TUESDAY MORNING CORP/DE - Quarter Report: 2010 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2010

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		75-2398532
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

6250 LBJ Freeway

Dallas, Texas 75240

(Address, including zip code, of principal executive offices)

(972) 387-3562

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 27, 2010
Common Stock, par value $0.01 per share		42,938,637

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections. These statements may be found throughout this Form 10-Q particularly under the heading “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 future results of operations, our future financial position, and our business outlook or state other “forward-looking” information.

Readers are referred to “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2009 for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following:

· uncertainties regarding our ability to open stores in new and existing markets and operate these stores on a profitable basis;

· conditions affecting consumer spending and the impact, depth and duration of the current economic recovery;

· inclement weather

· changes in our merchandise mix;

· timing and type of sales events, promotional activities and other advertising;

· increased or new competition;

· loss or departure of one or more members of our senior management or experienced buying and management personnel;

· an increase in the cost or a disruption in the flow of our products;

· seasonal and quarterly fluctuations;

· fluctuations in our comparable store results;

· our ability to operate in highly competitive markets and to compete effectively;

· our ability to operate information systems and implement new technologies effectively;

· our ability to generate strong cash flows from our operations;

· our ability to anticipate and respond in a timely manner to changing consumer demands and preferences; and

· our ability to generate strong holiday season sales.

The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements were made. Except as may be required by law, we undertake no obligation to update our forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events.

The terms “Tuesday Morning,” “the Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.

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PART I - FINANCIAL INFORMATION	4

Item 1 — Financial Statements	4

Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009	4

Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2010 and 2009	5

Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009	6

Notes to Consolidated Financial Statements	7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3 — Quantitative and Qualitative Disclosures About Market Risk	15

Item 4 — Controls and Procedures	15

PART II — OTHER INFORMATION	16

Item 1 — Legal Proceedings	16

Item 1A — Risk Factors	16

Item 6 — Exhibits	17

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

March 31, 2010 (unaudited) and June 30, 2009

(In thousands, except for per share data)

	March 31, 2010		June 30, 2009

ASSETS
Current assets:
Cash and cash equivalents	$	26,619	$	5,783
Inventories	257,996		223,628
Prepaid expenses and other current assets	8,100		10,197
Deferred income taxes	667		1,545
Total current assets	293,382		241,153

Property and equipment, net	72,447		72,356
Deferred financing costs	3,777		4,211
Other assets	1,834		1,521

Total Assets	$	371,440	$	319,241

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	83,395	$	47,109
Accrued liabilities	33,704		28,765
Income taxes payable	3,164		1,564
Total current liabilities	120,263		77,438

Deferred rent	3,355		4,171
Income tax payable — non current	644		—
Deferred income taxes	1,363		2,279

Total Liabilities	125,625		83,888

Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share, authorized 10,000,000 shares, none issued or outstanding	—		—
Common stock, par value $0.01 per share, authorized 100,000,000 shares; 42,938,637 shares issued and outstanding at March 31, 2010 and 42,836,707 shares issued and outstanding at June 30, 2009	429		428
Additional paid-in capital	206,110		203,633
Retained earnings	39,193		31,334
Accumulated other comprehensive income (loss)	83		(42		)

Total Stockholders’ Equity	245,815		235,353

Total Liabilities and Stockholders’ Equity	$	371,440	$	319,241

The accompanying notes are an integral part of these consolidated financial statements.

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Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

(In thousands, except for per share data)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009

Net sales	$	172,000		$	167,000		$	627,482		$	613,052
Cost of sales	107,440			106,022			390,080			387,023
Gross profit	64,560			60,978			237,402			226,029
Selling, general and administrative expenses	70,814			70,366			220,422			221,593
Operating income (loss)	(6,254		)	(9,388		)	16,980			4,436
Other income (expense):
Interest income	5			—			7			1
Interest expense	(772		)	(860		)	(2,228		)	(1,988		)
Other income (expense), net	(244		)	(173		)	(155		)	98
	(1,011		)	(1,033		)	(2,376		)	(1,889		)
Income (loss) before income taxes	(7,265		)	(10,421		)	14,604			2,547
Income tax expense (benefit)	(2,929		)	(3,593		)	5,151			962

Net income (loss)	$	(4,336	)	$	(6,828	)	$	9,453		$	1,585

Earnings Per Share
Net income (loss) per common share:
Basic	$	(0.10	)	$	(0.16	)	$	0.22		$	0.04
Diluted	$	(0.10	)	$	(0.16	)	$	0.22		$	0.04
Weighted average number of common shares:
Basic	42,049			41,534			41,844			41,479
Diluted	42,049			41,534			42,377			41,729

Dividends per common share	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	Nine Months Ended March 31,
	2010			2009

Net cash flows from operating activities:
Net income	$	9,453		$	1,585
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,795			12,637
Amortization of financing fees	804			474
Deferred income taxes	(538		)	(1,432		)
Loss on disposal of assets	781			546
Stock-based compensation	1,519			1,656
Other non-cash items	125			12
Change in operating assets and liabilities:
Inventories	(34,527		)	(19,570		)
Prepaid and other assets	1,784			726
Accounts payable	32,564			5,377
Accrued liabilities	4,939			(755		)
Deferred rent	(816		)	28
Income taxes payable	2,244			1,579
Net cash provided by operating activities	30,127			2,863

Net cash flows from investing activities:
Capital expenditures	(12,668		)	(9,919		)
Net cash used in investing activities	(12,668		)	(9,919		)

Net cash flows from financing activities:
Repayments under revolving credit facility	(61,605		)	(193,242		)
Proceeds under revolving credit facility	61,605			206,742
Change in cash overdraft	3,722			(5,130		)
Payment of debt financing costs	(370		)	(4,437		)
Proceeds from exercise of common stock options	25			—
Net cash provided by financing activities	3,377			3,933
Net increase (decrease) in cash and cash equivalents	20,836			(3,123		)
Cash and cash equivalents, beginning of period	5,783			8,630
Cash and cash equivalents, end of period	$	26,619		$	5,507

The accompanying notes are an integral part of these consolidated financial statements.

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Tuesday Morning Corporation

Notes to Consolidated Financial Statements (unaudited)

1. Basis of presentation — The unaudited consolidated interim financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the consolidated financial statements and notes thereto in our Form 10-K for the year ended June 30, 2009. Due to the seasonal nature of our business, the results of operations for the quarter are not indicative of the results to be expected for the entire fiscal year.

The balance sheet at June 30, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the year ended June 30, 2009. We operate our business as a single operating segment.

2. Stock-based compensation — We account for our stock-based compensation plan in accordance with Accounting Standards Codification (“ASC”) 718 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R), “Share Based Payment.” Under ASC 718, all stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statement of operations over the requisite service period.

We have established the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended (the “1997 Plan”), the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”), and the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”), which allow for the granting of stock options to directors, officers, key employees of, and certain other key individuals who perform services for us and our subsidiaries. The 1997 Plan authorized grants of options to purchase up to 4,800,000 shares of authorized, but unissued common stock. Equity awards may no longer be granted under the 1997 Plan but options granted under the plan are still exercisable. The 2004 Plan and the 2008 Plan authorize grants of options to purchase up to 2,000,000, and 2,500,000 shares, respectively, of authorized, but unissued common stock.

Options granted under the 1997 Plan and the 2004 Plan typically vest over periods of three to five years and expire in ten years while options granted under the 2008 Plan typically vest over periods of one to three years and expire in ten years. Options granted under the 2004 Plan and the 2008 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. No options with performance conditions were outstanding as of March 31, 2010. The exercise prices of the outstanding options range between $0.63 and $35.23, which represents fair market value on the grant date of the shares of common stock into which such options are exercisable. At March 31, 2010, all shares available under the 1997 Plan had been granted and the 1997 Plan expired pursuant to its terms as of December 29, 2007, although certain awards remain outstanding under the 1997 Plan. There were 1,164,134 shares and 601,374 shares available for grant under the 2004 Plan and 2008 Plan, respectively, at March 31, 2010. Stock options are awarded with a strike price equal to the average of the high and low trading prices of the Company’s common stock on the date of grant in the 1997 Plan and the 2004 Plan. Stock options are awarded with a strike price equal to the closing price of the Company’s common stock on the date of the grant in the 2008 Plan.

Under the terms of the 2004 Plan and the 2008 Plan, we may also grant restricted stock to compensate certain directors, officers, key employees of, and certain other key individuals who perform services for us and our subsidiaries. Restricted stock awards are not transferable, but bear rights of ownership including voting and dividend rights. Shares are valued at the market price at the date of award. As of March 31, 2010, there were 800,202 shares of restricted stock outstanding with a weighted average fair value of $1.86 per share under the 2004 Plan and 2008 Plan.

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Stock-based compensation expense recognized in the three-month and nine-month periods ended March 31, 2010, was as follows (in thousands):

	Three Months Ended March 31, 2010			Nine Months Ended March 31, 2009

Total cost of stock-based compensation during the period	$	457		$	1,360
Amounts capitalized in ending inventory	(172		)	(535		)
Amounts recognized in expense previously capitalized	138			694

Amounts charged against income for the period before tax	$	423		$	1,519

3. Comprehensive income or loss — Comprehensive income or loss is defined as net income or loss plus the change in equity during a period from transactions and other events, excluding those resulting from investments by and distributions to stockholders. We account for foreign currency forward contracts as cash flow hedges in accordance with ASC 815 (formerly SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities.” Changes in the fair value of the contracts that are considered to be effective are recorded in other comprehensive income or loss until the hedged item is recorded in earnings. Effective cash flow hedges are reclassified out of other comprehensive income or loss and into cost of sales when the hedged inventory is sold. Ineffective cash flow hedges are recorded in other income or loss and were not material for the periods presented. The effect of foreign exchange contracts on our financial position or results of operations has historically been immaterial. Comprehensive loss for the quarters ended March 31, 2010 and 2009 was $4.3 million and $6.8 million, respectively, while comprehensive income for the nine-month period ended March 31, 2010 and 2009 was $9.6 million and $1.6 million, respectively.

4. Commitments and Contingencies — During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs sought 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 also sought attorney’s fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of managers-in-training and management trainees which was paid in November 2005 with no material impact to our financial statements. A store manager class was certified. However, in August 2008, our motion for de-certification of the class of store managers was granted, thereby dismissing their class action claim. The California Court of Appeals upheld the trial court’s de-certification order and the California Supreme Court has declined to review that decision. We settled the individual claims of two plaintiffs in the lawsuit with no material impact on our financial statements. In addition, approximately 75 individual plaintiffs have chosen to pursue their claims individually and have filed separate lawsuits against us alleging overtime violations. We do not expect any of these complaints to have a material impact on our financial statements.

A similar lawsuit, which also alleges claims concerning meal and rest periods, was filed in Orange County, California in 2004, by managers, managers-in-training and assistant managers, and an amended complaint was filed in July 2007. In December 2008, the four plaintiffs abandoned their class action claim and have elected to pursue their individual claims as well as claims under California’s Private Attorney General Act with respect to such allegations. The Court has found in our favor on all claims and we are awaiting the entry of a final judgment. It is presently unknown whether any of the plaintiffs will choose to pursue any of their claims on appeal. A companion lawsuit alleging the same claims was filed in Orange County Superior Court in December 2008 on behalf of approximately thirty-four additional individual plaintiffs. This lawsuit includes a claim under California’s Private Attorney General Act. The companion lawsuit is still in the initial stages of litigation. We do not expect any of these complaints to have a material impact on our financial statements.

In December 2008, a class action lawsuit was filed by hourly, non-exempt employees in the Superior Court of California in and for the County of Los Angeles, alleging claims covering meal and rest period violations. This case has been stayed pending the outcome of another case. We do not expect this complaint to have a material impact on our financial statements.

In September 2009, we received notice of a judgment filed in the District County Court of Texas in and for the County of Bexar. The plaintiff, a former employee, claimed violations under the Equal Employment Opportunity Act (EEOC). We have appealed the judgment. We do not expect it to have a material impact to our financial statements.

We intend to vigorously defend all pending actions. We do not believe these or any other legal proceedings pending or threatened against us would have a material adverse effect on our financial condition or results of operations.

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5. Earnings per common share - The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended March 31						Nine Months Ended March 31
(In thousands, except for per share data)	2010			2009			2010		2009

Basic earnings per share:
Net income (loss)	$	(4,336	)	$	(6,828	)	$	9,453	$	1,585
Less: Income to participating securities	—			—			229		—
Income available to common stockholders	(4,336		)	(6,828		)	9,224		1,585
Weighted average number of common shares outstanding	42,049			41,534			41,844		41,479
Net income (loss) per common share	$	(0.10	)	$	(0.16	)	$	0.22	$	0.04

Diluted earnings per share:
Net income (loss)	$	(4,336	)	$	(6,828	)	$	9,453	$	1,585

Dilutive effect of employee stock options and restricted stock	—			—			533		250
Weighted average number of common shares outstanding	42,049			41,534			41,844		41,479
Weighted average number of common shares and diluted effect of outstanding employee stock options and restricted stock	42,049			41,534			42,377		41,729

Net income (loss) per common share	$	(0.10	)	$	(0.16	)	$	0.22	$	0.04

For the quarters ended March 31, 2010, and 2009, 1,849,049 and 3,468,497 options, respectively, were excluded because their inclusion would have been anti-dilutive. For the nine-months ended March 31, 2010, and 2009, 1,869,444 and 2,459,088 options, respectively, were excluded because exercise prices were in excess of the average market price. Additionally, 800,202 and 1,306,769 restricted shares were outstanding at March 31, 2010, and 2009, respectively. None of these shares were included in the diluted earnings per share calculation for the quarters ended March 31, 2010, and 2009, because such inclusion would have been anti-dilutive.

6. Revolving credit facility — On December 15, 2008, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in the amount of up to $150.0 million, which matures on December 15, 2013. On January 28, 2009, we entered into an amendment to increase the amount from $150.0 million to $180.0 million. The Revolving Credit Facility may be increased by up to $70.0 million, not to exceed an aggregate total commitment of $250.0 million. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains, among other things, a “clean down” provision requiring that the sum of the aggregate principal amount of the outstanding loans and undrawn letters of credit may not exceed a specified dollar amount for 30 consecutive days during the period from December 28 through January 31. On January 29, 2010, we entered into a second amendment to the Revolving Credit Facility to increase the clean down limit from $45.0 million to $65.0 million. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, sell assets or merge or consolidate with any other entity. The amount that can be drawn on the Revolving Credit Facility at any given time is determined based on percentages of certain inventory and credit card receivables. Unless borrowings and letters of credit exceed 82.5% of the maximum amounts available under the Revolving Credit Facility or an event of default exists, the Company does not have to comply with any financial covenants. Should such an event occur, the Company is required to comply with a consolidated fixed charge coverage ratio of 1:1. As of March 31, 2010, we were in compliance with all required covenants. There were no LIBOR loans during the quarter ended March 31, 2010.

At March 31, 2010, we had no outstanding amounts under the Revolving Credit Facility, $9.3 million of outstanding letters of credit and availability of $112.9 million under the Revolving Credit Facility. Letters of credit under the Revolving Credit Facility are primarily for self-insurance purposes. We incur commitment fees of up to 0.75% on the unused portion of the Revolving Credit Facility. Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our average daily availability changes.

The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The only material financial instrument we carry is our revolving credit facility. We believe our debt, as recorded, approximates fair value as the interest rates are variable based on current market rates.

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7. Income Taxes — Tuesday Morning Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, Tuesday Morning Corporation is no longer subject to U.S. state and local income tax examinations by tax authorities for years before 1999. The Internal Revenue Service has concluded an examination of the Company for all tax years through June 30, 2007. The effective tax rates for the nine-months ended March 31, 2010 and March 31, 2009 were 35.3% and 37.8%, respectively. The effective tax rate is lower in the nine-months ended March 31, 2010 as compared to the nine-months ended March 31, 2009 due to a decrease in the effective tax rate for state income taxes.

8. Cash and Cash Equivalents — Credit card receivables of $4.4 million and $2.7 million at March 31, 2010 and June 30, 2009, respectively, from MasterCard, Visa, Discover and American Express, as well as highly liquid investments with an original maturity date of three months or less, are considered to be cash equivalents.

9. Recent Accounting Pronouncements — In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 260-10-45 (formerly Emerging Issues Task Force 03-6-1) “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share.” ASC 260-10-45 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company adopted the provisions of ASC 260-10-45 on its consolidated financial statements effective July 1, 2009 with no material impact to the financial statements.

In June 2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), “Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” The FASB Accounting Standards Codification (“Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include the new Codification numbering system along with original references. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Introduction

We operated 847 discount retail stores in 43 states as of March 31, 2010. We sell closeout home furnishings, housewares, gifts and related items, which we purchase at below wholesale prices. Our stores operate during periodic “sales events” that occur in each month except January and July. We are generally closed for the first two weeks of January and July, which traditionally have been weaker months for retailers. We purchase first quality, brand name merchandise at closeout prices and sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

Business Overview

The retail home furnishings industry has been negatively impacted by increased supply and competition within an already highly competitive promotional environment, a trend we believe is likely to continue in the near term and potentially longer. As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, specialty and e-commerce retailers and mass merchants, 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 and houseware products that we sell. Many of these competitors have substantially greater financial resources than we do. Our competitors’ greater financial resources allow them to initiate and sustain aggressive price competition, initiate broader marketing campaigns that reach a larger customer base, fund ongoing promotional events and communicate more frequently with existing and potential customers.

In response to increased competition in the retail home furnishings and housewares industries, we have been focused internally on various strategic initiatives that we believe have and will continue to offset the impact of this trend including, but not limited to:

· striving to provide a merchandise assortment that evolves and adapts to the changing needs and preferences of our customer base;

· continuing to review the individual contributions of the existing store base and making decisions about the future of individual store locations including whether to close or relocate them;

· seeking to improve overall supply chain efficiency including reviewing operational practices such as freight costs, vendor payment terms, distribution processes and increasing inventory turns;

· striving to maximize our traffic by optimizing our marketing plan;

· increasing comparable store sales;

· expanding the current customer base;

· increasing cost efficiency;

· striving to optimize our purchasing of inventory to best match customer demand.

We also continue to closely monitor and control our markdowns of inventory to avoid marking down items that continue to sell through at reasonable rates. Markdowns during the third quarter of fiscal 2010 were 4.8% of sales versus 5.7% of sales for the same period last year. We believe this strategy has contributed and will continue to contribute to overall margin by focusing our markdowns on inventory that is truly slow moving and not marking down items on the basis of age in inventory alone thereby allowing us to continue to exclude markdowns on opportunistic buys which are too large for us to sell through in one year. However, if our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at March 31, 2010 would result in a decline in gross profit and diluted earnings per share for the third quarter of fiscal 2010 of $1.3 million and $0.02, respectively. Under current economic conditions, forecasts can vary significantly from the actual results we may encounter.

Our ability to continuously attract buying opportunities for closeout merchandise, and to anticipate consumer demand as closeout merchandise becomes available, represents an uncertainty in our business. By their nature, specific closeout merchandise items are generally only available from manufacturers or vendors 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 shortage of closeout merchandise in the near future, we cannot assure that manufacturers or vendors will continue to make desirable 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. Since this uncertainty is a by-product of our business, we expect it to be an ongoing concern.

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The stability of our earnings is also heavily influenced by macroeconomic factors. As the economy improves or worsens our business is often similarly impacted. Macroeconomic factors, such as the current conditions in the debt and housing markets and unemployment, have impacted and will continue to impact our business by decreasing the disposable income of our potential consumers. The decline in consumer confidence levels has also had a negative impact on consumers’ ability and willingness to spend discretionary income. At this time, we view the direction of the economy to be uncertain, which does not allow us a high degree of visibility or certainty with respect to our future earnings.

Net sales for the third quarter of fiscal 2010 were approximately $172.0 million, an increase of 3.0% compared to the same period last year. Comparable store sales for the quarter ended March 31, 2010, increased by 1.6% compared to the same period last year which was primarily due to an increase in customer traffic offset by a decrease in average ticket. Net loss for the quarter was $4.3 million and diluted loss per share was $0.10.

We continue to remain focused on our long-term growth and profitability. The home furnishings and high end decorative sectors of the U.S. economy continue to be challenged by the highly competitive promotional environment and weakness in the housing and debt markets.

We opened three new stores and closed fourteen existing stores during the third quarter of fiscal 2010. In addition, we relocated thirteen existing stores.

Results of Operations

The following table sets forth certain financial information from our consolidated statements of operations expressed as a percentage of net sales. Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31, which includes the holiday season. There can be no assurance that the trends in sales or operating results will continue in the future.

	Three Months Ended				Nine Months Ended
	March 31				March 31
	2010		2009		2010		2009
Net sales	100.0	%	100.0	%	100	%	100.0	%
Cost of sales	62.5		63.5		62.2		63.1
Gross profit	37.5		36.5		37.8		36.9
Selling, general and administrative expense	41.1		42.1		35.1		36.1
Operating income (loss)	(3.6	)	(5.6	)	2.7		0.7
Net interest expense and other income (expense)	(0.6	)	(0.6	)	(0.4	)	(0.3	)
Income (loss) before income taxes	(4.2	)	(6.2	)	2.3		0.4
Income tax expense (benefit)	(1.7	)	(2.2	)	0.8		0.2

Net income (loss)	(2.5	)%	(4.1	)%	1.5	%	0.3	%

Three Months Ended March 31, 2010

Compared to the Three Months Ended March 31, 2009

During the third quarter of fiscal 2010, net sales increased to $172.0 million from $167.0 million, an increase of $5.0 million, or 3.0%, compared to the quarter ended March 31, 2009. The increase in third quarter sales was primarily due to a 1.6% increase in comparable store sales and an increase of $2.3 million in non comparable store sales. The increase in comparable sales for the third quarter of fiscal 2010 was comprised of a 2.9% increase in the average number of transactions and a 1.3% decrease in average transaction amount. Average store sales for the third quarter of fiscal 2010 increased 3.3% compared to the same period last year. Comparable store sales and average sales per store increased primarily due to a higher average number of transactions. Management believes the average number of transactions were higher due primarily to an improvement in the economy combined with consumers’ focus on value shopping in the current economic climate.

Gross profit increased $3.6 million, or 5.9%, to $64.6 million for the quarter ended March 31, 2010 as compared to $61.0 million for the same quarter last year. This increase was primarily the result of higher sales volume. Our gross profit percentage increased from 36.5% for the third quarter of fiscal 2009 to 37.5% for the third quarter of fiscal 2010. This increase of 1.0% in gross profit percentage was primarily due to a 0.9% decrease in markdowns as a percentage of sales due to improved sell-through rates.

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Selling, general and administrative expenses increased $0.4 million, or 0.6%, to $70.8 million in the third quarter of fiscal 2010 from $70.4 million in the same quarter last year. The increase was primarily attributable to an increase in wages and benefits offset by decreases in rent, utilities and advertising. As a percentage of net sales, selling, general and administrative expenses decreased 1.0% to 41.1% in the third quarter of fiscal 2010 from 42.1% in the same quarter last year which was primarily due to the improved expense leveraging given the increase in average store sales. Selling, general and administrative expenses per average store were $83.0 thousand this quarter compared to $82.3 thousand in the same quarter last year, an increase of 0.9%.

The income tax benefit for the quarter ended March 31, 2010 was $2.9 million versus $3.6 million for the same period last year. The effective tax rate for the quarters ended March 31, 2010 and 2009 was 40.3% and 34.5%, respectively. The effective tax rate is higher in the quarter ended March 31, 2010 as compared to the quarter ended March 31, 2009 due to primarily to higher effective state income tax rates.

Nine Months Ended March 31, 2010

Compared to the Nine Months Ended March 31, 2009

During the nine months-ended March 31, 2010, net sales increased to $627.5 million from $613.1 million, an increase of $14.4 million or 2.4% compared to the nine-month period ended March 31, 2009. The increase in sales for the first nine months of fiscal 2010 was primarily due to an 1.0% increase in comparable store sales. The increase in comparable sales for the first nine months of fiscal 2010 was comprised of a 2.6% increase in the average number of transactions offset by a 1.6% decrease in the average transaction amount. Total average store sales for the first nine months of fiscal 2010 increased 2.3% when compared to the same prior year period. Comparable store sales and sales per store increased primarily due to higher traffic levels. Management believes the average number of transactions were higher due primarily to an improvement in the economy combined with consumers’ focus on value during the current economic climate.

Gross profit increased $11.4 million, or 5.0%, to $237.4 million for the nine-months ended March 31, 2010 as compared to $226.0 million for the same nine-month period last year. This increase was primarily the result of higher sales volume. In the nine-month period ended March 31, 2010, our gross profit percentage increased to 37.8% from 36.9% in the same period last year. This 0.9% increase in gross profit margin was primarily due to a 0.6% decrease in markdowns as a percentage of sales, primarily due to better sell through of merchandise resulting in lower markdown percentages combined with a 0.2% decrease in shrink as a percentage of sales.

Selling, general and administrative expenses during the nine-months ended March 31, 2010 decreased $1.2 million, or 0.5%, to $220.4 million from $221.6 million during the nine-months ended March 31, 2009. The decrease was primarily attributable to a $3.6 million decrease in advertising, a $1.1 million decrease in utilities, and a $0.8 million decrease in depreciation. Those decreases to total selling, general and administrative costs were offset by a $5.2 million increase in salaries and benefits and a $1.2 million increase in legal expenses. As a percentage of net sales, these expenses decreased by 1.0% to 35.1% in the first nine months of fiscal 2010 from 36.1% in the same period last year. The decreased percentage is primarily due to the improved expense leveraging given the increase in average store sales. Selling, general and administrative expenses per average store were $258.3 thousand for the nine months-ended March 31, 2009 compared to $260.0 thousand in the same period last year, a decrease of 0.6%.

The income tax provision for the nine month periods ended March 31, 2010 and 2009 was $5.2 million and $1.0 million, respectively, reflecting an effective tax rate of 35.3% and 37.8%, respectively. The effective tax rate is lower in the nine months ended March 31, 2010 as compared to the nine months ended March 31, 2009 due to a decrease in the effective tax rate for state income taxes.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flows will continue to be utilized for the expansion of our business. Our borrowings have historically peaked in the quarter ended September 30 as we build inventory levels prior to the holiday selling season. Given the seasonality of our business, the amount of borrowings under our revolving credit facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Net cash provided by operating activities for the nine-months ended March 31, 2010 and 2009 was $30.1 million and $2.9 million, respectively, representing a $27.2 million increase. The $30.1 million of cash provided by operating activities in the third quarter of fiscal 2010 was primarily due to an increase in our accounts payable of $32.6 million combined with net income of $9.4 million, and a depreciation adjustment of $11.8 million offset by an increase in inventory of $34.5 million. The increase in accounts payable was primarily due to the timing of our purchases with more merchandise received in the third fiscal quarter of 2010. Our overall purchases for the third fiscal quarter of 2010 were also higher than the same period last year. There has been no material change in our payment policy to vendors.

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Capital expenditures are principally associated with new store openings or enhancements to warehouse and office equipment and totaled $12.7 million and $9.9 million for the nine-months ended March 31, 2010 and 2009, respectively. The increase in capital expenditures was primarily related to systems improvements, distribution center equipment and store fixtures. We expect to spend approximately $8.3 million for additional capital expenditures during the remainder of fiscal 2010, which will include systems improvements, the opening of new stores, relocations of existing stores, enhancements of selected stores, fixtures for existing stores and purchases of equipment for our distribution center and corporate office.

Net cash provided by financing activities of $3.4 million for the nine-months ended March 31, 2010 is primarily due to increases in our cash overdraft.

On December 15, 2008, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in the amount of up to $150.0 million, which matures on December 15, 2013. On January 28, 2009, we entered into an amendment to increase the amount from $150.0 million to $180.0 million. The Revolving Credit Facility may be increased by up to $70.0 million, not to exceed an aggregate total commitment of $250.0 million. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains, among other things, a “clean down” provision requiring that the sum of the aggregate principal amount of the outstanding loans and undrawn letters of credit may not exceed a specified dollar amount for 30 consecutive days during the period from December 28 through January 31. On January 29, 2010, we entered into a second amendment to the Revolving Credit Facility to increase the clean down limit from $45.0 million to $65.0 million. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, sell assets or merge or consolidate with any other entity. The amount that can be drawn on the Revolving Credit Facility at any given time is determined based on percentages of certain inventory and credit card receivables. Unless borrowings and letters of credit exceed 82.5% of the maximum amounts available under the Revolving Credit Facility or an event of default exists, the Company does not have to comply with any financial covenants. Should such an event occur, the Company is required to comply with a consolidated fixed charge coverage ratio of 1:1. As of March 31, 2010, we were in compliance with all required covenants. There were no LIBOR loans during the quarter ended March 31, 2010.

Store Openings/Closings

	Nine Months		Nine Months		Fiscal Year
	Ended		Ended		Ended
	March 31,		March 31,		June 30,
	2010		2009		2009

Stores open at beginning of period	857		842		851
Stores opened during the period	21		27		23
Stores closed during the period	(31	)	(19	)	(17	)
Stores open at end of period	847		850		857

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 260-10-45 (formerly Emerging Issues Task Force 03-6-1) “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share.” ASC 260-10-45 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company adopted the provisions of ASC 260-10-45 on its consolidated financial statements effective July 1, 2009 with no material impact to the financial statements.

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included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include the new Codification numbering system along with original references. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, such as foreign currency exchange and interest rates. Based on our market risk sensitive instruments outstanding as of March 31, 2010, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date. Our market risk is discussed in more detail in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We have not been significantly affected by any changes in the foreign currency exchange rate or interest rate market risks since June 30, 2009. The effect of foreign exchange contracts on our financial position or results of operations has historically been, and continue to be, immaterial.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Based on our management’s evaluation (with participation of our principal executive officer and our principal financial officer), our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of March 31, 2010 to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q was (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs sought 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 also sought attorney’s fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of managers-in-training and management trainees which was paid in November 2005 with no material impact to our financial statements. A store manager class was certified. However, in August 2008, our motion for de-certification of the class of store managers was granted, thereby dismissing their class action claim. The California Court of Appeals upheld the trial court’s de-certification order and the California Supreme Court has declined to review that decision. We settled the individual claims of two plaintiffs in the lawsuit with no material impact on our financial statements. In addition, approximately 75 individual plaintiffs have chosen to pursue their claims individually and have filed separate lawsuits against us alleging overtime violations. We do not expect any of these complaints to have a material impact on our financial statements.

Item 1A. Risk Factors

There have been no material changes from our risk factors previously disclosed in “Item 1A. Risk Factors” of our Form 10-K for the fiscal year ended June 30, 2009.

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Item 6. Exhibits

Exhibit Number		Title of Exhibit

3.1		Certificate of Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the “Commission”) on February 10, 1998)

3.1.2		Certificate of Amendment to the Certificate of Incorporation of the Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999)

3.1.3		Certificate of Amendment to the Certificate of Incorporation of the Company dated May 7, 1999 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 10-Q as filed with the Commission on May 2, 2005)

3.2		Amended and Restated By-laws of the Company dated December 14, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K as filed with the Commission on December 20, 2006)

10.1		Second Amendment, dated January 29, 2010 to Credit Agreement by and among the Company, Bank of America, N.A., Wells Fargo Retail Finance, LLC, and Regions Bank (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission on February 4, 2010)

31.1		Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

32.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

*The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TUESDAY MORNING CORPORATION
	(Registrant)


DATE: April 30, 2010	By:	/s/ Stephanie Bowman
		Stephanie Bowman, Executive Vice President, Chief Financial Officer, Treasurer and Secretary

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EXHIBIT INDEX

Exhibit No.		Description

3.1		Certificate of Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the “Commission”) on February 10, 1998)

3.1.2		Certificate of Amendment to the Certificate of Incorporation of the Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999)

3.1.3		Certificate of Amendment to the Certificate of Incorporation of the Company dated May 7, 1999 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 10-Q (File No. 000-19658) as filed with the Commission on May 2, 2005)

3.2		Amended and Restated By-laws of the Company dated December 14, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 000-19658) as filed with the Commission on December 20, 2006)

10.1		Second Amendment, dated January 29, 2010 to Credit Agreement by and among the Company, Bank of America, N.A., Wells Fargo Retail Finance, LLC, and Regions Bank (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission on February 4, 2010)

31.1		Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*