Q2 2022 Tile Shop Holdings Inc Earnings Call

Good day and welcome to the SEC.

Second quarter 2022 tile shop Holdings incorporated earnings Conference call.

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After todays presentation, there will be an opportunity to ask questions.

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<unk>. Thank you please.

Please note this event is being recorded.

I'd now like to turn the conference over to Mark Davis.

President of Investor Relations and Chief Accounting Officer. Please go ahead.

Thank you good morning to everyone and welcome to the tile Shop's second quarter earnings call. Joining me today are Kabi, Luna, Alright, Chief Executive Officer, and carload lunar and our Chief Financial Officer.

Certain statements made during the call today constitute forward looking statements made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.

Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those 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 reconciliation of those non-GAAP financial measures, which has also been posted to our company website.

With that let me now turn the call over to Kathy.

Kevin.

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

We had a good quarter highlighted by another double digit increase in comps and sales in excess of $100 million.

It is clear that our strategic focus on our existing store base is paying off.

The team continues to execute we've made great progress building relationships with our pros and we have a number of exciting initiatives underway.

Despite this strong performance, we see signs that the macro tailwind that we've enjoyed over the last several quarters are starting to change.

Industry analysts site rising interest rates slowing existing home sales and shifts in consumer spending patterns as possible reasons, why we may see a slowdown in home improvement spending during the second half of 2022.

We have started to observe the trend in our business as the growth in new orders has started to decelerate in recent weeks.

With that high level overview in mind I'd like to provide an update on our 2022 strategic objectives surrounding our employees executioner stores and our supply chain.

First with respect to our employees. It is a privilege to lead such a talented team.

Skills, we've cultivated across our organization are in high demand, especially given the current labor shortages and it remains challenging to attract new talent in the current environment to stay ahead of this we have been focused on initiatives designed to invest in our people enhance our culture and foster employee engagement.

Over the past year, we have refined our training develops career paths and increased opportunities for interaction between leaders and their teams.

During the third quarter, we're looking forward to holding our national sales meeting with all of our store managers pro market managers and leadership.

It's been several years since we've been able to bring everyone. Together. So I think this will be an extra special events as we build relationships reinforce best practices celebrate milestones and build excitement surrounding our vision for the future.

Second our in store execution continues to improve I am pleased with the results I've seen on a variety of different metrics such as conversion back shelf attachment rates and average ticket.

We saw a nice increase in pro sales during the quarter, our pro mix exceeded 65% of our total sales.

We also successfully piloted a new technology that streamlines, our process to log customer interactions such as quotes and sample orders and monitor and follow up activities.

We plan to roll this tool out to the rest of our store base during the third quarter.

Lastly, we've made nice progress on our supply chain initiatives over the last six months.

Our in stock levels are back to normal and we feel good about the level of inventory, we're carrying to meet customer demands.

Product availability has recently not been an issue for us our suppliers are continuing to pass along price increases in response to inflationary cost pressures.

In the near term, we anticipate that the cost pressure will persist and.

In response to these pressures we've pulled forward certain purchases before price increases were implemented.

This contributed to a $5 $3 million sequential increase in inventory during the quarter.

We're also continuing to evaluate alternative sources of supply we were able to source high quality products at lower prices.

In short we had a nice quarter and are positioned to stay focused on our strategy and what we can control.

I'll now hand, the call over to Karla to touch on our financial results.

Karla.

Thanks, Cathy good morning, everyone, the $107 $6 million of revenue generated during the quarter represents a new quarterly sales record comparable store sales increased by 12%. This improvement was largely due to an increase in average ticket driven by our pricing actions and partial.

Offset by a modest decrease in unit volumes.

The gross margin rate during the second quarter was 66%, which was down 310 basis points from last year's second quarter, but up 80 basis points sequentially from the first quarter. The sequential improvement was primarily due to our pricing actions and partially offset by inflationary cost pressures.

He expects the inflationary cost pressures to continue in our supply chain and our inventory costs to stay elevated in the near term.

Given the decrease in unit volumes during the second quarter and the softening demand trends cap spoke about earlier, we plan to take a more conservative approach to future pricing actions.

We intend to pass through future cost increases from our suppliers to our customers. However, we are not planning to raise prices to the levels required to maintain our current gross margin rates.

As a result, we expect to see continued pressure on gross margin rates during the second half of 2022.

SG&A expenses increased by $2 $4 million during the second quarter of 2022, when compared to the second quarter of 2021.

And benefits expenses, excluding bonus expense increased by $4 million due to an increase in staffing levels sales commissions and benefit costs.

Additionally, our store occupancy costs increased by $1 million due to an increase in common area maintenance expenses normal store repair costs and utility billings. We also spent an additional $700000 in marketing and $400000 on travel during the quarter. These increases were partial.

We offset by a $3 $1 million decrease in bonus expense during the second quarter of 2022, when compared to the second quarter of 2021.

Approximately three quarters of the decrease was due to a decrease in the expected annual incentive payments and the remaining quarter was due to a decrease in sales bonuses.

Additionally, depreciation expense decreased by $700000.

Net income was $6 $9 million during the second quarter of 2022, and adjusted EBITDA was $16 $8 million.

Our adjusted EBITDA margin rate fell 40 basis points to 15, 6% largely due to the year over year decrease in gross margin that was partially offset by lower bonus expenses.

Moving to the balance sheet as of the end of the quarter. Our inventory balance was $110 million. This included the pull forward of some inventory purchases that cab mentioned earlier.

We expect inflationary cost pressures to persist in the near term.

The combination of our decision to accelerate certain purchases and the ongoing inflationary cost pressure is expected to result in elevated inventory balances over the next several quarters.

As of the ended the quarter, we had $10 $5 million of cash and our bank debt remained at $5 million.

In closing we are pleased with our second quarter results and are staying proactive against the dynamic macro environment with that Kevin and I are happy to take any questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using speaker phone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Connor Jensen with capital markets. Please go ahead.

Yeah.

Conor Jensen for Mark Smith with Lake Street Capital markets. I was just wondering if you could give us an update on what youre seeing in consumer behavior as your customers slowed spending as the stores are projects getting canceled due to economic issues right now.

Hey, guys. This is cam thanks for the question.

Consumer spending we are still seeing a pretty solid ticket average.

What we are noticing though is the traffic is slowing a little bit here and there knowing that.

This seasonality.

Along with.

The macro environment. So we expect to see our traffic slowed during the.

The summer months, but we're seeing a little bit more in areas that are getting us to believe it's impacting our customer. So the the order balance has gone down slightly a little bit more than we would hope but the ticket average is still very strong I think our inventory position has really helped us and in Q2 going into Q3.

As well, we don't have a lot of delays in very few cancellations I think people are excited to get their projects done when they have the labor there to knock it out for them.

And then maybe update us on how slowing housing trends have historically impacted you guys as the housing market kind of starts to weaken here.

Yes, typically we are a few points better than existing home sales.

New home sales, so when you see it being depressed.

That tells us what we're in for <unk>.

Happy with our results in Q2, and we have a significant.

Significant order bank going into into Q3, but we're seeing it starting to slow.

And we're not surprised by that when you look at the environment and well with what's happening in housing.

The store manager in 2008, when all of this happened. So I went through this before and we just tightened our belts and grind through it.

People are still going to remodel we have a lot of customers that are they cant get into a new house theyre going to remodel their existing so we're positioned well for the customers that are still engaged and wanting to do work.

Okay.

And then lastly, any update on how the remodeled stores are performing.

Any updates on growth plans for the use of capital whether it be new stores or continued investments in the current stores.

Yes, absolutely we are still not not our remodels, we're pretty excited with the results. They look good we're getting the product we want in them and you know the.

The response has been great. So we have crews out there right now remodeling our stores.

With capital allocation, we're talking about it every day, we're excited about some things that we think we may be able to accomplish here this year. So.

Not putting out there any new stores right now I'm not going to say, we're not or we will.

But theres other things with investments in the business that we're looking at it currently Connor.

As a reminder, if you would like to ask a question. Please press Star then one answered the question queue.

The next question comes from Dave Cannon with Cannon wealth forms. Please go ahead.

Hi, Good morning, guys, congratulations on a nice quarter.

Uh huh.

So first question is in regards to inflation.

You alluded to gross margins.

Probably going down sequentially in the back half of the year I'm, assuming that's a function of.

Direct cogs, such as natural gas, which I know silver remains elevated labor probably.

Youre seeing continued pressures, but the one bright spot that we're tracking is transportation and contain our costs have come down meaningfully are you starting to see that impact your business.

Hey, David as cab, we're excited to seeing these these costs go down we do have a whack model meaning.

We order products six months before it hits, our our floor in our Dcs. So we have we were challenged with the orders that we placed six months ago that are still rolling through we're staying with our orders, replacing now yes.

Pricing will come down some of the cost will come down, but we'll get that benefit probably in 'twenty three.

$110 million of inventory that we're cycling through at a higher cost.

We are looking at Resourcing actively resourcing looking at different areas of the world, where they're not as challenged with things like natural gas are high container cost, but we see it as well we're excited but we have to grind away is what we've got right now.

Okay.

And then last quarter, you guys touched on a new product.

Youre going to start caring luxury vinyl tile.

And we did some some checks and we see.

For example, a L L lumber liquidators is being impacted.

By F N D, taking doing very well in that space. So we're excited to see you guys enter I know, it's early but can you give me a preliminary read on that I know, it's a multibillion dollar opportunity in terms of market or Tam.

What's the early read for you guys and how should we look at the cadence as you roll it out.

Sure Yeah, we've been carrying <unk> for about a year now and just more of a test.

Had a few skus, we added a few more and we're pretty excited with those results. So we're positioning the company to make a.

Bigger investment into that segment.

It's a little ways out, but we're getting everything ready on our end too to carry more.

Mega Splash in that arena.

We've noticed a lot of things with our customers with pros.

And how they're adapting to LDC.

We're seeing in other areas, where you typically see carpet or hardwood. So we're selling a lot of our time for bathrooms kitchens fireplaces mud rooms, but LPT gives you an opportunity to go into areas, where typically you would never even find tile bedrooms, and laundry rooms things like that so.

We're pretty excited about it but more to come.

Okay and then.

In regards to your current.

Uh huh.

Our credit agreements.

Do the covenant covenants permit for stock buybacks.

Can you tell.

Tell me whats permitted what's not I havent dug through that yet.

And would you guys be willing to amend that it seems like we have an opportunity.

Two even though this year with traffic slowing down a little bit even though what.

Omitted from your commentary is that interest rates actually have dropped almost three quarters of a point from where they were a month ago.

Maybe going back the other way again.

Gasoline prices are down so many of the things that affected the consumer could be coming back our way again, but we don't know we don't have a crystal ball, but one of the things opportunities that we have even if you know.

Revenue were to flatten or EBITA were to flatten as to substantially grow our earnings through share repurchases like very large share repurchases similar to what Gary.

Gary Friedman did it restoration hardware, which has been one of the best performing stocks over the last decade in the world.

So could you comment on that for me. Please the loan covenants and would you if need be potentially get amendments or augmentations to it. So that we can drive earnings growth through our capital allocation.

Hey, Good morning, David This is Mark Davis.

I just want to acknowledge that yes.

Our credit agreement does provide for the ability to repurchase shares as long as our leverage ratio stays below a certain point.

What we would decide to do in terms of amending our credit agreement is is really all hypothetical at this point.

And to that end in terms of the broader ideas that you're raising.

We have a good history here of a really considering various options in front of us.

And trying to make the right decision for the company and its shareholders and we will continue to do so.

Okay, guys best of luck in the second half of the year and beyond thanks for your time.

Thanks, David.

This concludes our question answer session I would like to turn the conference back over to Mark Davis for any closing remarks.

Thank you for listening to our earnings conference call, we anticipate filing our Form 10-Q later today. Thank you for your interest in the tile shop and have a great day.

The conference has now concluded. Thank you for attending today's presentation you may.

That's correct.

Okay.

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