Q3 2021 Tile Shop Holdings Inc Earnings Call

November 4, 2021

Good day, and thank you for standing by and welcome to the third quarter 2021 tile shop Holdings earnings Conference call.

This time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Mind you that this call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mark Davis, Vice President of Investor Relations and Chief Accounting Officer. Please go ahead.

Okay.

Thank you good morning to everyone and welcome to the tile Shop's third quarter earnings call. Joining me today are a cabby Lama, 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 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 risks and uncertainties are described in our earnings press release issued earlier and in our filings with the SEC. The 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 a 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 cabby.

Kathy.

Thanks, Mark good morning.

Everyone and thank you for joining us today for an update on our business and a review of our third quarter financial results.

Excellent quarter with great execution highlighted by the continued momentum of our revenue performance.

$92 2 million of revenue reported this morning represents the highest level of third quarter sales in our history.

It was particularly exciting was that this level of performance is more typical of a sales performance. We've seen this spring, which is traditionally the busiest time for home remodel project activity.

Well the strength of the home improvement sector continues to provide a tailwind to our business. These results would not have been possible without the disciplined execution of our strategic priorities focused on execution of our stores, our website and our supply chain.

This focus has led us to record performance through the first nine months of the year and has us on pace to set a new annual sales record for 2021.

I'd like to take a moment to discuss each of our strategic priorities.

Perhaps the most important strategic priority driving our current performance is our retail execution.

Our teams continue to rise to the challenge and have done a fantastic job controlling discounts improving our collection rate on delivery fees and keeping inventory. Thank you.

Could you damage losses in check in addition, our recent investment to expand our regional leadership team has had an immediate positive impact in our stores.

Moving to our next priority, we continue to build on our success by enhancing our customers online experience.

Over the past nine months, we have made a number of enhancements to our website to improve content the shopping experience and our multichannel capabilities.

While our online sales still represent less than 5% of our overall orders, we're seeing nice growth in this area as our e-commerce platform evolves.

We feel good about the direction, we are headed and how our digital experience complements our in store experience.

Our final strategic priority centers that our supply chain.

Over the last 18 months goals global supply chains have encountered significant challenges Gov.

Government mandated lockdowns labor shortages international shipping capacity constraints and port congestion have grabbed headlines and created bottlenecks that have affected many industries.

Our sourcing teams have done an incredible job managing through these challenges affecting global supply chains we.

We've been working closely with our suppliers to secure inventory and with our carriers to ensure timely delivery to our distribution centers.

We've made progress over the last quarter for example, our Backorder levels decrease for the first time in 2021 during the third quarter. We're also pleased to see our inventory levels increased by $7 8 million during the quarter to $76 7 million at the end of the third quarter.

This progress is very encouraging given current conditions, but by no means are we out of the woods.

We anticipate that sourcing challenges will persist into 2022, but we remain confident in our ability to further manage through this to ensure we have adequate supply to meet our customers' needs.

In addition to product availability, we're seeing cost pressure across our supply chain.

The cost of international shipping remained a headwind for us. Additionally, many of our suppliers are signaling cost increases due to labor shortages rising energy costs and other inflationary factors collectively this cost pressure has impacted our gross margin, which was 68, 2% during the third quarter of 2021.

As we work with our suppliers on ways to mitigate against rising costs. We're also taking steps to adjust our pricing.

Additionally, we're targeting new opportunities to shift our source of supply as the cost of sourcing goods across the world changes for example, we're starting to explore options to source style from vendors based in the United States, who are increasingly better able to offer competitively priced items in light of the changing landscape.

We will continue to pursue alternative sources of supply across the globe, where opportunities exist to lower the cost of items, we carry in our assortment, while maintaining our high quality standards now before I close I'd like to offer some early thoughts on where we're headed for 2022.

While we've made great progress in 2021 and are on pace to set a new annual sales record. We're continually striving to do better we've made significant headway improving the performance in many of our stores and we believe the best opportunity for continued growth rests on our ability to continue focusing improvements within our existing store base.

At this time, we're not planning to open any new stores during the first half of 2022.

Focused retail execution is really key to our success in 2021 and it will continue to be a point of emphasis for us as we move into 2022. Additionally, we plan to continue to focus on our supply chain and have several projects slated to enhance visibility to our inventory and improve our ability to have the right inventory in the right location to efficiently.

Serve our customers finally, we will continue to focus on our culture and our people.

The last 18 months have been challenging however, I could not be more proud of our entire team who will put forth the time and gone above and beyond to lead us to the results we delivered today.

Putting our people first re engaging with one another as we emerge from the pandemic and cultivating our winning culture is an important priority of mine and our leadership team for the future.

With that I'll now turn the call over to Nancy for further details of our financial performance Nancy.

Well good morning, everyone. Our record setting third quarter sales of 92 point kinlaw, along or troubled by it.

A couple of stores.

The increase in comparable store sales can be attributed to stronger demand for home improvement products.

Execution of our strategy and an increase in average ticket.

During the third quarter of 2021, we also made progress bringing on orphan Troy what has helped us.

O'clock, we conclude the main call incredibly firewater pump customer deposits placed to secure delivery of product in future periods.

Elevated over historical levels of fixing quite 10 million at September 32021, which was down slightly from $16 5 million at the end of the second quarter.

We were pleased with our strong gross profit during the third quarter of 2021.

And I know our gross margin rate was 68, 2% for the quarter.

This represents a 30 basis point improvement compared to the third quarter of 2020, but a modest 90 basis point decline sequentially from the second quarter of 2021.

As Todd mentioned, we're facing headwinds related to REIT, while international freight costs and cost pressures with many of our suppliers. We are managing through this we're taking actions to adjust pricing to help offset higher costs. Additionally, we're exploring alternative sources of product.

Across the globe to reduce cost while maintaining our quality standards.

Our selling general and administrative costs increased by $7 4 million during the third quarter of 2021, when compared to the third quarter of 2020.

This increase can best be described as coming back to normal business.

Over the last year with increased staffing levels.

<unk> spend travel including in store activities as we've returned to normal which resulted in $3 $3 million, okay, and selling general and administrative expenses.

Additionally, SG&A increased due to a $1 1 million dollar increase in variable compensation costs.

$700000 increase allows me consulting cost and a $700000 store asset impairment charge recorded during the third quarter of 2021.

Sequentially, selling general and administrative expenses increased by $1 million for the second quarter of 2021.

This was predominantly related to the store asset impairment charge. This impairment was related to a store that has underperformed prior to the onset of Covid.

A notable decrease in sales during COVID-19 and struggled to regain its footing as we emerge from the pandemic, partially due to staffing turnover.

In light of the difficulty encountered getting to sort of back on track. We concluded it was appropriate to compare the store assets during the third quarter.

Net income increased by $300000 from $1 $9 million during the third quarter of 2020 to $2 $2 million during the third quarter of 2021.

Adjusted EBITDA decreased $700000 from $11 $1 million during the third quarter of 2020 to $10 4 million gallons from third quarter of 2021.

Adjusted EBITDA margin decreased 240 basis points from 13, 7% during the third quarter of 2020 to 11, 3% during the third quarter of 2021.

Earnings per share remained unchanged from the third quarter of 2020 to the third quarter of 2021 at four cents during.

During the nine months ended September 32021, we generated operating cash flow of $44 $4 million, we used approximately $8 $9 million in cash to fund capital expenditures over the same timeframe to build one new store opened during the first quarter.

Okay. It won't start during the second quarter remodel existing stores invest in information technology and enhanced merchandising assets. We ended the quarter with a $44 3 million dollar cash balance and no debt.

As announced earlier this morning, our board of directors declared a special dividend of 65 cents per share payable on December 30 to shareholders of record on November 19th we're very pleased to be in a position to return capital to our shareholders. Thanks to our strong results and cash position.

With that operator, Kathy and I are happy to take any questions.

Thank you.

Reminder, to ask a question you will need to press star one on your telephone.

Your question. Please press the pound key please standby, while we compile the Q&A roster.

Yeah.

And our first question comes from David Cannon with Cannon wealth management. Your line is open.

Good morning Congrats.

Congratulations excellent.

Sales number.

Okay.

Hello.

Hey, David Thanks, I really appreciate it and we were pretty happy with our result.

Yeah.

Favorably impressed.

So a.

Couple of questions.

In terms of gross margin you alluded to.

Shifting some of your sourcing potentially here to the U S. And then also taking some price.

When do you think gross margins will exceed.

The previous Pea potentially getting back over 70% is that something thats doable in this environment and if you can provide a timeframe for that.

Thanks, David.

We've always been really proud of our margins here at the tile shop and with some of these increases that we've done in the past and we're going to do here.

We feel that we're going to get back in line with our historical gross margins, but there's a lot of unknowns currently with global supply chain and we're seeing the energy crisis right now in Europe, we're seeing it even here in the U S things that are going to continually impact. So there is there is an unknown, but we're making the changes that we feel are going to.

Help us increase our gross margin.

But I can't give you an exact timeframe at this point.

Okay, and then Nancy digging into the SG&A Luke.

It looks like correct me, if I'm wrong, but the $700000 asset impairment.

Impairment charge from closing that store was.

It was not added back into operating income and adjusted EBITDA am I correct.

So it does impact.

Our SG&A and it impacts the EBITDA margin.

Right. Okay, so usually what I'm accustomed to and this is an obviously subjective you guys are taking a very conservative approach.

I'm accustomed to as a company in adjusted EBITDA would have added back that 700000 due to the onetime nature. So you are saying you did not add it back so if I if I take the liberty of adding it back operating income and adjusted EBITDA were actually higher than the reported numbers that exactly.

Correct Yep Yep, that's correct okay.

Okay and then.

Is there anything.

Within the overall seven 4 million dollar increase in SG&A is there anything in there that probably will come down over time or is this the new normal and going forward, we should continue to expect.

Total spend to be approximate what it was in Q3.

Well when we compare it year over year.

Yeah significantly last year at this time, we are in the middle of Covid and quite frankly, we're doing everything we could to reduce our cost and maintain especially collect during COVID-19.

The escalation of the increase if you will and SG&A spend.

Year over year is really getting back to normal business.

Yeah, when you look at last year.

We cut wherever we possibly could so this year, we've increased staffing levels.

We're putting money back into marketing spend travel.

Creating star maintenance and some other things which is really.

What's driven the three great increase.

Over here.

Okay, and then I believe it was up about $1 million sequentially. So so youre, saying that the absolute spend in SG&A.

In each segment that you just numerator will continue going forward. There is nothing there is not an area where potentially spin.

Spend was a little higher than what you need going forward.

Not at this time, but what I will call your attention to and just be mindful of when we're looking at the sequential it's up 1.1 and six.

Question really that one quite want included 700000 tower asset impairment.

I see okay. So it was really only up 400000 sequentially, which based on such a profound increase sales.

Is actually quite control.

Because there's a variable component there.

Okay.

You're thinking about it correctly.

Okay, well, thank you I'm going to I'll jump back into queue great job.

We shape the special dividend I think that's a good return on capital and will hopefully create a loyal shareholder base and I wish you the best in the future.

Thank you thanks, David.

Thank you.

As a reminder to ask a question Thats Star One our next question comes from Jeff Moore with borrowed capital. Your line is now open.

Hi, Thanks for taking my call a great result.

Quick question on the special dividend in the press release regarding that I saw some some language that I wanted to get a little bit more clarity on it said after review and consideration of capital allocation alternatives with its financial adviser Independent transaction Committee of the board has unanimously recommended that the board approved a special dividend.

So.

I assume it's safe to say you all have engaged with a financial adviser and have formed a committee called the independent transaction Committee.

What all of this committee.

Looking at and what are some of the discussions that are going on with that specifically, if youll routine to financial advisor to potentially sell the company.

Thanks for the question, Jeff I'll, let Nancy take this one.

Yeah. So.

The independent transaction Committee is something that was formed earlier this year, we do have a charter for it.

And they took this process.

Quite seriously and looked at a number of different options, including.

Buyback options as well as paying a special dividend and yes that did engage.

With an independent financial consultant.

Ensure that we were getting the best advice looking at things to make the best decision and this is the recommendation that would come forward.

You know when we talk about selling the business that is not something that.

We are currently looking at and they were we bought and the advisor specifically for this project.

Check.

Okay. Thank you.

Okay.

Our next question comes from John Hollander with Citi. Your line is now open.

Hi, everybody congrats on another great quarter.

Again on the special dividend.

If I look at the cash on the balance sheet I think it was about $44 million and there's about 50 million shares outstanding at 65 cents, so that to me about.

$32 million of that cash gets used on the special dividend.

Can you help me understand the thought process.

Towards allocating capital to the dividend as opposed to investing in your stores.

So we hired Jason Feldman.

Go ahead Nick.

Go ahead.

So it'll be about $34 million going back to the shareholders and that leaves us with approximately $10 million in cash.

And we do intend to use some of that money.

To invest back into our stores and we anticipate that.

At this point being able to build some of that cash back up given our cash flow performance and sales.

Yeah.

And Dana on top of that.

We've kept some cash on hand, we're going to continue to do our remodels, we're going to invest their stores as in my prepared remarks, we're not going to open any new stores in the first half of 2022, but we will have cash on hand, and we're going to continue to generate cash. So when we are ready to grow we can self fund that as well.

No I got that broke in the call last quarter, we spoke about very attractive store reinvestment metrics I believe in the neighborhood.

Payback in two years if not.

On that capital.

I'm, having a hard time understanding with them.

A large majority of these 128 stores why we wouldn't just be reinvesting it for a two year payback as opposed to be doing a special dividend, which obviously is taxable to your investors.

No.

Good question now when you were our changes of 143 stores and when we look at Remodels were very strategic when we do that and it's been a very difficult environment with cause pressure on product and availability. So with intent I've dialed that back and I wanted to see where this shakes out here in the coming quarter, but we're remodeling stores today, we're really modeling.

Stores next month, so we're going to continue to invest in new stores next year.

But at this point, we thought it prudent to return the capital to shareholders knowing that what we had in the bank.

Thank you just final follow up on that how many stores are you intending to remodel during 2000 22002.

That hasn't been defined yet Don we continue to look at the environment and when we look at product cost and product availability not just tile, but everything goes into remodel that will help us define going into our budgeting season here, but it's definitely one of our strategic objectives here in 2022 to continue to refresh our stores listen our chain.

Looks good we're pretty happy with our chain. This stuff doesn't spoil look bad what we view as strategic when we do a remodel and why we do it so I'm pretty confident in how we look today and what we're going to be doing in Q4 and in 2022.

And well.

<unk> insight into 'twenty two capital plans are.

Our next call.

As Pat mentioned, we need to get through our budgeting process and work through some other things, but we will provide some insight for 'twenty two and our next call.

Okay.

Thank you for that I'll get back into queue.

Yeah.

Thank you.

And I have a follow up with David Cannon with Cannon wealth management. Your line is open.

Okay.

Quick follow up on the previous.

Callers question in regards to our ROI on store refreshes and Mike correct in assuming that we can have our cake and eat it too in other words, we received a special dividend.

With the remaining cash on the balance sheet and future free cash flow generation, we'll be able to do both is that accurate.

That's very accurate David we're doing that right now so we can continue to do that going forward.

Okay, and then in the <unk>.

Prepared remarks in the press release, you talk about the 12% or so growth and the drivers continued improvement in the home improvement sector. And then you you specify execution of the company's strategy could you speak to that a little bit exactly what youre doing X.

Occasionally to get more productivity out of each box.

Yes, absolutely.

Reinvesting in our people has been a big.

That's the priority of mine and for the last year and a half two years, it's been a struggle during a pandemic, but what we decided was let's let's get our investment back from these stores and what does that take that takes leadership, so expanding our regional leadership team, so, bringing the store count down expanding our training.

And our training in each market.

Expanding our recruiting team, helping our stores recruit the best talent looking at everything from benefits the comp all of these things to reinvest in our people and what we're finding is our execution has gotten a lot better and it will continue to get better and that's where we're focused right now and it's led to good good results, thus far and I believe it will continue to.

So going forward.

Okay.

Could you touch a little bit.

On that same subject just about emphasis on professionals on pros.

And how that how you would grade back during the quarter.

Yes sure.

We launched our pro market managers, a couple of years ago, and we've expanded that as well. We've also kind of model the new pro marketing campaign and our assortment. So we're hitting it on all levels with pros, we're marketing to them differently, we have different product assortment for them and we have a specialized sales force just for approach along with our.

Loyalty and rewards program. So we're seeing the pros are responding favorably to everything we're doing and we're going to continue to invest there knowing the return we get with the pro customer.

So yes, we're getting the results that we were hoping to get and it can grow a lot more from here.

Okay.

Okay. Cabby would you include designers in that category.

Pros or is that a separate segment.

No that's definitely our designers, yes designers are definitely a segment within our pro business and we.

<unk>.

Partner with them very well if you look at our website look at some of our direct mail you look at our inspiration in store, we get a lot of feedback from designers. So they share a lot of their work with us. So they are excited to partner with the tile shop as we are with them and we've had quite a few successful.

Partnerships with tile lines with designers in the past and that's.

Another strategic move that we've made and has paid off well, we're going to continue down that path. So designers are very important part of our business David.

Okay, Alright, that's all I have thanks again, guys. Good luck next quarter.

Thanks, David Thank you. Thank you.

Our next question comes from site out moment with B Riley Your line is open.

Okay.

Hi, Kevin.

Well appreciate it great quarter, just two quick questions. So one the asset impairment that you guys mentioned there was like 700000, just to confirm that has not been added back to adjusted EBITDA and I'm sorry.

The comparison of a lot better.

So it's not or it looks like not in there.

Hi, Ted.

Yes.

You are correct it's not.

Okay. So you guys. So you guys actually have done probably better than what the numbers expect in terms of.

Imagine the cost cost inflation. So okay. No that's great and then the second question I was just wondering if you could just provide.

Greater detail than some of the maybe growth initiatives you guys are exploring I think the potential store.

<unk> opportunities.

Kind of until some of the geographies are currently and any color would be great.

Yeah, we continually evaluate our portfolio and we look at opportunities, but again like in my prepared remarks, we're not going to open any new stores in the first half we have our finger on the pulse, though across the country. We've done analysis, we've partnered with other vendors to look at.

What looks good out there.

What's the pricing looking like in site selection and all of that so we're very engaged in that process.

But as I said, we're going to we're going to hold off and continue to invest in our existing store base to get our investment back with our existing footprint, but again, if we see something super attractive we can move if we want to.

Got it got it great and then just to follow up on that so with the Remodels I mean on average can you guys quantify what type of same store sales uplift youre seeing.

Yeah.

It really varies side when you look at our store and the tenure of the store when you remodel it is.

It's something that when you look at the customer base you look at the location you look at a lot of different variables. So when you invest in that store.

It could be a year and a half it could be three to four years, but typically we've said in the past around two and a half years, but that's.

Again, it varies depending on the market location.

Alright, great I appreciate it thank you thank.

Thank you.

And I have a follow up with Mr. Hollander with Citi. Your line is open.

Hi, everybody I wanted to spend a quick few minutes on working capital.

Could you please comment on your inventory levels, obviously quarter to quarter, but just in general about working capital needs of the business for this quarter and what youre thinking about going forward.

Thanks, Don.

I'll throw that one over to you.

Yeah. So our inventory is currently 70 to 76, 7%.

That's up 7.8.

8 million or 70, it's currently at $76 7 million, which is up about 7.8 and with any luck or hoping to see that increase as Kevin mentioned.

We're still having some challenges in this current environment. Okay procurement team has really done a fantastic job to get us products that continue to search all over the world, including domestically to fill in those gaps we can expect that level of inventory to increase.

Thanks, Katina open up probably level off.

Sometime we're expecting mid 'twenty two.

And that would be funded just out of our natural.

Cash flow.

Thank you. Our next question comes from Craig Cohen.

Greg Cohen with <unk> Your line is open.

Yes.

Hey, guys.

Great great quarter.

Specific question on E. Commerce can you kind of give us some color on.

What what percentage of our revenue comes from E Commerce today, and where you see that.

Kind of in the next few years and sort of also.

Ancillary.

Margin differential.

E Commerce sales versus.

In store sales and then sort of how you see that impacting overall.

Profitability.

In the future. Thanks.

Sure.

Thanks for the question, Yes, we're pretty excited about our E. Commerce again in my prepared remarks was less than 5% of our total sales, but the investments we've made into the design.

So when you look at some of our PD our pages. When you look at the usability of our consumer we're working through the website. We're seeing the results that we were hoping to see and we're going to continue to invest in the website. When you think about.

Margin, we don't run sales on our website youre not going to see any flash sales or 20% to 25% off on our website. So it has a good cost is good store for us.

There is some some freight expense so we charge the customer for that as well. So we're hoping to see our E. Commerce scale continue to scale going into Q4 and in the next few years, but it has ramped.

Quite a bit in the last few quarters than it has in the previous few years.

The other piece that we find really fascinated about the ecommerce site.

As long or all of our customers are using that as a launch pad.

Jason.

And looking at hospitals that are available, but when they come into the store that much Mark Parr.

Further down on their purchasing funnel if you will so that's been a great.

For inspiration and customer knowledge as well.

At this point.

And sales Opex.

Hello.

You may have started at our website.

Okay, Yes, that's helpful and just kind of a follow up.

I think that your social media strategy.

Amazing and you can clearly see the customer engagement.

And that goes along with kind of the collaborations that you guys do it.

Designers.

And kind of tile specialists alright. Thanks.

Really well are we seeing.

Just.

Kind of more specifically do you think that.

<unk>.

This could become 50% E Commerce company over time or.

Or do you kind of just you would add.

As a side business like how do you think about e-commerce.

Ah.

Strategically.

For the long term.

Greg It's amazing how the consumer has really changed in the last few years and it really accelerated through the pandemic and we wanted to reach our consumer at any point during their process and we want to give them the ability to come in the store to get the in store experience and the knowledge and get to touch it and feel it but.

If they wanted to stay home and get it online that's we're investing to let's meet them there and.

We would love to see our e-commerce continue to grow and be made.

A major portion or percentage wise, who knows I can't tell you that.

Going into the environment that we have today, but I do know is the consumer changes, we're going to change as well to meet them.

Okay, great well thanks for the.

The color on that.

And it over.

Thank you.

Your next question comes from Jeff Moore with borrowed capital Your line is open.

Yes, I think it was last quarter that you guys started to sell luxury vinyl plank.

And I was curious as to.

Kind of how that's going for you all.

Sure Jeff.

We're pleased with our sales results of our.

Our luxury vinyl right now and we've made some significant reorders as well so it's not something that we're going to take away.

We've added a few skus to that assortment, but we're going to continue to monitor it as we work through the next few quarters, but we're happy right now.

Okay and is that something that you all generally carry at stores that are in the distribution centers and I mean, what what kind of volumes are you seeing with it.

It's a heavier volume material, meaning they do larger areas typically with it kitchen floors basements things like that we do carried at the Dcs, we don't carry too much in stores, we want to be able to get it where it needs to be quickly without overloading inventory in each store so.

Yes, we are seeing larger volumes of it for sure, but it's based in the Dcs.

Right, but I mean as a percent of sales can you give any clarity on.

What revenue share you're seeing from it.

It's not a significant percentage of sales at this point, we just started testing it but.

But we're happy with the limited SKU count that we have the results that we're seeing.

Okay, great. Thank you.

Yeah.

Thank you.

And I'm currently showing no further questions in the queue at this time I would like to hand, the conference back over to Mr. Mark Davis for any closing comments.

Okay.

Thank you for listening to our earnings conference call, we anticipate filing our Form 10-Q later today.

To you for your interest in the tile shop and have a great day.

Okay.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

[music].

Yes.

[music].

Good day, and thank you for standing by and welcome to the third quarter 2021 tile shop Holdings earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session will need to press star one on your telephone as a REIT.

This call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mark Davis, Vice President of Investor Relations and Chief Accounting Officer. Please go ahead.

Okay.

Thank you good morning to everyone and welcome to the tile Shop's third quarter earnings call. Joining me today are cabby Lama, our Chief Executive Officer, and Nancy <unk>, Our Chief Financial Officer.

Word looking statements made today are as at the date of this call and we do not undertake any obligation to update these forward looking statements.

With that let me now turn the call over to Cabby cabby.

Thanks, Mark Good morning, everyone and thank you for joining us today for an update on our business and a review of our third quarter financial results.

Excellent quarter with great execution highlighted by the continued momentum of our revenue performance the.

The $92 2 million of revenue reported this morning represents the highest level of third quarter sales in our history.

What was particularly exciting was that this level of performance is more typical of a sales performance. We've seen this spring, which is traditionally the busiest time for home remodel project activity.

This focus has led us to record performance through the first nine months of the year and has us on pace to set a new annual sales record for 2021.

I'd like to take a moment to discuss each of our strategic priorities for.

Perhaps the most important strategic priority driving our current performance is our retail execution.

Our teams continue to rise to the challenge and they've done a fantastic job controlling discounts improving our collection rate on delivery fees and keeping inventory shrinkage and damage losses in check. In addition, our recent investments to expand our regional leadership team has had an immediate positive impact in our stores.

Moving to our next priority, we continue to build on our success by enhancing our customers online experience.

Over the past nine months, we have made a number of enhancements to our website to improve content.

Shopping experience and our multichannel capabilities.

While our online sales still represent less than 5% of our overall orders we are seeing nice growth in this area as our e-commerce platform evolves.

We feel good about the direction, we are headed and how our digital experience complements our in store experience.

Our final strategic priority centers on our supply chain over the last 18 months <unk> global supply chains have encountered significant challenges.

Government mandated lockdowns labor shortages international shipping capacity constraints and port congestion have grabbed headlines and created bottlenecks that have affected many industries.

Our sourcing teams have done an incredible job managing through these challenges affecting global supply chains we.

We've been working closely with our suppliers to secure inventory and with our carriers to ensure timely delivery to our distribution centers.

We've made progress over the last quarter for example, our backwater levels decrease for the first time in 2021 during the third quarter. We're also pleased to see our inventory levels increased by $7 8 million during the quarter to $76 7 million at the end of the third quarter.

This progress is very encouraging given current conditions, but by no means are we out of the woods.

We anticipate that sourcing challenges will persist into 2022, but we remain confident in our ability to further manage through this to ensure we have adequate supply to meet our customers' needs.

In addition to product availability, we're seeing cost pressure across our supply chain.

Okay.

Focused retail execution has been a key to our success in 2021 and it will continue to be a point of emphasis for us as we move into 2022. Additionally, we plan to continue to focus on a supply chain and have several projects slated to enhance visibility to our inventory and improve our ability to have the right inventory and the right location to efficiently.

Serve our customers finally, we will continue to focus on our culture and our people.

The last 18 months have been challenging however, I could not be more proud of our entire team who will put forward at the time and gone above and beyond to lead us to the results. So we delivered today.

Putting our people first reengaging with one another as we emerge from the pandemic and cultivating our winning culture is an important priority of mine and our leadership team for the future.

With that I will now turn the call over to Nancy for further details of our financial performance Nancy.

Well good morning, ethanol, a rocket quoting third quarter staff of novelty Kim wrong or driven by.

Comparable stockpiles of 12.8%.

And comparable star status can be attributed to stock a demand for health improvement products.

Execution of our strategy and an increase in average ticket during.

During the third quarter of 2021, we also made progress bringing in inventory, what's helped us reduce our backlog we continue to maintain an incredibly strong water bank customer deposits place to to catch up on your product in future periods remained elevated over historical novels of $16 2 million of September 30th 2021.

Which was down only slightly from $16.5 million at the end of the second quarter.

We were pleased with our strong gross profit during the third quarter of 2021 62.9 million are gross margin right with 68.2% for the quarter. This.

This represents a 30 basis point improvement compared to the third quarter of 2020, but a modest 90 basis point decline sequentially from the second quarter of 2021.

Okay, I'd mentioned, we're facing headlines related to rising international freight costs and cost pressures with many of our suppliers. We're managing through this will taking actions to address pricing to help offset higher costs. Additionally, or exploring alternative sources of product from other suppliers across the globe to reduce costs, while maintaining our quality stand.

<unk>.

Are selling general and administrative costs increased by $7.4 million during the third quarter of 2021, when compared to the third quarter of 2020.

A portion of this increase can best be described as getting back to normal business.

Over the last year, we've increased staffing Ramos marketing spend travel recruiting and start maintenance activities as we've returned to normal which resulted in $3.3 million increase and selling general and administrative expenses.

Distantly SG&A increase due to a 1.1 million dollar increase in variable compensation costs.

700000 dollar increase an I T consultant cough, and a $700000 store as an impairment charge recorded during the third quarter of 2021.

<unk> selling general and administrative expenses increased by one $9 for the second quarter of 2021.

This was predominantly related to the stress of impairment charge. This impairment was related to a store that has underperformed prior to the onset of Covid.

Song notable decrease in sales during COVID-19 and struggled to regain its putting his weight emerged from the pandemic, partially due to staffing turnover.

In light of the difficulties encountered getting the store back on track. We concluded it was appropriate to impair the store assets during the third quarter.

Net income increased by $300000 from $1.9 million during the third quarter of 2000 $22.2 million during the third quarter of 2021.

Tested EBITDA decreased $700000 from $11.1 million during the third quarter of 2000 $20 million to $10.4 million during the third quarter of 2021.

The adjusted EBITDA margin decrease 240 basis points from 13.7% during the third quarter of 2022, 11.3% during the third quarter of 2021.

Diluted earnings per share remained unchanged from the third quarter of 2022, the third quarter of 2021 at four cents.

During the nine months ended September 30th 2021, we generated operating cashflow of $44.4 million, we used approximately $8.9 million in cash to fund capital expenditures over the same timeframe to build one new store open during the first quarter relocate one start during the second quarter remodel.

Existing store, that's in information technology, and enhanced merchandising asset we ended the quarter with a 44.3 million dollar cash balance and note that.

As announced earlier this morning, a board of directors declared a special dividend 65 cents per share payable on December 3rd to shareholders of record on November 19th we're very pleased to be in a position to return capital to our shareholders based on a strong results and cast position.

With that operator, Kathy and I are happy to take any questions.

Thank you as a reminder to ask a question you'll need to press star one on your telephone.

Try your question. Please press the pound key please stand mine will be compounded Q&A roster.

And our first question comes from David Canaan, with Kitten, well management. Your line is open.

Good morning, Congratulations excellent sales number.

Hello.

Hey, David Page I really appreciate it if we were pretty happy with the result.

<unk>.

Yeah.

Mm favorably impressed so.

Questions in terms of gross margin you alluded to shifting some of your sourcing potentially here to the U S. And then also taking some price.

When do you think gross margins will exceed the previous P. You know potentially getting back over 70% is that something that's doable in this environment and if you can provide the time frame for that.

Thanks, David Yeah, It's it's always been really proud of our margins here at the tiled shop and with some of these increases that we've done in the past what we're gonna do here, we feel that we're gonna get back in line with our historical gross margins, but there's a lot of unknowns currently with Glee.

Global supply chain, and we're seeing the energy crisis right now and in Europe, we're seeing it even here in the US things that are going to continue to impact. So there is there is an unknown, but we're making the changes that we feel are going to help us increase our gross margin, but I can't give you an exact time frame at this point.

Yeah.

Okay, and then Nancy digging into the S T and a it looks like correct me, if I'm wrong, but the 700000 dollar asset in power impairment charge from closing that store was not added back into operating.

<unk> com and adjusted EBITDA am I correct.

So it does impact our SG&A an impact the EBIT margin.

Right. Okay. So so usually what I'm accustomed to in and this is obviously subjective you guys are taking a very conservative approach, what I'm accustomed to as a company and adjusted EBITDA would would have added back that 700000 due to the one time nature.

You're saying you did not add it back so if I if I take the liberty of adding it back operating income and adjusted EBITDA were actually higher than the reported numbers that is that.

Correct Yep Yep, that's correct okay.

Okay, and then is there anything within the overall 7.4 million dollar increase in S. T. N. A is there anything in there that probably will come down over time or is this quote the new normal and and.

Going forward, we should continue to expect total spend to be approximate what it was in Q3.

Yeah.

Well when we compare a year over a year. It's a significant let me last year at this time, we were in the middle of Covid and quite frankly, they're doing everything that we could to reduce our costs and maintain especially collect during COVID-19. So the escalation of the increase if you will.

N S T nice and Ah you're over a year is really getting back to normal business. So you know we look at last here you know we cut wherever we possibly could so this year, we've increased staffing levels were putting money back into marketing span trap.

Or recruiting star maintenance and some other things, which is really driven.

Driven the three great increase ear over here.

Okay, and then I believe it was up about a million dollars sequentially. So so you understand that.

The absolute spend an S T M a.

<unk> segment that you're just numerate. It will continue going forward. There, there's nothing is not an area where potentially.

Spend was a little higher than what you need going forward.

Not at this time, but what I will call your attention to and just be mindful of when we're looking at the sequential itself 1.1.

And sequentially that 1.1 included Uhm, the 700000 dollar S impairment.

I see okay. So it was really only 400000 sequentially, which based on such a profound to increase sales.

Is is actually quite controlled.

Because there's a variable component there.

Okay, Yeah that you're thinking about it correctly.

Okay, well, thank you I'm gonna I'll jump back into the queue great job I appreciate the special dividend and I think that's a good return of capital and will will hopefully create a loyal shareholder base and I wish you the best in the future.

Thank you for your Thanksgiving.

Thank you.

As a reminder to ask a question that storm line. Our next question comes from Jeff more with Sarah Catheter Your Highness now open.

<unk>.

Hi, Thanks for taking my call Great results Uhm.

Uhm quick.

A quick question on the special dividend in the press release regarding that I saw some some language that I wanted to to get a little bit more clarity on it said after review and consideration of capital allocation alternatives with its financial adviser the independent transaction Committee of the board is unanimously recommended that the board for the special dividend.

So.

I assume it's safe to say, you'll have engaged with a financial adviser and have formed a committee called the independent transaction Committee.

What all is this committee looking at <unk> and what are some of the the discussions that are going on with that specifically, if you'll routine to financial adviser to potentially sell the company.

Thanks for the question I'll I'll Nancy take this one.

Yeah. So.

In a transaction commit a it's something that was farmed earlier this year.

We do have a charter for it and they took this process.

I'm quite seriously it looked at a number of different options, including.

Buyback options as well as paying a special dividend and yes, they did engage with an independent financial consultant.

To ensure that we were getting the best advice looking at things to make the best decision and this is the recommendation that's come forward.

You know when we talk about selling the business that is not something that we are currently looking at and they were we brought and the advisor specifically for this project.

Okay. Thank you.

Our next question comes from John Hollander with C. D. Your line is now open.

Hi, everybody congrats on your other great quarter Uhm refreshing again on the special dividend.

If I look at the cash on the balance sheet I think there's about $44 million and there's about 50 million shares outstanding at 65 cents, so that to me about.

$32 million of that cash gets used on the special dividend can you help me understand the thought process.

Towards allocating capital to the dividend as opposed to investing in your stores.

So we are on it.

Go ahead no.

No go ahead [laughter].

So it'll be about 34 million going back to the shareholders and that leaves us with approximately $10 million in cash and we do intend to use some of that money too.

To invest back into our store and we anticipate at this point being able to build some of that cashback, given our cash flow performance and sales.

And Donna on top of that we've.

We've kept some cash on here, we're going to continue to our Remodels, we're going to investors stores as in my prepared remarks, we're not going to open any new stores in the first half of 2022, but we will have cash on hand, and we're going to continue to generate cash. So when we are ready to grow we can self on that as well.

No I I got a call last quarter I always talk about very attractive store reinvestment in that church I believe in the neighborhood of.

Payback in two years.

On that capital.

I'm, having a hard time understanding with it just as large as you like having 20th stores.

Why are we would it just be reinvesting it for the two year payback.

Page to be doing a special.

Special dividend.

Do a passable to your investors.

Oh. Good question now when you were already chain is 143 stores and when you look at Remodels were very strategic when we do that and it's been a very difficult environment with cause pressure in product and availability. So with intent I've dialed back and I wanted to see where the shakes out here in the coming quarter, but we're we're <unk>.

<unk> stores today, we're remodeling stores the next month and we're going to continue to investors stores next year.

But at this point, we thought it'd prove it to return the capital to shareholders, knowing what we had in the bank.

Thank you Uhm just thought will follow up on that how many stores are you intending to remodel during 2000 2042.

It hasn't been defined yet done we would continue to look at the environment and we look at product costs and product availability not just tile, but everything goes into remodel that will help us define going into our budgeting season here, but it's definitely one of our strategic objectives here in 2022 to continue to refresh in our stores listen I would change.

Looks good we're pretty happy with our chain. This stuff doesn't spoil look bad what we do or strategic when we do a remodel and why we do it.

So I'm pretty confident in how we look today and what we're going to be doing in queue for end in 2022.

And.

Uhm provide insight into 22 capital planned on our next call.

His cab mentioned, we need to get through our budgeting process than for some other things, but we will provide some insight for 22 and Uhm next call.

Okay.

Thank you for that I'll get back to you.

Thanks, Thank you.

And I have a follow up with David Keenan was keen and wealth management. Your line is open.

Okay.

Quick follow up on the previous.

Callers question in regards to R. O Y on store Refreshers, they might correct in assuming that we can have our cake and eat it too in other words received the special dividend and with the remaining cash on the balance sheet in future free cash flow generation will be a.

Well to do both is that accurate.

That's very accurate David we're doing that right now so we can continue to do that going forward.

Okay, and then in the prepared remarks in the press release, you talk about the 12% or so grove and the drivers continued improvement in the home improvement sector. And then you you specify execution of the company's strategy could you speak to that a little.

<unk> exactly what you're doing execution Holly to get more productivity out of each box.

Yeah, absolutely reinvesting in our people has been a big.

That's the priority of mind for the last year and a half two years I mean, it's been a struggle Julia pandemic, but while we decided was let's let's get our investment back from these stores and what does that take that takes leadership, so spending our regional leadership team, so, bringing the store count down expanding our training and.

And our trainings in each market.

Spanning a recruiting team, helping or stores recruit the best talent looking at everything from benefits to comp all these things to reinvest in our people and what we're finding is our execution has gotten a lot better and they will continue to get better and that's what we're focused right now and it's led to good good results, thus far and I believe it will continue to use.

So going forward.

Okay could you touch a little bit on.

On that same subject just about emphasis professionals on pros.

And how that how you would grade that during the quarter.

Yeah sure.

We launched our pro market marriages, a couple of years ago, and we've expanded that as well. We've also kind of modeled a new pro marketing campaign and our assortment. So we're hitting it on all levels of prose, we're marketing to them differently, we have different product assortment form and we have a specialized salesforce just four approach along with our.

Loyalty and rewards program. So we're seeing the pros are responding favorably to everything we're doing and we're going to continue to invest their knowing the return we get with the pro customer.

So yeah, we're getting the results that we're hoping to get and it can grow a lot more from here.

Okay. Cabby would you include designers in that category with pros or is that a separate segment.

No that's enough your designer Yeah designers are definitely a segment within our pro business and we.

Partner with them very well if you look at our website you look at some of our direct mail you look at our inspiration in stores.

Q3 2021 Tile Shop Holdings Inc Earnings Call

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