Q1 2022 Tile Shop Holdings Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, thank you for calling please remain on your line you conference call will begin momentarily. Thank you for your patience.
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Good day, ladies and gentlemen, and thank you for standing by and welcome to the tile shop Holdings incorporated first quarter 2022 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.
I ask a question. During this session you will need to press Star then one on your telephone keypad.
As a reminder, this conference call is being recorded if you require any further assistance. Please press Star then zero at this time I would like to turn the conference over to Mr. Mark Davis.
Thank you good morning to everyone and welcome to the tile Shop's first quarter earnings call. Joining me today are caddy Loma, our chief Executive Officer, and Carla Luna in our Chi.
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.
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 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 Kathy.
<unk>.
Thanks Mark.
Morning, everyone and thank you for joining us today for an update on our business and a review of our first quarter financial results.
Earlier. This morning, we reported revenues that eclipsed the $100 million in a quarter for the first time in our history. We also set our fourth consecutive quarterly sales record.
Well home improvement tailwind to have continued in our recent pricing actions have contributed to our results. These results would not have been possible without the strong execution by the entire tile shop team there.
There are three specific areas I'd like to touch on this morning.
Our in store execution continues to improve over the last year. We've made it a point to focus on our people cultivate talent and reinforce our brand promise to provide best in class service.
Recall that it was just a little over a year ago. When we started rebuilding our team by adding staff in our stores and expanding our store hours. We also increased the number of regional managers overseeing our 143 store portfolio from six to nine which increased the level of interaction between sales leadership in each of our stores.
We've been successful in strengthening our talent bench at the same time, we raise the bar and haven't been able to make a number of strategic moves to replace managers, who are struggling to meet our expectations. Today, we're in a much better position with our staffing levels and the caliber of the talent managing our stores.
We continue to see strength in our professional customer channel, which exceeded 60% of our overall sales mix during the quarter.
Our pro market managers have done a great job of cultivating relationships with our best Roes.
Our loyalty program provides great benefits to our professional customers that include tiered discounts referral rebates and no fee jobs take delivery for the pros, who do the most business with us.
Our assortment includes products, specifically sourced web pros that include reputable brands in the industry such as we'd ionarde.
This has proven to be a winning formula that has helped us sustain growth in sales to this key customer segment.
Third the investments we've made in our digital commerce capabilities are also contributing to the improvement in our topline results.
For instance, we launched our visualize their last year, which gives our customers access to a virtual design studio. Additionally, we've enhanced the way we merchandise our inventory online and further merge the digital and in store shopping experiences.
Our constant work on our digital commerce is paying off.
Online orders increased by over 30% between the first quarter 2021 and the first quarter 2022.
Well online orders still represent less than 5% of our overall orders were pleased with our progress and believe we have an opportunity for continued growth in digital sales.
Turning to our supply chain is.
Stock levels have continued to get closer to pre COVID-19 levels. Despite all the recent disruptions in the worldwide supply chain.
We have successfully worked with a number of our suppliers to secure delivery of inventory that had been backwards and we're now in a much better position from an inventory availability standpoint.
While product availability continues to improve inflationary cost pressure remains a challenge across the industry.
We continue to see elevated rates for international container freight and many of our vendors across the world are raising prices in response to increases in the cost of energy labor and other inflationary cost pressures. Currently this is most pronounced in Europe , where natural gas prices have increased in recent months following Russia's invasion of Ukraine.
Natural gas is a key resource used by your vendors the buyer of the kilns that are used to make ceramic porcelain and other man made titles.
Further increases in oil prices contributed to higher costs to extract stone from corridors around the world it's been transported for fabrication.
In the near term, we anticipate that the cost pressures will persist.
In response to these challenges we're executing several axes.
We're pulling forward some purchases on items to secure shipment before price increases go into effect.
We're raising our prices we completed a price increase in January of 2022. We also completed a similar price increase in April 2022, while we continue to evaluate and adjust pricing in future periods as it makes sense and as always we're evaluating alternative sources of supply across the globe. Most recently targeting South America.
In the United States.
We're always searching for the best vendors to deliver the best products and the best prices.
The current inflationary backdrop as volatile, but I'm confident we have the right team in place to help navigate the current challenges.
And now I'll hand, the call over to Karla to touch on our financial results Carla.
Thanks, Cathy good morning, everyone.
It's exciting to see the strength in our top line the 10.7% comparable store sales increase during the first quarter was largely due to an increase in average ticket driven by our recent pricing actions. However, we did see some modest volume uptake as well.
As pleased as anywhere with our top line performance, we continue to see the cost pressure affect our gross margin, which was 65.2% during the first quarter. It was encouraging to see that the price increases implemented during the first quarter helped to slow the pace of sequential decline in gross margin.
The current environment remains incredibly volatile and we expect further pressure on our gross margin in the near term.
SG&A expenses increased by $4.8 million during the first quarter of 2022 when compared to the first quarter of 2021.
The majority of the increase was due to a $3 9 million dollar increase in pay and benefits related to getting staffing levels back to pre COVID-19 levels and $700000 of increased marketing spend to take advantage of the current home improvement environment.
Transportation expenses also increased by $500000 due to increases in fuel prices. These factors were partially offset by an $800000 decrease in depreciation expense.
Our SG&A expense rate was 66% during the first quarter of 2022 which represents a 160 basis point improvement when compared to the first quarter of 'twenty 'twenty. One we've made a number of important expense investments rebuilding our store teams expanding our regional support growing our corporate.
Teams and investing in other areas of the business to help drive growth.
It is critical that we're able to continue to leverage our SG&A expenses, both at the store and corporate levels.
Especially given the impact that inflationary cost pressure has had on our gross margin.
Net income was $3 $5 million during the first quarter of 2022 and adjusted EBITDA was $11 $7 million.
Our adjusted EBITDA margin rate was 11, 4% in the first quarter of 2022 which was 460 basis points lower than our adjusted EBITDA margin rate during the first quarter of 2021.
The decrease was largely due to the decrease in gross margin rate I spoke about earlier move.
Moving to the balance sheet, we've made headway rebuilding our inventory levels and reducing back orders as of the ended the quarter, our inventory balance was $104 $7 million as Kevin mentioned, we are actively pulling forward some inventory purchases in advance of announced vendor price increases.
Also expect the inflationary cost pressure to persist in the near term.
The combination of our decision to accelerate certain purchases and ongoing inflationary cost pressure is expected to result in an increase in inventory balances over the next several quarters.
As of the end of the first quarter, we had $13 5 million of cash and $5 million of debt outstanding.
In closing, we're pleased with our topline results and the strong execution by our team well margin pressures persist we have and will continue to manage these challenges and we remain confident in our future with that cabby and I are happy to take any questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from the line of David Cannon from Kane and Wolf. Your line is open.
Good morning, guys.
First question is in regards to be inflationary pressures could you break down for me how much of it is coming from.
Direct cost of goods versus transportation costs.
Hey, Thanks, David This is cabby, yeah, it's funny, because it's a balance of our assortment because we ship from 155 suppliers in 23 different countries. So we have different shipping cost increases across the world and then they're also dealing with their own issues.
With increase of it.
He had all their their product cost so I would like to say is it's more on the product side. The transportation side right now and it's volatile you know we're seeing it go up and down in different areas, but it's definitely more product than shipping at this point.
Okay.
Is it like 80% product, 20% transportation could you quantify that.
Yeah.
Yes, it's really tough to quantify because of the other segments that we sell and the different you know velocity. So all I can say is it's more more on product than than shipping David.
Okay.
And then.
In terms of e-commerce or online sales.
That was a nice number up 30%.
Where do you see that getting to in terms of your mix of overall sales over the next couple of years and then visualize are available to the consumer.
The online buying experience or is that in store when you meet with me.
Representative salesperson.
Sure let me tackle the first part.
We see you know this growing nicely for us our investments are paying off in technology, and our E. Commerce area I would love to be eclipsed the 5% and keep growing it from there.
And our trajectory is strong so I'm very excited with our a team in merchandising and marketing team in getting this going.
When it comes to the visualized or yes, a consumer can use it at home they can use it in the store.
We're making updates to it monthly and a it's a great tool, we're really proud of it.
Okay, Great and then just last question before I jump back into queue.
Could you give us some more detail on.
What percent it was.
And also.
For your consumer I'm pretty sure you guys have loyalty could you give us an update on.
Loyalty ads and so forth.
Sure I mean, we're we're pretty excited with our initiatives in Perl, our new pro market manager team has done a great job in getting our pro sales at 60% plus 60%, which are we're excited I mean these are loyal customers that continue to send their customers to us and they buy more often so we're continuing to invest into that area of our business.
With the added enhanced assortment for those customers.
And with our pro market managers in our program.
Loyalty program getting them more engaged and what the benefits are and we're seeing a nice buy in there from our pro customers.
Our regular customers and loyalty, we see the same customers probably every five to seven years, you know if they're if they're doing it themselves. That's typically the turnaround on a on a project that they're doing on their own and we continue to see a lot of the same old faces. So it's been good for us.
Okay could you.
Just as a reference point, so I'll meet percentage wise, what pro was I know you said it was just north of 60%, but what was that a year ago and last quarter.
Last quarter. It was just below 60% a year ago, we were in the fifties and three years ago. We were in the forties. So it's continues to climb.
Well youre going to see that enduring and you know it's going to be with the macro environment. We're looking at you know pros are our book. So there's not a you know there's always going to be a stress on getting that labor into your house and so we're going to see strong pro business continuing but then we're also going to see I think a resurgence of the DIY customer.
Because of you know with the fed increasing interest rates and things like that we're going to see people wanted to turnaround and started doing it themselves again, so it's a nice balance of the tile shop offers I mean, we we we have videos and tools for the do it yourself customer and then we have those enhanced assortments for the pro customer, but we're going to continue to see pro increase.
That's been a focus of ours for quite some time and it's paying off.
We continue to invest in the DIY customer as well.
Okay. Thank you guys. Good luck.
Thanks, David.
Thank you. Our next question or comment comes from the line of Mark Smith from Lake Street Capital. Your line is open.
I guess first question for me just want to look at traffic versus ticket you've done a good job taking price increases what it was.
Store traffic look like.
Hey, Mark Thanks for the question Scott No traffic has been declining a we've seen that in the first quarter and continuing in the second quarter. Our ticket has been increasing now some of this is due to unit increase and some of that's been due to the pricing increase I'd say more pricing and unit, but theyre both up.
Positive.
So we're executing wellness stores, our conversion rate has gone up our.
Ticket continues to go up and as long as I see units going up I'm pretty pretty happy with the results.
Yeah.
Yeah.
What kind of pricing power do you think you have.
Is there a limit at some point, where consumers may be pulled back.
It's something that we monitor really close smart it's it was since our since our assortment is so vast it's we have opportunities to pull levers and different segments of the Assortments you know when you're dealing with back shelf and pro when youre dealing with high end water jet mosaics or just the commodity subway tiles. These are areas, where we can.
<unk> to make adjustments as needed I think we still have room to go if we need to.
Yeah.
Okay.
And then look at kind of use of capital here, where are you seeing the most attractive places to put capital to work is it remodels on stores, you know any update on kind of new store growth.
Looking at putting some of this capital.
Sure.
Right now, we're really focused on the execution in the stores with enhancing merchandising.
Investments into technology, and then inventory Mark I mean inventory right now is a great cash asset for me because inventories cash and we're going to grab it.
As fast as we can and we want to get ahead of some of these pricing increases I'd rather have it needed the need it not have it and right now with supply chain loosening up a little bit we're able to get a lot more inventory we're in a better spot now than we've been in quite some time, so we're making a lot of capital investments into our inventory and into our stores, but when it comes to new store growth again.
I'm focused on the existing footprint really getting the stores back to where I want them to be I don't see anything.
New opening in 2022, maybe maybe a store or two in the fourth quarter, but I'm not going to commit to that right now I think that our 2023 would probably be the time. It was looking at the macro environment. We're in right now, let's let's focus on our existing footprint and get the growth where we can in our investments we've already made and then stop.
Going again.
Okay.
As you focus on the existing footprint would you see needs on on Remodels as are big investments you've made in the existing stores.
You know not big investments Mark I mean, what we want to do is we do a lot of fresh and ups right. We refresh them. So we'll go in we'll spend a couple of hundred thousand and get some new vignettes and some of the stores that deserve them, but honestly if youre not a tile shop employee you can walk into any of our stores and they look good I'm pretty happy with the look and feel of our chain right now.
Tile doesn't expire so you look into the tile shop is 10 years old or a vignette. That's 10 years old that's still a pretty good today, so I'm pretty happy with how the stores look now we are investing in Remodels, we have remodels going today, but they have increased in cost.
As labor and material goes up that's impacting our budget for two months, so we're being real careful and selective on where we're going and how we're investing in these stores in these refreshes.
Okay.
Great. Thank you.
You bet.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to Mr. Mark Davis for any closing remarks.
Yes.
Thank you for listening to our earnings conference call, we anticipate filing our Form 10-Q later today. Thank you for your interest in the tile shop and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
Okay.
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Okay.
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