**UNITED STATESSECURITIES AND EXCHANGE COMMISSION** Washington, D.C. 20549

**FORM 10-Q**

**(MarkOne)**

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

**FOR THE QUARTERLY PERIOD ENDEDMarch 31, 2007**

**OR**

**o****  TRANSITION REPORT PURSUANT TOSECTION 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 FreewayDallas, 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, ifchanged since last report)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x  No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Acceleratedfiler x                             Non-acceleratedfiler o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes  oNo  x

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

| **Class**                                |   | **Outstanding at April 27, 2007** |
|------------------------------------------|--------|-------------------------------------------------------|
| Common Stock,  par value $0.01 per share |   | 41,438,903                                            |

 

 

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**Forward-Looking Statements**

*This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of thefederal securities laws and the Private Securities Litigation Reform Actof 1995. These statements may be found throughout this Form 10-Qparticularly under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” among others. Forward-lookingstatements 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 shouldconsider statements that contain these words carefully because they describeour expectations, plans, strategies and goals and our beliefs concerning futurebusiness conditions, our future results of operations, our future financialposition, and our business outlook or state other “forward-looking”information.*

*Readersare referred to”Item 1A. Risk Factors” of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, and “Item 1A RiskFactors” of this Quarterly Report on Form 10-Q for examples of risks,uncertainties and events that could cause our actual results to differmaterially from the expectations expressed in our forward-looking statements.These risks, uncertainties and events also include, but are not limited to, thefollowing:*

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

·                  *conditions affecting consumer spending, such as highgasoline prices and household utility costs;*

·                  *general regional and national economic conditions;*

·                  *inclement weather, such as the pattern of hurricanesthat affected the Southeast U.S. in August and September 2004 andagain in September 2005;*

·                  *changes in our merchandise mix;*

·                  *timing and type of sales events, promotionalactivities and other advertising;*

·                  *uncertainties arising out of world events;*

·                  *increased or new competition;*

·                  *our ability to continuously attract buyingopportunities for closeout merchandise and anticipate consumer demand ascloseout merchandise becomes available;*

·                  *loss of, or disruption in, our centralizeddistribution center;*

·                  *loss or departure of one or more members of oursenior management;*

·                  *our dependence on external funding sources;*

·                  *an increase in the cost or a disruption in the flowof our products;*

·                  *environmental regulations;*

·                  *seasonal and quarterly fluctuations;*

·                  *fluctuations in our comparable store results;*

·                  *our ability to operate in highly competitive marketsand to compete effectively;*

·                  *our ability to attract and retain quality sales,distribution center and other associates in large numbers, as well as,experienced buying and management personnel;*

·                  *our ability to operate information systems andimplement new technologies effectively;*

·                  *our ability to generate strong cash flows from ouroperations to support capital expansion, operations, debt repayment and ourstock repurchase program;*

·                  *our ability to maintain internal control overfinancial reporting;*

·                  *our ability to anticipate and respond in a timelymanner to changing consumer demands and preferences; and*

·                  *our ability to generate strong holiday season sales.*

*The forward-looking statements made in this Form 10-Qrelate only to events as of the date on which the statements were made. Weundertake no obligation to update our forward-looking statements to reflectevents and circumstances after the date on which the statements were made or toreflect the occurrence of unanticipated events.*

*The terms “Tuesday Morning,” “we,” “us” and “our” as used inthis Quarterly Report on Form 10-Q refer to Tuesday Morning Corporationand its subsidiaries.*

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| **PART I - FINANCIAL  INFORMATION**                                                                   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       |       |
| Item 1 – Financial  Statements                                                                        |       |
|                                                                                                       |       |
| Consolidated Balance  Sheets as of March 31, 2007 and December 31, 2006                          |       |
|                                                                                                       |       |
| Consolidated  Statements of Income for the Three Months Ended March 31, 2007 and 2006                 |       |
|                                                                                                       |       |
| Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2007 and  2006            |       |
|                                                                                                       |       |
| Notes to  Consolidated Financial Statements                                                                |       |
|                                                                                                       |       |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |
|                                                                                                       |       |
| Item 3 – Quantitative  and Qualitative Disclosures about Market Risk                                  |       |
|                                                                                                       |       |
| Item 4 – Controls  and Procedures                                                                     |       |
| ** **                                                                                                 | ** ** |
| **PART II – OTHER  INFORMATION**                                                                 |       |
| ** **                                                                                                 | ** ** |
| Item 1 – Legal  Proceedings                                                                           |       |
|                                                                                                       |       |
| Item  1A – Risk Factors                                                                               |       |
|                                                                                                       |       |
| Item 5 – Other  Information                                                                           |       |
|                                                                                                       |       |
| Item  6 – Exhibits                                                                                    |       |

 

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**PART I- FINANCIAL INFORMATION**

**Item 1. Financial Statements**

## **Tuesday Morning Corporation**

## **Consolidated Balance Sheets**

## **March 31, 2007(unaudited) and December 31, 2006(In thousands, except for share data)**

| ** **                                                                                                                                                                                                        | ** ** | **March 31,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                                                                   |       |                     |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                        | 9,563      |                    | $          | 49,633 |   |
| Inventories                                                                                                                                                                                                       |       | 280,987                  |       | 242,674                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                        |       | 7,508                    |       | 5,617                   |       |
| Deferred income  taxes                                                                                                                                                                                            |       | 3,162                    |       | 3,162                   |       |
| Total current  assets                                                                                                                                                                                             |       | 301,220                  |       | 301,086                 |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Property and equipment,  net                                                                                                                                                                                      |       | 85,149                   |       | 86,397                  |       |
| Deferred financing  costs                                                                                                                                                                                         |       | 471                      |       | 514                     |       |
| Other assets                                                                                                                                                                                                      |       | 3,383                    |       | 5,137                   |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Total Assets                                                                                                                                                                                                      |       | $                        | 390,223    |                    | $          | 393,134 |   |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                     | ** ** | ** **               | ** ** | ** **              | ** ** |
| Current liabilities:                                                                                                                                                                                              |       |                     |       |                    |       |
| Accounts payable                                                                                                                                                                                                  |       | 89,682                   |       | 88,514                  |       |
| Accrued  liabilities                                                                                                                                                                                              |       | 32,680                   |       | 35,934                  |       |
| Income taxes  payable                                                                                                                                                                                             |       | 540                      |       | 15,543                  |       |
| Total current  liabilities                                                                                                                                                                                        |       | 122,902                  |       | 139,991                 |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Revolving credit  facility                                                                                                                                                                                        |       | 45,500                   |       | —                  |       |
| Deferred rent                                                                                                                                                                                                     |       | 4,629                    |       | 4,618                   |       |
| Deferred income taxes                                                                                                                                                                                             |       | 4,648                    |       | 4,648                   |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Total Liabilities                                                                                                                                                                                                 |       | 177,679                  |       | 149,257                 |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| 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; 41,432,159 shares  issued and outstanding at March 31, 2007 and 41,423,327 shares issued  and outstanding at December 31, 2006 |       | 414                      |       | 414                     |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 197,285                  |       | 196,381                 |       |
| Retained  earnings                                                                                                                                                                                                |       | 14,847                   |       | 47,090                  |       |
| Accumulated other  comprehensive income (loss)                                                                                                                                                                    |       | (2                       | )          | (8                      | )          |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Total  Stockholders’ Equity                                                                                                                                                                                  |       | 212,544                  |       | 243,877                 |       |
|                                                                                                                                                                                                              |       |                     |       |                    |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                   |       | $                        | 390,223    |                    | $          | 393,134 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

1

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**Tuesday Morning Corporation**

**Consolidated Statements of Income(unaudited)**

**(Inthousands, except per share data)**
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                          |       |                                             |       |   |   |
| Net sales                                     |       | $                                                | 189,156    |   | $ | 187,759 |   |
| Cost of sales                                 |       | 118,288                                          |       | 114,168 |   |
| Gross profit                                  |       | 70,868                                           |       | 73,591 |   |
| Selling, general  and administrative expenses |       | 69,289                                           |       | 63,163 |   |
| Operating income                              |       | 1,579                                            |       | 10,428 |   |
| Other income  (expense):                      |       |                                             |       |   |   |
| Interest income                               |       | 143                                              |       | 99 |   |
| Interest expense                              |       | (234                                             | )          | (186 | ) |
| Other income                                  |       | 203                                              |       | 133 |   |
|                                          |       | 112                                              |       | 46 |   |
| Income before income taxes                    |       | 1,691                                            |       | 10,474 |   |
| Income tax  expense                           |       | 644                                              |       | 3,934 |   |
|                                          |       |                                             |       |   |   |
| Net income                                    |       | $                                                | 1,047      |   | $ | 6,540 |   |
|                                          |       |                                             |       |   |   |
| **Earnings  Per Share**                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income per  common share:                 |       |                                             |       |   |   |
| Basic                                         |       | $                                                | 0.03       |   | $ | 0.16 |   |
| Diluted                                       |       | $                                                | 0.03       |   | $ | 0.16 |   |
| Weighted average  number of common shares:    |       |                                             |       |   |   |
| Basic                                         |       | 41,427                                           |       | 41,376 |   |
| Diluted                                       |       | 41,650                                           |       | 41,674 |   |
|                                          |       |                                             |       |   |   |
| Dividend per common  share                    |       | $                                                | 0.80       |   | $ | 0.80 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

2

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**Tuesday Morning Corporation**

**Consolidated Statements of Cash Flows(unaudited)**

**(In thousands)**
| ** **                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                                           |       |                                             |       |   |   |
| **Net  cash flows from operating activities:**                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $                                                | 1,047      |   | $ | 6,540 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                  |       | 4,363                                            |       | 4,007 |   |
| Amortization of financing fees                                                 |       | 43                                               |       | 43 |   |
| Loss on disposal of assets                                                     |       | 289                                              |       | — |   |
| Stock-based compensation                                                       |       | 1,033                                            |       | 809 |   |
| Other                                                                          |       | (140                                             | )          | 52 |   |
| Change in operating assets and liabilities:                                    |       |                                             |       |   |   |
| Inventories                                                                    |       | (38,441                                          | )          | (21,743 | ) |
| Prepaid and other assets                                                       |       | (137                                             | )          | (799 | ) |
| Accounts payable                                                               |       | 1,168                                            |       | 4,572 |   |
| Accrued liabilities                                                            |       | (3,244                                           | )          | (11,522 | ) |
| Income taxes payable                                                           |       | (15,003                                          | )          | (12,689 | ) |
| Net cash used in operating activities                                          |       | (49,022                                          | )          | (30,730 | ) |
| **Net  cash flows from investing activities:**                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Capital expenditures                                                           |       | (3,404                                           | )          | (2,385 | ) |
| Net cash used in investing activities                                          |       | (3,404                                           | )          | (2,385 | ) |
| **Net  cash flows from financing activities:**                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Payment of dividends to common stockholders                                    |       | (33,144                                          | )          | (33,102 | ) |
| Proceeds from revolving credit facility                                        |       | 45,500                                           |       | 28,000 |   |
| Net cash provided by (used in) financing activities                            |       | 12,356                                           |       | (5,102 | ) |
| Net decrease in  cash and cash equivalents                                     |       | (40,070                                          | )          | (38,217 | ) |
| Cash and cash  equivalents, beginning of period                                |       | 49,633                                           |       | 43,547 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                | 9,563      |   | $ | 5,330 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

3

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**TuesdayMorning CorporationNotes to Consolidated Financial Statements (unaudited)**

1.               Basisof presentation - The unaudited consolidated interim financial statementsincluded herein have been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations.These financial statements include all adjustments, consisting only of those ofa normal recurring nature, which, in the opinion of management, are necessaryto present fairly the results of the interim periods presented and should beread in conjunction with the consolidated financial statements and notesthereto in our Form 10-K filing for the year ended December 31, 2006.Because of the seasonal nature of our business, the results of operations forthe quarter are not indicative of the results to be expected for the entireyear.

2.           Stock-basedcompensation – We account for our stock-based compensation plan in accordancewith Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004) “Share-BasedPayment” (SFAS 123R).  Under SFAS 123R,all stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as an expense in theincome statement over the requisite service period.

We have established the Tuesday Morning Corporation 1997 Long-TermEquity Incentive Plan, as amended (the “1997 Plan”), and the Tuesday MorningCorporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”),which allows for the granting of stock options to directors, officers and keyemployees of, and certain other key individuals who perform services for us andour subsidiaries. The 1997 Plan and the 2004 Plan authorizes grants of optionsto purchase up to 4,800,000 and 2,000,000 shares, respectively, of authorized,but unissued common stock.  Stock optionsare awarded at a fair market value equal to the average of the high and lowtrading prices of the Company’s common stock on the date of grant.

Options granted under the 1997 Plan and the 2004 Plan typically vestdaily over periods of four to five years and expire in ten years. The exerciseprices of the options range between $1.43 and $35.23, which represents marketvalue on the grant date.  At March 31,2007, there were 223,386 and 1,589,551 shares available for grant under the1997 Plan and the 2004 Plan, respectively.

During the first quarter ended March 31, 2007 and 2006 we recognizedstock-based compensation expense as follows:

|                                                            | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                       |       |                                                       |       |                                                       |       |
| Total cost of  stock-based compensation during the period  |       | $                                                          | 905        |                                                       | $          | 1,150 |   |
| Amounts  capitalized in ending inventory                   |       | (221                                                       | )          | (341                                                       | )          |
| Amounts  recognized in expense previously capitalized      |       | 349                                                        |       | —                                                     |       |
| Amounts charged  against income for the period before tax  |       | $                                                          | 1,033      |                                                       | $          | 809 |   |
|                                                       |       |                                                       |       |                                                       |       |
| Amount of related  income tax benefit recognized in income |       | $                                                          | (293       | )                                                          | $          | (230 | ) |

 

3.*              *Comprehensive income - Comprehensiveincome represents our change in equity (net assets), during a period, fromtransactions and other events and circumstances from non-owner sources. Itincludes all changes in equity during a period except those resulting frominvestments or distributions by or to owners.   Total comprehensive income for the three month period endedMarch 31, 2007 and 2006 was $1.0 million and $6.6 million, respectively.

4.                  Legalproceedings - During 2001 and 2002, we were named as a defendant in threecomplaints filed in the Superior Court of California in and for the County ofLos Angeles. The plaintiffs are seeking to certify a statewide class made up ofsome of our current and former employees, which they claim are owedcompensation for overtime wages, penalties and interest. The plaintiffs arealso seeking attorney’s fees and costs. In October 2003, we entered into asettlement agreement with a sub-class of these plaintiffs consisting ofmanager-in-training/management trainees which was paid in November 2005with no material impact to our financial statements. The trial date related tothe remaining complaint is currently scheduled for September 2007. Asimilar lawsuit was filed in Orange County, California in 2004 by managers,managers-in-training and assistant managers and an amended complaint wasrecently filed in January 2007. This case is still in the discovery phase.We do not expect either of these complaints to have a material impact to ourfinancial statements.

We intend to vigorouslydefend all pending actions. We do not believe these or any other legalproceedings pending or threatened against us would have a material adverseeffect on our financial condition or results of operations.

4

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5.               Earningsper common share

|                                                                                                    | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| **Basic  earnings per share:**                                                                     | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net income                                                                                         |       | $                                                                 | 1,047      |   | $ | 6,540 |   |
| Weighted average number of common shares outstanding                                               |       | 41,427                                                            |       | 41,376 |   |
| Net income per common share                                                                        |       | $                                                                 | 0.03       |   | $ | 0.16 |   |
|                                                                                               |       |                                                              |       |   |   |
| **Diluted  earnings per share:**                                                                   | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net income                                                                                         |       | $                                                                 | 1,047      |   | $ | 6,540 |   |
| Dilutive effect of employee stock options                                                          |       | 223                                                               |       | 298 |   |
| Weighted average number of common shares outstanding                                               |       | 41,427                                                            |       | 41,376 |   |
| Weighted average number of common shares and diluted  effect of outstanding employee stock options |       | 41,650                                                            |       | 41,674 |   |
| Net income per  common share                                                                       |       | $                                                                 | 0.03       |   | $ | 0.16 |   |

 

6.               Revolvingcredit facility –  At March 31,2007, we had $45.5 million outstanding under the revolving credit facility andhad availability of $156.4 million.  Weincur commitment fees of up to 0.25% on the unused portion of the revolvingcredit facility. Any borrowings under the revolving credit facility incurinterest at LIBOR or the prime rate, depending on the type of borrowing, plusan applicable margin. These rates are increased or reduced as our average totalleverage ratio changes.   The weightedaverage interest rate at March 31, 2007 was 6.82%. On April 18, 2007, weentered into an amendment to the existing revolving credit facility.  The amendment to the revolving creditfacility provides for, among other things: the extension of the maturity datefrom December 22, 2009 to December 22, 2010; changes in applicable commitmentfees and interest rates in connection with average leverage ratios; a reductionof the lenders’ revolving credit commitment from $210 million to $200 million;and a requirement that for 15 consecutive days during the period from December1 through January 31, the principal amount of the outstanding loans may notexceed $30 million.

7.               IncomeTaxes - Tuesday Morning Corporation and its subsidiaries file income taxreturns in the U.S. federal and various state jurisdictions.  With fewexceptions, we are no longer subject to U.S. federal and state and localexaminations by tax authorities for years before 1999.  The IRS has concluded an examination of thecompany for years before 2004.

In June 2006, the FASBissued Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes*”, an interpretation of SFAS No. 109,“*Accounting for Income Taxes*” (“FIN48”), to create a single model to address accounting for uncertainty in taxpositions. FIN 48 clarifies the accounting for income taxes, by prescribing aminimum recognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition.

Weadopted the provisions of FIN 48 on January 1, 2007.  As a result of theimplementation of FIN 48, Tuesday Morning Corporation recognized a $145thousand increase in the liability for unrecognized tax benefits, which wasaccounted for as a decrease to the January 1, 2007, balance of retainedearnings.

Thetotal amount of unrecognized tax benefits (including interest and penaltyaccruals) as of the date of adoption on January 1, 2007 is $1.7 million. Included in the balance at January 1, 2007 are $1.1 million of taxpositions that, if recognized, would affect the effective tax rate.  Also,included in the balance at January 1, 2007 are $519 thousand of tax positionsfor which the ultimate deductibility is highly certain but for which there isuncertainty about the timing of such deductibility.  Because of the impactof the deferred tax accounting, other than interest and penalties, thedisallowance of the shorter deductibility period would not affect the annualeffective tax rate but would accelerate the payment of cash to the taxingauthority to an earlier period.

Weclassify and recognize interest and penalties accrued related to unrecognizedtax benefits in income tax expense.  During the tax years ended December31, 2006, 2005, and 2004, we recognized, net of tax effect, $142 thousand, $139thousand, and $378 thousand in interest, respectively. We had $112 thousand forpayment of interest during the year ended December 31, 2006.  No interest was paid in the tax years endedDecember 31, 2005 and December 31, 2004.

We do not anticipate thatthe total amount of unrecognized tax benefits will significantly increase ordecrease the effect tax rate within 12 months of January 1, 2007, the date ofadopting FIN 48.

8.               SubsequentEvent – On May 1, 2007,we announced that effective June 30, 2007, we wouldchange our year end from December 31 to June 30.

5

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**Item 2.****                               Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Introduction**

We operated 795 discountretail stores in 47 states as of March 31, 2007.  We sell closeout home furnishings,housewares, gifts and related items, which we purchase at below wholesaleprices.  Our stores operate duringperiodic “sales events” that occur in each month except January andJuly.  We are generally closed for thefirst two weeks of January and July, which traditionally have been weakermonths for retailers.  We purchase firstquality, brand name merchandise at closeout prices and sell it at prices 50% to80% below those generally charged by department stores and specialty andcatalog retailers. We do not sell seconds, irregulars, refurbished or factoryrejects.

**BusinessOverview**

Net sales for the firstquarter of 2007 were approximately $189.2 million, an increase of 0.7% comparedto the same period last year. Comparable store sales decreased by 5.4% drivenby a decline in customer traffic.  Net income for the quarter was $1.0million and diluted earnings per share was $0.03.

During the first quarterof 2007, we continued to focus our efforts on inventory productivity.  Inventory on a per store basis was 2.6%higher compared to the same quarter last year.  Home furnishings and high end decorative home merchandise continue to bechallenging sectors in an environment that remains highly competitive andpromotional.

We opened twelve newstores and closed twelve existing stores during the first quarter of 2007.  In addition, we relocated ten existing storesand expanded two existing stores.

On March 9, 2007, theboard of directors declared an annual cash dividend of $0.80 per common share,totaling approximately $33.1 million that was paid on March 30, 2007 toshareholders of record on March 20, 2007.

Effective June 30, 2007,we will change our year end from December 31 to June 30.  This will allow the Company to separate theannual business planning and fiscal year reporting process from the holidayselling season.

**Results of Operations**

Thefollowing table sets forth certain financial information from our consolidatedstatements of income expressed as a percentage of net sales. Our business ishighly seasonal, with a significant portion of our net sales and most of ouroperating income generated in the fourth quarter, which includes the holidayseason. There can be no assurance that the trends in sales growth or operatingresults will continue in the future.
|                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net sales                                        |       | 100.0                                            | %          | 100.0 | % |
| Cost of sales                                    |       | 62.5                                             |       | 60.8 |   |
| Gross profit                                     |       | 37.5                                             |       | 39.2 |   |
| Selling, general  and administrative expense     |       | 36.7                                             |       | 33.6 |   |
| Operating income                                 |       | 0.8                                              |       | 5.6 |   |
| Net interest  expense and other income (expense) |       | 0.1                                              |       | 0.0 |   |
| Income before  income taxes                      |       | 0.9                                              |       | 5.6 |   |
| Income tax  expense                              |       | 0.3                                              |       | 2.1 |   |
| Net income                                       |       | 0.6                                              | %          | 3.5 | % |

 

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**Three Months Ended March 31, 2007Compared to the Three Months Ended March 31, 2006**

Duringthe first quarter of 2007, net sales increased to $189.2 million from $187.8million, an increase of $1.4 million or .7% compared to the same quarter of2006. The increase in first quarter sales is primarily due to the $11.4 millionincrease in sales from non-comparable new stores, offset by a 5.4% decrease incomparable store sales. The decrease in comparable sales for the first quarterof 2007 was comprised of a 5.6% decrease in the number of transactions slightlyoffset by a 0.2% increase in the average transaction amount. Average storesales for the first quarter of 2007 decreased 7.0% when compared to the sameprior year quarter. Comparable store sales and sales per store decreasedprimarily due to lower traffic levels. Management believes traffic levels arelower due to a number of factors, including an increase in supply of homefurnishing products, the promotional environment of retailers in this sector,as well as the economic pressures impacting the discretionary income ofconsumers.

Grossprofit decreased $2.7 million, or 3.7%, to $70.9 million for the three monthsended March 31, 2007 as compared to last year’s first quarter of $73.6 million,primarily a result of higher markdowns. Our gross profit percentage decreasedfrom 39.2% to 37.5% in the first quarter. This decrease of 1.7% in gross profitpercentage is primarily comprised of a 1.0% increase in markdowns and a 0.7%increase in costs associated with the buying and distribution of inventory.

Selling,general and administrative expenses include store labor, store occupancy costs,advertising, miscellaneous store operating expenses and corporate office costs.Increases in dollar amounts of these expenses are attributable to increases inthe number of stores and increases in variable expenses due to sales growth.Variable expenses include payroll and related benefits, advertising expense andother expenses such as credit card fees.

Selling,general and administrative expenses increased $6.1 million, or 9.7%, to $69.3million from $63.2 million in the first quarter of 2006.  The increase wasattributable to a $4.6 million increase in store occupancy costs, storepersonnel costs and store depreciation expense primarily due to the expansionin our store base, an increase of $400 thousand of store maintenance and otherstore expenses, $500 thousand in advertising costs and $800 thousand of othercorporate expenses including audit fees, equipment maintenance, taxes andbusiness insurance.  These were slightly offset by a $200 thousanddecrease in stock compensation expense.  As a percentage of net sales,these expenses increased 3.0% to 36.6% in the first quarter of 2007 from 33.6%in the first quarter of 2006.  The increased percentage is primarily dueto a 2.2% increase related to store occupancy costs, store personnel costs andstore depreciation expense, a 0.2% increase in store maintenance and otherstore expenses and a 0.4% increase in other corporate expenses slightly offsetby the 0.1% decrease in stock compensation expense.  In addition, it is more difficult to leverageexpenses during periods of negative comparable store sales.

Theincome tax provision for the three month periods ended March 31, 2007 and2006 was $644 thousand and $3.9 million, respectively, reflecting an effectivetax rate of 38.1% and 37.6%, respectively. The effective tax rate is higher inthe first quarter of 2007 as compared to the first quarter of 2006 primarilydue to unfavorable changes to state income tax regulations.

### **Liquidity and Capital Resources**

Wehave financed our operations with funds generated from operating activities andborrowings under our revolving credit facility. Our cash flows will continue tobe utilized for the expansion of our business and future cash dividends to ourstockholders. We have no off-balance sheet arrangements or transactions withunconsolidated, limited purpose or variable interest entities, nor do we havematerial transactions or commitments involving related persons or entities.

Net cash used in operating activities for the threemonths ended March 31, 2007 and 2006 was $49.0 million and $30.8 million,respectively, representing an $18.2 million increase. This increase isprimarily due to the $8.8 million decrease in operating income and cash used topurchase inventory of $16.7 million offset by timing of cash payments made forother accrued liabilities of $8.4 million.

Capitalexpenditures principally associated with new store openings and warehouse andoffice equipment were $3.4 million and $2.4 million for the three months endedMarch 31, 2007 and 2006, respectively. The increase in capitalexpenditures is due to opening more stores during the first quarter of 2007when compared to the first quarter of 2006. We expect to spend approximately$15.2 million for additional capital expenditures during 2007, which willinclude the opening of new stores, stores expansion,  relocation of existing stores, enhancementsof selected stores and purchases of equipment for our distribution center andcorporate office.

AtMarch 31, 2007, we had $45.5 million outstanding under the revolvingcredit facility and had availability of $156.4 million.  We incur commitment fees of up to 0.25% onthe unused portion of the revolving credit facility. Any borrowings under therevolving credit facility incur interest at LIBOR or the prime rate, dependingon the type of borrowing, plus an applicable margin. These rates are increasedor reduced as our average total leverage ratio changes. The weighted averageinterest rate at March 31, 2007 was 6.82%. On April 18, 2007, we entered into an amendment to the existingrevolving credit facility.  The amendmentto the revolving credit facility provides for, among other things: theextension of the maturity date from December 22, 2009 to December 22, 2010;changes in applicable commitment fees and interest rates in connection withaverage leverage ratios; a reduction of the lenders’ revolving 

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creditcommitment from $210 million to $200 milliion; and a requirement that for 15consecutive days during the period from December 1 through January 31, theprincipal amount of the outstanding loans may not exceed $30 million.

Therevolving credit facility contains certain restrictive covenants, which amongother things, require us to comply with certain financial ratios coveringmaximum leverage, minimum fixed charge coverage and minimum interest coverage.Other restrictions affect our ability to incur liens or make certain other restrictedpayments, sell assets or merge or consolidate with any other person. As ofMarch 31, 2007, we were in compliance with all covenants.

We anticipate that our future net cash flows fromoperations and unused borrowings under our revolving credit facility will besufficient to fund our working capital needs and planned capital expendituresfor the next 12 months.

**StoreOpenings/Closings**
|                                     | ** ** | **Three Months  Ended  March 31  2007** | ** ** | **Three Months  Ended  March 31  2006** | ** ** | **Twelve Months   Ended  December 31,  2006** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** **                                                   | ** ** |
| Stores open at  beginning of period |       | 795                                               |       | 732                                               |       | 732                                                          |       |
| Stores opened  during the period    |       | 12                                                |       | 7                                                 |       | 71                                                           |       |
| Stores closed  during the period    |       | (12                                               | )          | (5                                                | )          | (8                                                           | )          |
| Stores open at end of  period       |       | 795                                               |       | 734                                               |       | 795                                                          |       |

 

**Item 3.****    Quantitativeand Qualitative Disclosures about Market Risk**

We areexposed to various market risks, including changes in foreign currency exchangerates and interest rates. Market risk is the potential loss arising fromadverse changes in market prices and rates, such as foreign currency exchangeand interest rates. Based on our market risk sensitive instruments outstandingas of March 31, 2007, we have determined that there was no material marketrisk exposure to our consolidated financial position, results of operations or cashflows as of such date. Our market risk is discussed in more detail in ourAnnual Report on Form 10-K for the year ended December 31, 2006. Wedo not enter into derivatives or other financial instruments for trading orspeculative purposes. There have been no significant changes in the foreigncurrency exchange rate or interest rate market risks since December 31,2006.

**Item 4.Controls and Procedures**

**Disclosure Controls and Procedures**

Based on ourmanagement’s evaluation (with participation of our principal executive officerand our principal financial officer), our principal executive officer and ourprincipal financial officer have concluded that our disclosure controls andprocedures (as defined in Rule 13a-15(e) orRule 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) were effective as of March 31, 2006 to ensure thatinformation required to be disclosed by us in this Quarterly Report onForm 10-Q was (1) recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’srules and forms and (2) accumulated and communicated to ourmanagement, 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, notabsolute, assurance that the objectives of the control system are met. Becauseof inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues, if any, within a companyhave been detected. Accordingly, our disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the objectives ofour disclosure control system are met and, as set forth above, our chiefexecutive officer and chief financial officer have concluded, based on theirevaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures were effective to provide reasonableassurance that the objectives of our disclosure control system were met.

**Changesin Internal Control Over Financial Reporting**

There were nochanges in our internal control over financial reporting that occurred duringthe quarter ended March 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

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**PART II- OTHER INFORMATION**

**Item 1. Legal Proceedings**

During 2001 and2002, we were named as a defendant in three complaints filed in the SuperiorCourt of California in and for the County of Los Angeles. The plaintiffs areseeking to certify a statewide class made up of some of our current andformer employees, which they claim are owed compensation for overtime wages,penalties and interest. The plaintiffs are also seeking attorney’s fees andcosts. In October 2003, we entered into a settlement agreement with asub-class of these plaintiffs consisting of manager-in-training andmanagement trainees which was paid in November 2005 with no materialimpact to our financial statements. The trial date related to the remainingcomplaint is currently scheduled for September 2007.  A similar lawsuit was filed in Orange County,California in 2004 by managers, managers-in-training and assistant managers andan amended complaint was recently filed in January 2007.  This case is still in the discoveryphase.  We do not expect either of thesecomplaints to have a material impact to our financial statements.

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

**Item 1A.Risk Factors**

There have been no material changes from our riskfactors previously disclosed in “Item 1A. Risk Factors” of our Form 10-Kfor the year ended December 31, 2006.

**Item 5. Other Information**

On December 14,2006, our board of directors approved amended and restated by-laws which, amongother things, added a provisions related to the nomination of directors bystockholders.  Previously, the by-lawswere silent as to such procedures.  Theamended and restated by-laws now provide that any stockholder entitled to votein the election of directors generally may nominate one or more persons forelection as directors at a stockholders’ meeting only if written notice of suchstockholder’s intent to make such nomination or nominations has been given,either by personal delivery or by United States mail, postage prepaid, to thesecretary of the corporation not later than (a) with respect to an election tobe held at an annual meeting of stockholders, 90 days prior to the anniversarydate of the date of the immediately preceding annual meeting, and (b) withrespect to an election to be held at a special meeting of stockholders for theelection of directors, the close of business on the tenth day following thedate on which a written statement setting forth the date of such meeting isfirst mailed to stockholders provided that such statement is mailed no earlierthan 120 days prior to the date of such meeting.  Notwithstanding theforegoing if an existing director is not standing for reelection to adirectorship which is the subject of an election at such meeting or if suchvacancy exists as to a directorship which is the subject of an election at astockholders’ meeting, whether as a result of resignation, death, an increasein the number of directors, or otherwise, then a stockholder may make anomination with respect to such directorship at any time not later than theclose of business on the tenth day following the date on which a writtenstatement setting forth the fact that such directorship is to be elected andthe name of the nominee proposed by the board of directors is first mailed tostockholders.  Each notice of a nomination from a stockholder shall setforth (a) as to each person whom the stockholder proposes to nominate forelection or re-election as a director, (i) the name, age, business address andresidence address of such person, (ii) the principal occupation or employmentof such person, (iii) the class and number of shares of the corporation whichare beneficially owned by such person, and (iv) any other information relatingto such person that is required to be disclosed in solicitations of proxies forelection of directors, or is otherwise required, in each case pursuant toRegulation 14A under the Securities Exchange Act of 1934, as amended (includingwithout limitation such persons’ written consent to being named in the proxystatement as a nominee and to serving as a director if elected); and (b) as tothe stockholder giving the notice (i) the name and address, as they appear onthe corporation’s books, of such stockholder, (ii) the class and number ofshares of the corporation which are beneficially owned by such stockholder,(iii) whether the stockholder intends to appear in person or by proxy at themeeting to nominate the person or persons specified in the notice and (iv) adescription of all arrangements or understandings between the stockholder andeach nominee and any other person or person (naming such person or persons)pursuant to which the nomination or nominations are to be made by thestockholder.

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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 (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            |       | First Amendment to Credit Agreement dated April 18,  2007 by and among Tuesday Morning, Inc., the Company, TMI Holdings, Inc., the  Lenders party to the Credit Agreement, and Wachovia Bank, National  Association, as Administrative Agent (incorporated by reference to Exhibit  10.1 to the Company’s Form 8-K (File No. 000-19658) as filed with the  Commission on April 20,2007) |
| 10.2            |       | Description of Directors Compensation                                                                                                                                                                                                                                                                                                                                                        |
| 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 *                                                                                                                                                                                                                      |

 

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| * |   | 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        | ** **       | **TUESDAY MORNING CORPORATION** |
|--------|------------------|---------------------------------|
|   |             |                            | (Registrant) |
|   |             |                            |   |
|   |             |                            |   |
| DATE:  | May 4, 2007 |                            | By: | /s/ Elizabeth A. Schroeder |   |
|   |             |                            |   | Elizabeth A. Schroeder, Executive Vice President,  Chief Financial Officer and Secretary  (Principal Financial Officer and duly   authorized to sign this report on behalf of the   registrant) |

 

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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             |       | First Amendment to Credit Agreement dated April 18,  2007 by and among Tuesday Morning, Inc., the Company, TMI Holdings, Inc., the  Lenders party to the Credit Agreement, and Wachovia Bank, National  Association, as Administrative Agent (incorporated by reference to Exhibit  10.1 to the Company’s Form 8-K (File No. 000-19658) as filed with the  Commission on April 20,2007) |
| 10.2             |       | Description of Directors Compensation                                                                                                                                                                                                                                                                                                                                                        |
| 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*                                                                                                                                                                                                                |

 

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| * |   | 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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