Q4 2021 Tile Shop Holdings Inc Earnings Call
Good day and thank you for standing by welcome to the Q4 2021 tile Shop Holdings, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star.
One on your telephone please be advised that today's conference 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 Investor Relations and Chief Executive Officer. Please go ahead.
Thank you good morning to everyone and welcome to the tile shop's fourth quarter earnings call. Joining me today are cabby Loma, our chief Executive Officer, and Carla lunar and our newly appointed 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 risks and uncertainties are described in our earnings press release issued earlier and in our filings with the SEC.
Forward looking statements made today are as 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 I'll turn the call over to Cabby cabby.
Thanks, Mark Good morning, everyone and thank you for joining us today.
We had a fantastic finish to 2021 and look forward to carrying this momentum into 2022.
From a topline perspective, we continued to perform at a high level the $92 million of fourth quarter revenue represents the highest level of fourth quarter sales in our history full.
Full year revenue of $377 million and established a new annual sales record for the company I'm incredibly proud of what our team has been able to accomplish by focusing on execution in our stores, our supply chain and our digital capabilities. We continue to believe that there is significant opportunity to grow both sales and profits within our existing 100.
43 store footprint not surprisingly retail execution at store level remains our key point of focus for us as we move into 2022. We recently made several important enhancements to our I T systems and are excited to leverage additional capabilities there'll be introduced throughout the next year.
We expect these changes will directly translate into an even better customer experience online and in our stores.
Our store and support teams are committed to attaining our retail execution goals and I believe that this focus will help us sustain the momentum we've established in 2021.
Throughout 2021 we've made it a point to limit distractions and ensure we can achieve our goals a number of our stores took a nice step forward in 2021 and we believe that we have many stores that are positioned to take another leap ahead and deliver great results in 2022.
As of today, we plan to keep our focus on our existing store base and forego opening any new stores in 2022.
Well it is possible we may open stores later this year, we are seeking additional financial improvements within our existing store base, particularly those stores will fall behind our expected sales targets as we have made system changes and discontinued promotional discounts to retail customers in recent years.
Once we feel good about our existing store base being back on track with our historical economic model, we will look at store growth.
Our second priority for 2022 centers on our supply chain.
Over the last quarter, we've made nice progress securing delivery of inventory from our vendors and reduced our back orders to levels more in line with historical norms.
And so at the end of the year, our inventory balance was $97 million demonstrating our commitment to build our inventory in response to the strong demand for our products.
We continue to see cost pressure across our supply chain, while international shipping rates have started to come down from peak levels. The rates. We're paying today are still much higher than they were in the past further many of our suppliers have implemented price increases due to labor shortages rising energy costs and other inflationary factors.
Actively this cost pressure has impacted our gross margin, which was 66, 1% during the fourth quarter 2021.
In response to the cost pressure, we are shifting sourcing to vendors, who are able to offer comparable products at more competitive prices as well as diversifying our supplier base and the countries, who we source product from.
We believe these changes will come stabilizing costs over time, however, it was still necessary to implement price increases during the fourth quarter of 2021 and in the first quarter of 2022.
Further we're closely monitoring the impact of the conflict in Ukraine, which could present, new challenges towards supply chain results and higher energy costs create further inflationary cost pressure and heightened cyber security risks.
In the near term, we anticipate that the pressure on our gross margin will persist and then it may be necessary to continue to take additional pricing actions.
Longer term, we anticipate that the inflationary pressures will subside and that the actions. We are taking will help ease some of the cost pressure. We are currently experiencing.
I'd like to share one other point on gross margin as you know we are willing to add lower gross margin product store assortment. If there's a compelling business reason and it generates incremental gross profit. For example, we have continued to make progress on initiatives to strengthen our relationships with our professional customers one area, where we've had success is in our <unk>.
Offering a best in class installation products that help reduce the time, a pro spends on each project and improve the quality of the installation.
These products are typically sold at a lower markups and other items, we carry in our assortment continued success, winning pro business and increasing our sales mix of pro installation products is expected to result in incremental gross profit dollars, but may result in a lower gross margin rate. Similarly in the past year, we have taken steps to test the luxury vinyl tile products in our stores.
And have plans to expand this offering in 2022.
Well L V T cells represent a small portion of our current sales mix the expansion of our L. V T offerings, which typically carry lower gross margin rates than our existing towel assortment could negatively impact our consolidated gross margin rate.
And both of these examples we will gladly make the train for more gross profit dollars at a lower margin rate since it adds to the store performance and supports our customer base.
Improving execution in our stores navigating supply challenges sourcing high quality products and above all providing an unmatched experience for our customers would not be possible without our team.
That is why our third area of focus for 2022 surrounds our tile shop team.
Over the past few years, we have taken steps to invest in training and development programs to help cultivate our next generation of leaders.
We find this investment has a strong return since many of these leaders now have a direct impact on improving the performance in our stores.
We continue to develop training content to enhance our team's knowledge of the latest installation techniques and design trends, we've made investments over the last year to grow our team, particularly in our stores to expand our store hours or distribution centers given the increase in demand.
Their technology team as we pursue initiatives to further leverage the investments we've made in our systems.
Now before I close I'd like to thank the entire tile shop team for an incredible 2021 what you do every day is truly inspiring.
We accomplished a lot in the future is bright.
I'd also like to take a moment to introduce you to one of the newest members towards tile shop team Carlo Leunen, Our Chief Financial Officer, Carla is a seasoned financial professional with a fantastic track record of leading teams that delivered great results in previous roles at Mastec, Black and Veatch, and Ernst and young Carla.
Carla joined US in January and has hit the ground running I've been impressed with how quickly Carla has been able to get up to speed and integrate throughout our organization with that I'd now like to hand, the call over to Carla Carla.
Thanks, Cabby good morning, everyone.
I can't claim to be fully up to speed yet I can't tell you that I have enjoyed my first two months here at the tile shop, it's been great to get to know the team and worked closely with cabby, Nancy and Marc I've been incredibly impressed with how welcoming everyone has been and the passion everyone has for the tile shop I'm honored to have the opportunity to work with such.
A talented and dedicated team.
There are a number of reasons by this opportunity was very exciting to me.
I felt my experience could quickly make an impact my previous experience in planning and analysis cost oversight identifying opportunities to process improvement technique and leading a streamlined support structure to assist operational teams well certainly be brought to bear here at the tile shop.
I was not coming into something that needed to be fixed the finance function here is strong, but as with everything in business. If there is a vision things can become even stronger I see that opportunity here.
Lastly, I love the energy and people first culture I truly feel I have found a home here at the tile shop.
Moving to the financial update as Kathy mentioned, we set several sales records one for the highest fourth quarter in our history and the other was an annual record.
Sales at comparable stores increased by 10, 3% during the fourth quarter and 13, 8% for the year.
The increase in comparable store sales for in the fourth quarter and the full year is largely attributable to an increase in the average ticket.
In my first two months with the company I have been focused on examining our existing store base. The company went through a period of rapid expansion between 2012, and 2017 that was predicated on a business case that stores would attain certain levels of sales and profitability as they mature.
Well there have been stores that have been very successful. There are also stores that have not yet achieved the level of sales and profits that the company targeted at the time the investment decision was made.
Many of these stores were able to take a meaningful step forward in 2021 as demand for home improvement products picked up and the company's initiatives surrounding retail execution took hold.
Perhaps the best leading indicator is average sales per store.
Our average sales per store increased from $2 3 million in 2020 to $2 6 million in 2021, well. This is very encouraging I still believe there is room for continued improvement there is a clear blueprint for success underlying the companys retail execution strategy.
I appreciate the wisdom underlying the decision to prioritize improving the existing store performance ahead of unit growth at this time.
The gross margin rate during the fourth quarter was 66, 1% during the quarter continued cost pressure outpaced the rate of our price increases which resulted in a 210 basis point sequential decline in gross margin between the third and fourth quarters of 2021.
For the year the gross margin rate was 68, 3% as cabby alluded to in his remarks, we expect that the cost pressure will persist in the short term, which may result in lower levels of gross margin.
We have and will continue to diversify suppliers and adjust our prices to help offset the impact of the cost pressures we are experiencing.
We are also pursuing opportunities to expand pro installation products and L. B T cells that are expected to provide incremental gross profit, but may result in a lower overall gross margin rate given the lower margin profile of these offerings relative to the gross margin on our tile products.
Okay.
Selling general and administrative expenses increased $3 $4 million in the fourth quarter of 2021 .
The increase in SG&A expense was primarily due to a $3 2 million dollar increase in payroll and benefit costs stemming from an increase in head count driven by additions made to our store distribution and technology teams.
For the year, our selling general and administrative expenses increased by $17 $4 million.
A portion of the increase in our SG&A expenses is due to an increase in variable selling costs, which included a $7 3 million dollar increase in variable compensation.
A $1 9 million dollar increase in transportation costs, and a $1.1 million increase in credit card fees. Additionally.
Additionally, a portion of the increase in SG&A expenses can best be described as getting back to normal business.
Over the last year, we've increased staffing levels, which has resulted in a $5 4 million dollar increase in payroll and benefit costs as well as our marketing spend which increased by $1 $4 million over last year.
During 2021 we also recorded $700000 of asset impairment charges.
Net income during the fourth quarter increased by $400000 and our diluted earnings per share was four cents.
For the year, our net income more than doubled and our diluted earnings per share in 2021 was 29 cents.
During 2021, we generated $39 $7 million of operating cash flow, we used approximately $11 1 million in cash to fund capital expenditures over the same timeframe to build one new store opened during the first quarter.
Relocate one store during the second quarter.
Remodel existing stores invest in information technology.
Enhanced merchandising assets. We were also pleased to return capital to our shareholders by declaring them paying a <unk> 65 cents special dividend, which resulted in a $32 9 million dollar cash outflow during the fourth quarter.
Looking ahead to 2022, we anticipate $13 million to $18 million of capital expenditures to remodel our stores invest in technology maintain our internal fleet in distribution centers and enhance our merchandising assets.
At this time, we are not plenty to relocate or open any new stores in 2022 .
Again, I am very happy to be here and look forward to meeting many of you over the coming months and years as we drive shareholder engagement and shareholder returns with that operator, cabby and I are happy to take any questions you may have.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Mark Smith from Lake Street Capital. Your line is now open.
Hey, guys.
Wanted to look first at the price increases that you guys have taken can you quantify or discuss that a little bit more you know did you take enough in Q4 to cover what you're seeing from cost pressure.
Thanks for the question Mark. This is Cam you know when we did our Q4 price increases we were seeing additional cost pressure throughout the same timeframe. So as we looked at our assortment we made adjustments.
It was different between each category, but as we went into January realizing things were slowing down we needed to do another one and so we feel good right now.
You know you can look back in the armchair quarterback it and say you know we could have raised more than the first round, but we feel comfortable with what we did the first round and then the second round. So we're pretty happy where we are right now.
And then you know how has that been received you know on the customer side, so far any pushback on that.
Maybe discuss the opportunity to continue taking price if needed.
Absolutely and we really haven't heard much of a pushback I think this is a great environment to when you're forced to raise prices because across retail everyone's on the same boat you know, we're all dealing with the same pressures so.
Not a lot of pushback and we feel there is opportunity we feel it necessary in the coming months, if we have to do it again, we will.
Okay.
Perfect and then can you just give us an update on the pro business. How that's trending you know any increase decrease kind of what you're seeing out there.
Our pro business has been very strong for the tile shop, we developed our pro market manager program.
Just over about two years ago, and it's really taken hold and driving more and more accounts into our stores.
So it's strong but as we all hear across as you know pros are backed up its theres still busy it's because the remodeling sector is strong so the pro business is increasing for the tile shop, and we're really happy with the results.
Perfect and then the last one for me you said early in the call you know not planning on opening any new stores. This year you know if you did it would be late you as we look at your store base and your focus on improving the existing stores.
Anything that's planned and now that we should be watching for as far as you know bigger remodels or any relocations are any stores that maybe people you know you.
You make a decision on cutting.
Sure remodeling, we're moving forward with we're remodeling stores right now and we continue we will continue that our new stores nothing is in the queue as of now, but it's not if it's when you know I am really focused on getting our chain back to where I feel they should be we took a nice step forward like we said in.
2021, and the team's focus on it.
So many different initiatives going and it's working and we don't want to take that that focus off because we do feel we have a lot of growth in 2022 if we maintain that focus now.
If something comes up at the end of the year.
We're not going to be shy about it but you know we're looking we always look at sites, we keep our finger on the pulse of real estate are what's going on out there and you know so.
So if the opportunities happen you know like I said before it's not if it's when.
Okay, great. Thank you guys. Thanks Mark.
Thank you. Our next question comes from the line of Eric Delmarva from Halfmann Capital. Your line is now open.
Good morning, Cabby welcomed Carla.
Could you elaborate a little bit more on the I T initiatives you referenced earlier in the call what that encompasses that visualization.
Absolutely when we talk when we talk about our priorities our retail execution supply chain and people first you know it's funny it all ties back to the technology at some point and you know with our new ERP system. Harman, we we have a lot of opportunity to bolt on different tools and products to enhance the lives of our customers.
All of our employees and especially in supply chain as well. So we have a lot of team is focused on our new tools to really upgrade where we were in the last few years and get us more streamlined and it's been working like I said and there's more work to do you know automation is the new thing you know we want to continue to folks.
On how we can be more efficient across the board. So a lot of the new enhancements will be coming this year and we're pretty excited about it.
Gotcha and will that alleviates some of the need for the vignettes or will that continue to be a focal point of the store footprint.
Yes, I've always been.
A core strength of the tile shop, yeah, its something where customers have that expectation of seeing something when they come in.
We always feel that there's room to test you know when you think about technology, we launched our new visualized or on our website and that's that's been very successful and so we're always thinking of how to incorporate new and exciting technology in the store experience.
So I think youre on the right track I think we have some things planned.
Great and just one more I noted in the footnotes of the press release about let's say two 2 million in asset impairment charges in last year is that added back to what you're disclosing adjusted EBITDA or how should we think of that.
No, we do not add that back into adjusted EBITDA.
Okay, great. Thanks, that's all I had.
Thank you.
Thank you. Our next question comes from the line of David Keenan from Kenan wealth management. Your line is now open.
Hi, good morning.
Congratulations and.
Too long.
Your new CFO carpeted Carla.
I apologize.
Welcome aboard best of luck.
So in terms of the Capex guidance that you gave can you give us more detail on how much is going into technology initiatives versus remodels. It seems like kind of an aggressive number.
Relative to the $11 million that we spent in 2021.
Thanks for the question David you know when we look at our Capex, we kind of bucket it and when you think of technology. It is expensive. So yeah. It's a big number but we we usually typically go a third a third and a third when youre looking at Capex and how we grow.
Okay. So that being said a good portion of Capex that is going into Remodels could you share with US you know, let's say it comes in that around.
<unk> four and a half four of $5 million can you take me through the economics on the stores that you've already remodeled and what the payback is.
Sure absolutely now when we look at Remodels, it's it's.
Theres a different recipe for different stores. So when we go into a store we've done million dollar Remodels, we've done $500000 Remodels and then we'll go in with it you know 200 to $300000 remodel and do a scrape or we call. It a freshen up and if we're in a market with multiple stores will try to hit those stores as well typically when we've done a significant remodel we look at it.
Two year payback on that cost you know when when we think about the investment now that's on a big investment we think in smaller investments, it's a little bit more difficult to quantify because you're not investing as much as many dollars, but I'm the larger remodels that we've done in the past, it's typically two to two and a half your return on that investment.
Okay.
All right that's encouraging and then can you comment you know where two thirds of more than two thirds of the way through Q1 Optum.
Optimistic I see inventory is up.
Is it safe to say that the momentum you've seen in sales has continued thus far this year.
Yeah, we've seen strong business, David and the nice thing is getting our inventory back to historical levels. It's the back orders have come down so with strong business compared over last year not as many back orders, which is nice so our stores are humming and we're pretty excited for Q1.
Okay, and then just a clarification I think you did a great job and I appreciate you calling out.
Excuse me.
Some of the lower margin product.
For the street to focus on more gross margin dollars.
But could you just further clarify.
You know that the blend maybe lower but you'll get more absolute gross profit dollars. So is it safe to say that vinyl.
And these other little lower margin products are not going to cannibalize or take away from traditional tile.
Correct, Yeah, that's something we're very cautious of we released vinyl in our stores.
We saw what we expected you know there were a lot of builders that continue to buy our tile and customers are buying tile, but we'll pick up that L. V team for a mud room or an entry way that typically would be sheet vinyl or something that would be transition to or something a.
Lower cost so it's been working for us without seeing the cannibalization of our assortment. So we have a handful of skus, we're going to add a handful more and continue the tests. We've picked up a few larger deals which is great through some of our pros.
And the pro installation products as we noted the pro is growing and so as the demand for new net new technology, and thin sets and shower systems and things of that nature. So the tile shops really took a great initiative to partner with a lot of well known incredible domestic vendors and you know the demand is high for their.
Unfortunately, the margin isn't as high but we want to have that products have what the customer wants and we should succeed.
Excellent.
And then.
Our last question you know given the strong free cash flow and the high returns that you guys are generating.
You know in retrospect I would have preferred you know instead of paying <unk> 30, something million dollar dividend I would've preferred honestly the company shrinking the share count so that we can grow EBITDA per share.
So I guess you know message you know for you and for the board is on a go forward basis, if we can buy back in.
In the next few years, a $100 million worth of stock, we could potentially shrink our share count by 35% to 40%.
Which is another lever.
And you know value creator I'd, rather see that over dividend now some shareholders made debate that but I think until you start to get the respect and the valuation from the market that would be the best deployment of capital and then at a later date when you have much fewer shares I think.
Entertaining a continuous dividend.
It would save cash and generate better returns for shareholders. So just a little bit of feedback there.
Thank.
You know the market is the.
The market is not really showing us the respect for the progress that the company has made.
We're trading at a significant discount to our peers. So I think that that would be a way to remedy back overtime.
Okay.
Thank you for the feedback David is I really appreciate it.
Okay, Alright, well good luck, guys and well look forward to the next update.
Thank you.
Thank you at this time I am showing no further questions I would like to turn the call back over to Mark Davis for closing remarks.
Thank you for listening to our earnings conference call, we anticipate filing our Form 10-K later today. Thank you for your interest in the tile shop and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].