Q2 2021 Tile Shop Holdings Inc Earnings Call
Mr. Mark Davis. Thank you. Please go ahead.
Thank you Felicia and good morning to everyone and welcome to the tile shop second quarter earnings call. Joining me today, Eric <unk>, Our Chief Executive Officer, and Nancy <unk>, Our Chief Financial Officer.
Certain statements made during the call today constitute forward looking statements made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements those.
Those risks and uncertainties are described in our earnings press release issued earlier in the of our filings with the SEC.
Forward looking statements made today are as of the date of this call and we do not undertake any obligation to update these forward looking statements.
Today's call will also include certain non-GAAP measurements.
Please see our earnings release for reconciliation of those non-GAAP financial measures, which has also been posted on our company website with that let me now turn the call over to Kathy.
<unk>.
Thanks, Mark Good morning, everyone and thank you for joining us today for an update on our business and a review of our second quarter financial results.
<unk> had an excellent quarter that was headlined by setting an all time quarterly sales record the $96.2 million of revenue reported. This morning represents a 42% increase from the second quarter of 2020 at 4.5% sequential increase in revenue from our first quarter of 2021, and an 8.2% increase from the revenue.
In the second quarter of 2019, which was prior to the pandemic.
While the current strength in the home improvement sector provides a nice tailwind. This success would not be possible without the strong execution of our entire tile shop organization.
I'd like to take a moment to say thank you to our frontline sales force our warehouse lawyers are distribution center team and our corporate employees.
The incredible results, we've been able to achieve would not of impossible without U.
Our formula for success is built on doing 3 things incredibly well curating, an amazing assortment inspiring our customers with in store displays and digital content and providing exceptional service.
Ultimately, it's our people who are the key to our success our ability to help our customers navigate our assortment designed beautiful spaces and create an exceptional experience is rooted in having an engaged knowledgeable and passionate team.
The tile shop team has performed at a high level through the first half of 2021, and we're excited to invest in our team to keep our momentum going.
This includes first we promoted several individuals within our retail sales and pro sales divisions.
These positions will help drive the strategy monitor execution and manage the day to day activities that are critical to achieving our goals within our sales teams.
Second we increased the number of regional sales leaders from 6 to 9 our regional leaders are instrumental in attracting and retaining talent training our field teams and ensuring best practices are followed throughout our stores.
The expansion of the regional leadership team will help increase their frequency of touch points between our regional leaders in our stores, including more onsite visits.
We expect that this investment will accelerate the improvements we've seen with respect to our retail execution goals and help develop our bench of up and coming talent that can move into store leadership roles in the future.
Third we added head count at our stores, making it possible to expand our store hours, which we reduced due to the COVID-19 pandemic during.
During the quarter, we increased the number of stores open on Sundays from 29 stores at the end of the first quarter to 38 stores as of the end of the second quarter.
We plan to open an additional 17 stores on Sundays during the third quarter. We will continue to evaluate the results of these tests perform additional tests and make adjustments to our store hours as test results show that the incremental business generated by extending store hours supports the additional investment in store overhead expenses.
These changes are exciting as they are expected to help gross sales within our existing store base and provide a foundation to support future store growth.
At this time, we do not anticipate any further store openings in 2021.
We are currently evaluating options for store growth as well as other internal initiatives to drive topline growth in 2022 and beyond.
I would now like to provide an update on the progress we've made with respect to our 3 top priorities for 2021.
Our first priority is focusing on retail execution.
We've continued to see improvements in our key metrics in this area of our.
Our field teams are doing a nice job controlling discounting improving our collection rate when we deliver product to our customers and keeping inventory shrinkage and damage losses in check.
At this attention to detail that helped us achieve a 130 basis point increase in gross margin rates. During the first 6 months of 2021, when compared to the first 6 months of 2020.
Our seasoned pro market managers continued to do a great job cultivating relationships with pros and sharing the benefits of our pro loyalty program. We've seen a nice increase in pro sales this year and our year to date probe mix has eclipsed 60% of our total sales.
Our second priority is to enhance our customers online experience now it was just 1 year ago that we really ramped efforts to sell our products online and response of the COVID-19 pandemic.
Our web orders from 2021 are on track to contribute to overall sales performance at a level consistent with 1 of our top stores and we're just getting started.
We feel good about the direction, we are headed and how our digital experience complements our in store experience in.
In addition, our visualize her has been delivering an improved customer experience to inspire and help select products.
During the second half of 2021, we're planning to refine the way we merchandise our products on our website.
The changes, we're making will make it easier to browser assortment online enhance the quality of the images on our website and provide recommendations of complementary products needed to complete of tiling project.
Our third priority to refine our purchasing and distribution processes has remained a challenge we continue to see elevated levels of back orders as of suppliers work through production challenges, resulting from COVID-19.
Our team is actively working with our network of international suppliers to secure delivery of backward of product.
Additionally, global shipping capacity constraints have compounded challenges to source inventory in a timely manner.
We've also seen an increase in the cost of ship products to the United States and some cases of rates have doubled from the inbound freight rates we've seen in the past.
We have taken steps to increase our prices and plan to continue to adjust pricing to combat rising costs of.
Additionally, the diligent execution by our retail teams will continue to be critical to maintaining our strong gross margin rates.
Overall I'm very pleased with the results that we're able to generate during the quarter and the progress we're making on our priorities.
I'll now turn the call over to Nancy who will take you through the financial details.
Nancy.
Kevin Good morning, everyone as Kevin mentioned, our second quarter results were headlined by the record sales of $96.2 million.
This was up 42% year over year, 4.5% sequentially from the first quarter of 2021, and 8.2% when we compare against the second quarter of 2019 cash.
Comparable store sales increased by 41, 6% during the second quarter of 2021, when compared to the second quarter of 2020, we were very pleased with this top line performance, especially given that we continued to carry a larger than usual backlog at the end of the second quarter due in part to product shortage of stemming from manufacturing.
Shipping delays as a result of COVID-19.
Customer deposits placed by customers to secure delivery of products in future periods also remain elevated over historical norms at $16.5 million on June 30 of 2021, which was down slightly from $17.8 million at the end of the first quarter.
Gross profit during the second quarter of 2021 was $66.4 million and increased by $21 million when compared to the second quarter of 2020, largely due to the increase in sales.
Our gross margin rate was 69, 1% 200 basis points higher than the second quarter 2020.
The improvement at our gross margin rate in the second quarter of 2021 compared to the prior year period is primarily due to better pricing and improvement in customer at delivery collection rates.
Essentially gross margin decreased 60 basis points from 69, 7% during the first quarter of 2021, the sequential decrease in gross margin is due to an increase in product costs in particular inbound freight cross from international suppliers.
Additionally, an increase in customer delivery mix contributed to the lower gross margin rate during the second quarter of 2021 compared to the first quarter of 2021.
Selling general and administrative costs increased by 11.6 loans during the second quarter of 2021, when compared to the second quarter of 2020.
Of 2020% to 16% during the second quarter of 2021.
Diluted earnings per share increased 13, <unk> from a loss of <unk> during the second quarter of 2020 to earnings of 11 cents during the second quarter of 2021 day.
During the second quarter, we relocated 1 store in Madison, Wisconsin as of the end of the quarter. Our total store count remained at 143 stores.
As Kathy indicated we do not plan to open any additional stores in 2021.
During the first 6 months of 2021, we generated operating cash flow of $42 million. This is strong evidence of the cash generating power of our model. This has been used to fund $6.2 million of capital expenditures over the same timeframe to finish the build out of the new store opened during the first quarter.
Relocate 1 store during the second quarter remodel existing stores invest in information technology and enhanced merchandising assets, we ended the quarter with $44.8 million cash balance and no debt.
As I close I wanted to touch on a topic that we announced on June 25th that's a little more personal.
After spending over 30 years working with companies in the hard surface flooring industry I've made the decision to retire.
When I came to the tile shop, 2 years ago I Couldnt of imagine would go through so much in such a short span of time and I'm proud of all we've been able to accomplish during my tenure at <unk>.
And at the cab and the rest of the executive leadership team will continue to guide the company down the right path. The company has launched a search process and I'm committed to assist in an orderly transition once of the position is filled with that Felicia I'll turn the call back to Gabby.
Thanks, Dan I also wanted to make a few comments regarding nancy's retirement.
He has been of great partner to me and our company issue. We missed her deep intimate knowledge of our space has been awesome, especially during these unprecedented times.
On behalf of our board and our entire company. Thank you Nancy for everything you've done for us as we execute our growth strategy.
With that let's move to Q&A.
Thank you again, ladies and gentlemen, like back of question. Please press Star then 1 on your Touchstone telephone again to ask a question. Please press Star then 1.
1 moment please.
Our first question comes from Jack Mohr of Borough of capital. Your line is open.
Hi, Yes, I was curious about the deposits that you guys have I think you said it was just under 17 million at the customer deposits. How much revenue does that does that represent over however, long it takes to get the supply chain issues are resolved.
Okay.
That varies actually depending on the product mix at Inc. In net back order.
Margin varied.
Depending on whether its store or its material. So its a little difficult to say and that changes on a daily basis given on the orders.
That are in process and currently.
And waiting for fulfillment.
Half of that Jeff retail customers put a 100% downward pro customers depending.
Small deposit or no deposit based on their tiers. So it does impact of different levels.
According to the customer type.
Sure.
Obviously going to be a little bit more than the deposit itself.
Sure.
So in terms of the mix of that deposit.
On your balance sheet, how how much of that would be pro customers and how much of that would be.
Irregular home remodel or buy it from.
Their own house.
Yes, it's a mix I mean right now of your if you listened to our prepared remarks, I mean, we've eclipsed 60% is pro business. So we have 40% of retail.
So you think that they have to put a 100% down you can do the math so it is higher than that but it's.
Not substantially hires.
Okay.
Also last conference call we.
I ask you about your borrowing facility and whatnot.
And I know, it's got a long dated maturity and everything there is nothing drawn on it but I was curious if you guys have looked into.
Borrowing facilities that have lower interest rates are more attractive terms or anything like that and what updates you could provide on that.
We continue to have a great relationship with our existing bank and we're always evaluating our options and what it's going to produce the best performance for us and for our shareholders, but at this time there is nothing new to update of share.
Okay, and then what about investigation of returning capital to shareholders.
That's something that's come up a lot.
We continue to be really pleased about of the cash flow that we're generating and frankly, I think having a cash cushion. During these unusual times that we're in today is really a good thing keep in mind that we've only been debt free really for 2 full quarters. This isn't something that we feel a need to Russia, but we do continue.
To evaluate our options and certainly will keep our shareholders in mind as we do so.
Okay, and then 1 last question.
In terms of valuations for.
Floor covering companies and whatnot I'm sure you guys have your finger on the pulse of M&A.
What kind of multiples and valuations are you seeing for.
Other companies as they kind of get folded up into larger entities.
Okay.
We're really not looking to discuss M&A or other companies at this time.
Any particular reason.
At.
It's just not part of our strategy is that we're prepared to discuss for a competitive reasons and again it really varies.
Okay. Thanks.
Thanks for your time.
Thanks, Jeff.
Thank you. Our next question comes from John Hollander.
Your line is open.
Good morning, guys and great quarter.
A few quick questions..1 is I wanted to chat about the store remodeling process, how many stores have been remodeled and how many do you expect to be remodeled over the next 12 months.
Yes.
Well.
Thanks for the question, Yes, we want to remodel we came out with a certain lift of stores at the beginning of the year, It's a remodel and enhanced now we do analysis based on the tenure of the store the segments of the customer.
<unk> of the vignettes and how much we want to spend on these remodels and we've remodeled.
Around the half dozen of.
So far this year, we've scaled back a little bit just due to some of the inventory and shipping constraints that we're experiencing but we're going to continue remodeling some stores throughout the remainder of the year.
Over 10, if not a few more depending on how things shake out here in the next few months.
I'm, sorry from was that kind of additional or going from 6 to 10.
Hopefully 10, additional but we're going to say 10 right now.
And we will see all as product continues to come in through the through the multiple ports.
Thank you and what type of returns or lift do you see on the store Remodels.
Yes.
We've done the analysis on this end depending on how much we invest it can be anywhere from 2 to 4 years, depending if we're investing a smaller amount to a larger amount or a full store remodel if we're doing just.
Scrape on some vignettes, we can see the return of quite quickly, but if were investing a substantial amount of the remodel it could take 2 years.
Okay.
And what is the impact on the employees of the manager of the local store. After you do the remodel.
From beginning to end, it's exciting and raises morale.
As a manager for 15 years and of salesman and when you have remodels going on in stores the customers get excited actually go around and watch this being done.
The staff excited to get new product in the stores, we tried to do any demo or anything that's disruptive to the business during the evening hours and setting an grouting of tile and applying fixtures during the day. So it's not disruptive at all and it creates a lot of excitement.
I will put it in a shameless plug for the Glen Burnie, Maryland store, if you could do a remodel there would be very.
Yeah.
I appreciate it I'm sure they're happy to hear that too so thank you.
Follow up question in your press release, you track of return on capital employed metric, but I was hoping to understand better why this is the metrics at the company trucks.
Hey, Good morning. This is mark we feel that the return on capital employed metric is is a very good metric to assess that.
The health of the business as well as the quality of the earnings that we are able to produce on our capital over time.
We do feel of that seen continued improvement in this metric is is helpful. But thats. The primary return on capital metric that we think is most important to us as we evaluate the health of our business.
Our management bonuses at all tied to this metric.
No.
Okay. At this metric has dramatically increased so congratulations for that in the last quarter was 7.2 of this quarter's 39.
And when doing any modeling at the obvious why because were taking out 4 quarters from 2020 of adding in these dramatically powerful quarters from 2021.
Bob.
What how does the metric I mean, how does the management feel about the different levels right now youre at nearly 14%.
What happens if this number goes higher does this change in your management's behavior.
I think the easiest way to answer that question is we feel really good about the progress we've made over the course of the last year, but we think that we can do better that doesn't necessarily change our behaviors, but we're continually striving to get a better return as we move forward.
Okay.
And finally, just about inventory and shipping delays could you comment a little bit about.
With the current delays.
Of your orders from your international suppliers have you delayed shorten at all of our Big lengthened has there been any impact adult of ARINC with what's going on in Asia right now just any qualitative commentary would be helpful.
Thanks, John Yes.
It's been a struggle for almost a year over a year now so what we're seeing though are our vendor.
Vendor partners are able to produce the product people are back at work all over the world and they're getting the product made.
We find a container shortage is continuing to be of struggle, but once we get the containers on the ships. The ships are sitting at ports and you have longshoremen strike of imports of Montreal, We've got fires in the northeast at her closing rail lines, but I mean, there's always going be challenges in logistics, but the good news is we're still continuing to receive a lot.
At a product more so today than in the past 9 months. So things are slightly opening up we're able to get a lot of our back orders in our Dcs, but we're also opening of lot of business as well. So as we receive back orders were continually creating some new ones. When you have 6000 skus of <unk>.
Balancing act, who can ship, what and when is it going to arrive at what port and what challenges are we going to incur not only at the ports button rail trucking and everything else, but the good news is it's getting better.
Thank you and do you lose any deposits because of these delays or customers not able to cancel I just wanted to understand how that rolls through.
Customers can cancel whenever they want we're very lenient with our customers and I think what I'm seeing I'm, a customer of myself and I'm waiting on furniture I'm waiting on certain things from my own homes are customers of seamless theyre in the remodeling, they're not just buying tile or buying cabinets or buying windows are buying siding and <unk>.
1 is experiencing the same thing so what I've seen and heard from our leadership in the field and when I talk to customers their understanding of the current challenges at everyone's facing so we're not seeing any elevated cancellation rates.
So I don't think Thats of concern if they wanted to they could.
But I'm not seeing that right now.
Thank you.
In terms of deposits Where's the best place to track that financials.
The deposits are included in the.
The cash that Youll see on our balance sheet right now, we've got $16.5 million.
And part of the cash that is fond of assets.
And is that broken out like in the queue because all of US doing the press release some of the leasing of $44.75 and restricted cash of level.
Hey, Brian This is mark it is broken out in the queue.
Actual of deferred revenue that we have associated with customer deposits is end.
Other accrued liability and we are of a breakdown of other accrued liabilities as part of our Q.
Okay. Thank you very much news all of my questions, great quarter, guys and looking forward to and remodeling of the Gander store.
Alright, John I made a note of it.
Right.
Thank you our net.
Next question comes from Jeff Moore of Borough of capital. Your line is open.
Thanks for taking a follow up.
Curious about the B Riley Summer summit that you guys are going to be attending on August 18th and 19th.
Are you all going to be doing some sort of a presentation that will be made public.
Hey, Jeff This is mark we're not necessarily going to be making a presentation. There that will be made public.
But certainly happy to meet with folks that.
Half of questions, our Investor Relations line is always open.
Okay and what.
That's kind of what color of the decision to to attend that it seems.
Kind of like a large directional change that the cash.
Company has made.
In.
Kind of the communications or attendance at these conferences.
Just a little bit out of the ordinary I personally think is of great thing that you all are attending.
But I was kind of curious what prompted that end.
You know kind of what some of the thinking was for that.
Hey, Jeff.
Im really excited to attend the conference and meet a bunch of people end and talk about the tile shop.
We want to increase transparency to our shareholders as we re listed on the NASDAQ I think it's important that we would come back and do the Q&A and hit some conferences and just share the excitement that I have about our company and where we're going to be going so.
That's pretty much at.
Okay. What are some of the other conferences you guys have kind of looked at and we might expect to see you at all.
Doing presentations are doing Q&A is at in the future.
We will let you know when we book them. There is a few out there that we're analyzing but.
We will let you know Jeff.
None at this time.
Okay. Thanks.
Yes.
Thank you.
Our next question comes from David Cannon.
At Cannon wealth management your line is open.
Good morning, guys. Congratulations I appreciate taking my questions.
First I'm traveling I don't even have Wi Fi. So maybe some of my questions may they may be in the press release that they may have been covered but in terms of the deposits customer deposits Nancy could you would call out sequentially.
They need the change from.
Q4, Q1 to Q2 that would be helpful.
I don't know off the top of my head exactly what it was for Q4. It was $17.8 million end Q1, and we're at $16.5 million end Q2.
Okay. So David I believe we're going to keep.
And then just with basically flat so basically it was flat.
There is a slight decrease it is fluctuating and has been over the last 3 quarters end. It goes back to some of what Kathy had mentioned earlier it depends on what product is coming in given the availability for transportation internationally and as we fulfill some orders other products will then go on back of.
So it does fluctuate somewhat.
I see okay. So as the lead times.
<unk> as you can ship product quicker to the sort of customer that number should work its way down and then ultimately move over to revenue correct, Yes, yes, that's correct.
Okay. So in general are you seeing that trend.
Sure.
Are you able to get product to customers. Some of the supply chain issues are resolved are improving about resolving but are they improving.
They are improving they are definitely not resolved yet, but it looks like we're starting to trend in the right direction.
Okay, and then in terms of the growth.
Cabbie and I know that you guys spoke about this but I missed it.
How much of the growth is attributable to pro versus retail customer.
And then if you could just comment in general on the levers.
You see or that were effective in driving business during the quarter.
For growth.
Yes.
We anchor back David to our strategies this year, which was re retail execution enhance our customers online experience in and really work on our supply chain all of those things impacted our growth I mean, we're pulling levers and all avenues when it comes to impacting our business. So yes, our pro business has grown at eclipsed 60% as of.
My prepared remarks, and when you can grow your pro business hopefully you can grow your retail that comes with it so I don't want to get into specific numbers.
But I think we're doing the right things today, and we're going to continue to do these the things that we've started.
That will continue to impact of business in a positive manner, but growth is always talk about here. So it's a good question.
Okay, well guys congratulations.
You've done them.
Very good job I'm very pleased that as a shareholder I guess I'll just leave you with the comment that obviously, you're having all of that cash sitting on the balance sheet returning almost zero.
Probably not a good strategy for the long haul and I know previous caller.
About at or made a comment I would just like to share my view of that.
And I'm sure you guys are working on that side of no doubt you guys have a very good board.
Smart management I'd like to see that cash return to shareholders.
Rather than just sit on the balance sheet unless you have a high ROI.
Activity for at it seems like that would be wise, so just keep up the great work and.
I hope to chat next quarter.
Thanks, David.
Thank you again, if you'd like to ask a question. Please press Star then 1 on your Touchtone telephone 1 moment. Please.
Again to ask a question. Please press Star then 1.
I'm showing no further questions at this time I'd like to turn the call back over to Mark Davis for any closing remarks.
Thank you for listening to our earnings conference call, we anticipate filing our form 10-Q later today, we look forward to providing our next update in November. Thank you for your interest at the tile shop have a great day.
Thank you ladies and gentlemen at this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
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