immune to this as we were operating in line with our plan through November and started to see softness during December week 2. It appeared we were coming out of peak Omicron disruption in January week 2 and then various weather related events occurred. As of now, we are projecting mid-single digit comp sales growth for the third quarter as compared to fiscal 2021. 05:16 Turning next to our stores. The stores have continued to make great progress on improving execution and simplifying the shopping experience. The significant amount of time I spent during the second quarter visiting our stores, I was happy with the inventory levels, product assortment, store presentations and staffing investments that we made during the busiest time of the year. One thing that continued is the dedication and quality of our store associates. It's great to see that our store teams are embracing our transformation. Telling me that they like having less inventories, simplify presentation standards and less interference. We have many associates that have been part of the Tuesday Morning family for a long time and are committed to making their store a great place to shop. 06:19 As I mentioned last quarter, we recently rolled out a new customer survey program. While still early to extrapolate trends, the initial feedback has been positive. And we look forward to receiving more results to provide further insight on ways to continue to improve our shopping experience. 06:42 In addition to our focus on four wall execution, we have begun a thorough review of our real estate footprint. Approximately 30% of our stores have a lease expiration date in the next 12 months. We have engaged a third party that focuses on using a comprehensive analytical approach to evaluate our store locations. This data based insight will help insure we are making the right decisions in either extending existing leases or identifying better real estate within the market for a relocation. This review will also provide a C point strategy for new store growth, identifying those locations across the country that provide the best demographics for a successful Tuesday Morning location. 07:38 Long term, I believe the optimal size for Tuesday Morning is approximately 10,000 square feet, gross square feet. Compared to an average of 12,800 that we operate in today. As the overwhelming majority of our existing store base is profitable, we will not necessarily reduce the size of our existing stores, instead, we will evaluate our existing base as opportunities allow and focus our long term store growth strategy on 10,000 square feet. 08:17 As we think to the future growth opportunities for Tuesday Morning, it is critical that we improve our supply chain. This is the final initiative I will discuss today and the one that will take the most times and expertise to develop and execute. During the second quarter, we engaged a third party who specializes in developing supply chain network strategies to help us identify our optimal distribution network. This study includes everything from location, size and number of distribution centers, to the design of the building, the (ph) strategy to support our entire network and evaluation of startup and ongoing costs for each scenario. 09:04 They're evaluating a 1 and 2 distribution set of network to determine which would be the best option to support both the growth and storage assumptions through 2028. This work will incorporate minimizing labor and inbound and outbound transportation costs, as well as maximizing speed to store. We expect the initial phase of this project will continue through the third quarter, and we look forward to sharing more with you on our next earnings call. 09:39 Now before I turn the call over to Jennifer, I would like to provide an update on the ongoing supply chain dislocation. As we mentioned on the prior call, our initial 2022 plans assumes inbound freight headwinds would begin to improve by the fourth quarter of our fiscal year. As time has passed, given the continued uncertainty we now expect that we will see cost pressures due to the macro supply chain dislocation at least through the 2022 fiscal year. 10:16 As Jennifer will review, we have updated our expectations for the remainder of the year, given the current impact on our P&L from supply chain headwinds, as well as identified cost savings and SG&A, which will partially mitigate the incremental inbound freight costs. This is the reason that we're still guiding full year adjusted EBITDA to be slightly better than last year. 10:44 Despite near term macro headwinds, we also see a lot of opportunity with respect to inventory availability. As we have hoped to see, we've been able to leverage our pack and hold storage location to take advantage of buying opportunities for highly desirable national brands at grade prices. As well as late arriving seasonal inventory to be the least next year. 11:12 We are very confident in inventory availability for the rest of the fiscal year. And we will continue to focus on the off price merchandising model of purchasing flexibility, shallow and broad assortments and improvement on inventory returns. 11:30 I would now like to turn it over to Jennifer to discuss our financial results.

Jennifer Robinson: 11:36 Thank you, Fred. And good morning, everyone. As we previously noted, comparability to prior periods is difficult due to actions the company took related to its free organization under Chapter 11, as well as the impact related to COVID-19 and the elimination and promotional activity. 12:00 For comparable store sales and inventories specifically, the second quarter and first 6 months of fiscal 2020 are the most applicable comparisons due to significant impacts from COVID-19 that occurred in the first 6 months of 2021. 12:20 The other financial statement line items are compared to the respective periods in fiscal 2021 as our store count and associated operational costs have significantly changed since fiscal 2020. 12:36 Our store count as of the end of the second quarter of fiscal 2022 was 492 stores, compared to 705 stores at the end of the second quarter of fiscal 2020 and 490 stores at the end of the second quarter of fiscal 2021. 12:59 Compared to Q2 of 2020, we delivered comp store sales growth of 1% in Q2 fiscal 2022. The comp increase was entirely driven by an increase in AUR, which is a direct result of our merchandising strategy previously discussed. 13:22 It is important to note that the second quarter of fiscal 2022 contains no promotional events. While Q2 2020 contained 14. We delivered net sales of $251.4 point million compared to one $198.6 million in Q2 of 2021. 13:48 During the second quarter of fiscal 2022, 30 new stores were opened and no stores were closed. Gross margin was $71.5 million compared to $60.1 million for the second quarter of fiscal 2021. Gross margin rate in the second quarter of fiscal 2022 declined to 28.5% compared to 30.2% in the second quarter of 2021. The decrease in gross margin was primarily driven by higher supply chain and transportation costs, slightly offset by improved merchandise margins due to lower markdowns. 14:34 Moving to SG&A as a percentage of net sales, SG&A was 26.9% compared to 31.9% in the same period of fiscal 2021. SG&A was $67.7 million in Q2 of fiscal 2022, compared to $63.3 million in the same period of fiscal 2021. The leverage in SG&A as a percentage of sales was primarily related to higher sales. 15:10 Our operating income was $3.4 million compared to a loss of $4.3 million in Q2 of fiscal 2021. Our net income was $1.9 million or $0.02 per share for Q2 of fiscal 2022. This compares to net income of $40.3 million or $0.88 per share for the second quarter of fiscal 2021, which included a benefit of $48 million related to reorganization items. Adjusted EBITDA, a non-GAAP measure was $9.3 million for the second quarter of fiscal 2022. Compared to $800,000 for the same period of fiscal 2021. 16:00 As we look at the first half of fiscal 2022, our first tax comp store sales growth was 1.9% compared to the first half of fiscal 2020. Even with being up against 23 promotional events. This performance was in line with our financial plan set at the beginning of fiscal 2022. The favorability in sales we discussed during our first quarter earnings call was offset with lower than planned sales in the second quarter due to the softening we saw in December. 16:38 Adjusted EBITDA for the first half of fiscal 2022 was $3.6 million compared to a loss of $5.2 million in the first half of fiscal 2021. This adjusted EBITDA performance was better than our initial plan due to the timing recognition of supply chain costs, partially offset by higher store payroll costs. 17:03 Turning now to the balance sheet, we ended the quarter with an inventory position of $157 million, an increase of 37.3% compared to the prior year period. As Fred noted, we started the quarter with comparable short inventories down 42% as compared to the beginning of Q2, 2020. But our ability to continue to deliver fresh inventory to the stores throughout the quarter improved our store inventory position ending the quarter down 26% as compared to end of Q2 2020. We are focused on improving inventory turns and providing ourselves buying flexibility to stay liquid and chase what is working within the season. 17:57 As we discussed on last quarter's call, reserve inventories, which is comprised of pack and hold, flow on hold and short hold inventory is a key to the off price model. We were able to take advantage of opportunities this quarter, resulting in our reserve inventories being higher than expected as of the end of the second quarter due to these purchases. As a result, our reserve inventories is roughly twice as much as we had initially planned when we began the fiscal year. The biggest component of this inventory is pack and hold. 18:35 This is a combination of strategic purchases and the late arriving direct imports, both of which are high (ph) goods. Given the ongoing supply chain dislocation, we feel very good about the fact that we own these goods now and we'll have no issues delivering these on time over the next 12 months. We believe that while owning these goods now detracts from liquidity, it was the right decision and will help drive high IMY sales. 19:09 Total liquidity was $62 million, including $58 million under our revolver. As of fiscal quarter end, we had $18 million in borrowings outstanding under our line of credit, compared to no borrowings at the end of Q2 2021. The increased outstanding balance was primarily driven by higher inventory levels. 19:35 I will now move to our outlook for the remainder of the year. Going forward, we will be using last year of fiscal 2021 for all comparisons. Beginning in Q3 we have had all periods with promotional events. As Fred mentioned, we expect our comp store sales growth for the third quarter to be in the mid-single digits. And we expect the comp sales growth for the last 6 months of the year to be in the low to mid-single digits. 20:10 With respect to gross margin, as a reminder, our supply chain costs, which include inbound and outbound transportation, as well as distribution center costs are recognized on our P& L and gross margin as inventory turns. Therefore, there is a delay in when those costs are incurred and when they flow through the P& L. 20:36 In Q2, we invested in additional supply chain costs to drive our store inventories to higher levels and to bring in pack and hold, flow on hold and short hold purchases. In addition, as Fred mentioned, our original plan for fiscal 2022 had assumed inbound freight headwinds would begin to improve by the fourth quarter. We have now adjusted our outlook to assume these cost pressures will continue at least through the end of fiscal 2022. 21:11 Accordingly, these factors will negatively impact our second half gross margin, which we expect to be lower than that recognized in the first half. We are proactively addressing these continued headwinds by identifying SG& A cost savings in areas such as labor costs, outside professional fees, and travel related costs to partially offset the impact of the higher supply chain costs. These actions have allowed us to maintain our full year guidance of an adjusted EBITDA loss for the year that is slightly improved from fiscal 2021. 21:54 For the last two quarters, we provided a 12 month average liquidity outlook. Given that a detailed fiscal 2022 financial plan has not yet been completed, we cannot provide that. Our average monthly liquidity for January through June of fiscal 2022 is estimated at approximately $30 million. On our Q1 call, we stated a 12 month average monthly liquidity projection of $40 million. If we were to look at the spring average incorporated in that number, it was $37 million. By taking into account an additional $7 million related to our higher inbound freight costs, and higher reserve inventories, we are in line with that projection. We believe this is more than enough capacity to cover our obligations and meet our plans for the rest of 2022. 22:58 I will now turn the call back over to Fred for some concluding remarks. Fred?

Fred Hand: 23:04 Thank you, Jennifer. I want to close our prepared remarks by thanking the entire Tuesday Morning team for their dedication and execution during the holiday season. The team is working with a sense of urgency on executing on our initiatives to lead Tuesday Morning through its transformation to become a world class off price retailer. In addition, I would like to thank the vendor communities for their continued partnership and support. 23:37 We will now open the call up for questions.

Operator: 23:43 Thank you very much. At this time we will be conducting a question-and-answer session. We have a question from the line of Hamed Khorsand from BWS Financial. Please go ahead.

Hamed Khorsand: 24:22 Good morning. First off, could you just talk about the merchandise strategy as it relates to inventory? How you've been able to source that inventory to really execute on this sales strategy you have been having?

Fred Hand: 24:41 Good morning, Hamed. Thank you for the question. The inventory that we were able to source our merchant team has done a great job of being able to really work with the vendor community, given all the challenges with the macro supply chain dislocation to be able to bring the goods in and part of this is the mix of business that we have and how we're bringing good in between direct imports, POE, as well as domestic buys. And they've been very agile and reacting to what challenges have come up. 25:24 The fact that we were able to bring in the freshness that we brought in during the quarter was really a huge plus for us and really enabled us to be very much ready for the holiday business. But the ongoing work that's really our merchants are working on is really making sure that they're sourcing all the product that they can get their hands on as aggressively, as efficiently as they can and really proactively working with our supply chain team, as well as the vendor community to make sure that we're able to bring the goods in. 26:04 I don't know if Mark or Jennifer, if you guys want to add any more color to that.

Marc Katz: 26:10 Yes, I think it was -- those well said. And I think it really is a credit to our merchant team. I know that one of the other things they're doing is, they're consistently looking to add new vendors to our total mix. So they're bringing on new vendors as well, as well as fantastic existing relationships they have with our existing vendors. So to your points, it’s really credit to them.

Hamed Khorsand: 26:33 Okay. And then the other question I had was just from the press release, you had been mentioned that you're pleased with the sales execution. Could you just describe that a little bit, because you don't really provide much guidance, so what was driving that comment?

Fred Hand: 26:51 Sure. Absolutely. I spent a lot of time in the stores during the peak weeks of between Thanksgiving and Christmas. Typically, that's what I've done in my career. I think that's the best opportunity to engage with, not just the customer, but also the stores team, understand what's working and what's not working and really make sure that we learn about the opportunities of how we can beat things better for the next season. 27:20 My trips to the stores were in 4 to 5 of our priority markets, 4 in addition to the Dallas Fort Worth market that we visit frequently. And really looking at anything from assortment from a quality quantity point of view looking at it from how our presentation standards were and looking at the gifting category and the holiday motif. There's always opportunities for improvement. And the challenge for us is to really make sure that we look at what's working, listen to our customer, listen to our store associates and really make sure that we put together actions that we can correct for the next holiday season. 28:09 The other thing that I would just add is, these trips were made by members also of my senior leadership team, because I think it's important for every one of my senior leadership team members to be able to spend some time in the stores during the holiday to understand what really works and what the opportunities are. I felt great about our prep. I thought that the store operations have done a great job of prepping the stores. I felt great about a level of our staffing, both front of house being able to take care of our customers, maintaining a clean and neat store and providing great service, as well as our back house, being able to process goods to the floor as fast as possible and getting the merchandise to the floor as quickly as they could. 28:54 And looking at the quarter, frankly, Hamed, we were on plan through November. And then as I noted in my remarks, we did experience some softness in December week 2, which continued through the beginning of January. The great thing is, if you look at our sell throughs, if you look at our very little seasonal carryover, which has positioned us very well going into Q3, which is also a good start, although we're dealing still with a little bit of weather issues as I mentioned. Overall, I would tell you that the sentiment that I got from the customer, the stores and what I felt and looking at how we were positioned versus the competition, I felt great about it. 29:40 I was very pleased with our set up for holiday. And I think there's a lot of lessons learned that we can apply to the next season, next holiday season that's going to come up, that we can react to. But clearly, I felt that we were going in the right direction. Our merchants did a great job of securing product, our supply chain team did a herculean effort of getting record setting shipments to the stores 9 weeks in the row, which was really terrific. And our shore teams that were very well prepared and did a great job of managing the customer traffic and providing the service. Those are the reasons why I would tell you that I'm pleased with the execution in Q2.

Hamed Khorsand: 30:23 Okay, great. And then, is inventory the driving factor as to why you're confident of mid-single digit comp growth this quarter? Is it just the refresh that's happening with the inventory quality? Or is it the price points?

Fred Hand: 30:41 It's a combination of both. I would tell you that we feel good about the content. Clearly, as we've mentioned in the past, and we will continue to do, we see an increase in the average unit retail product. We're focused on bringing in quality brands at great value, as well as the freight saving items versus our competition. But those are the key factors that I think is going to continue to drive the incremental sales. 31:14 The other thing just to keep in mind for Q2 or Q3 rather, we're up against the weather in February that really impacted the southern part of the states, particularly Texas, Oklahoma and surrounding states. So that's something that we also have baked into our numbers as an opportunity for Q2, but clearly the majority of it is just the direction and what we've experienced and what we're working on with our inventory.

Marc Katz: 31:41 Yeah. And the only thing I would add on to that, Hamed, is that, for the first time and we mentioned this, we actually ended fall in line with our inventory plan. We had been running so much under for so long. In fact that we were able to get that inventory plan at the end of fall, really set us up for our beginning of season for spring. And then the other thing I would add is that freshness. Our freshness continues to be kind of at all-time highs. So it's very fresh inventories that make us feel real good about it.

Hamed Khorsand: 32:13 Okay. And then last question for Jennifer. Could you just talk about some of the puts and takes between the EBITDA guidance and gross margin declining second half of the year?

Jennifer Robinson: 32:30 Sure. Absolutely. So as we’ve mentioned in our prepared remarks, in Q2 we did make some investments in additional supply chain costs to drive higher store inventories and also to bring in pack and hold, flow and hold and short hold purchases. 32:48 So given that our supply chain costs are recognized in our P& L as inventory turns, a large amount of those costs will negatively impact our gross margin during the second half of the year. And in addition to that, our initial plan, as Fred mentioned, for fiscal 2022 had assumed that our inbound freight costs would start to improve in Q4 as time has passed and uncertainty is continued, we no longer believe that that is going to be the case. And so, that is approximately $4 million of incremental transportation costs that we added to Q4, which suppresses gross margin as well. 33:29 We did do a thorough scrub of all of our SG& A areas for the back half of the year to partially mitigate over half of these incremental transportation costs and the savings came from all areas of the company from the stores, organization, the marketing, corporate, along with company-wide travel. So it's the combination of all of those things that result in us being able to reiterate our adjusted EBITDA guide, while also expecting a lower gross margin in the spring versus the fall.

Hamed Khorsand: 34:05 Okay, great. Thank you.

Fred Hand: 34:07 Thanks, Hamed.

Marc Katz: 34:09 Thank you.

Operator: 34:11 Thank you. Ladies gentlemen, this concludes our Q&A session. I'd like to turn the call back to the management for closing remarks. Over to you gentlemen.

Fred Hand: 34:21 Thank you for joining us today. We appreciate your continued support and look forward to speaking to you at our next earnings call. Have a great day everyone.

Operator: 34:32 Thank you very much. Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.