Q3 2022 Tile Shop Holdings Inc Earnings Call

Good day and thank you for standing by welcome to the Q3 2022 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 one on your telephone you will then hear an automated message advising your hand is raised please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Mark Davis, Vice President Investor Relations and Chief Accounting Officer. Please go ahead.

Thank you good morning to everyone and welcome to the tile Shop's third quarter earnings call. Joining me today are Todd Loma, Our Chief Executive Officer, and Karla Lewis, 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.

Looking statements made today are David this call and we do not undertake any obligation to update these forward looking statements.

Today's call will also include certain non-GAAP measures. 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 Ken.

Thanks Mark.

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

Our team is pleased with the quarterly results, we announced earlier this morning.

While the macro environment remains volatile we continue to grow sales at comparable stores and ended the quarter with $97 $2 million of revenue.

This represents our sixth consecutive quarterly sales record for the respective quarter.

We also delivered good flow through to the bottom line, our sales strength combined with disciplined expense management practices and share repurchases resulted in earnings per share doubled what we reported in the third quarter last year.

These results have been made possible by focusing on our team refining our processes and investing in technology.

We've made significant progress over the last year and I am proud of what we've been able to accomplish.

I'm also pleased to announce that we completed our share repurchase program Karla will discuss the details of the repurchases in just a few minutes at.

At the same time I see new challenges on the horizon. We've enjoyed a period of very strong demand for home improvement products over the last two years.

Rising interest rates and decreases in housing turnover signal that a slowdown in remodeling activity may be coming.

There was the tile shop for over 20 years and I know this is a resilient organization.

In fact, we've shown that we can grow even when the macro environment is challenging.

We are focused on staying proactive with the goal of sustaining our current level of success.

As we look ahead to 2023 I believe we can position the company to grow even in the challenging environment by executing the following objectives first.

We're expanding our line of luxury vinyl tile products for several years <unk> has been one of the fastest growing product categories in hard surface flooring.

Initially we were hesitant to enter this market good product quality concerns a lower margin profile and the question of whether our customer base are accepted as a viable option.

Over time product innovations have led to a number of higher quality <unk> products and consumer demand has increased.

Several quarters ago, we initiated a test pilot a small line of lvg products in our stores.

This test showed us that LPT lines have broad appeal with both pro and retail customers.

We've also learned that many customers who buy <unk> from US also by title from Us and often on the same order.

Over the summer we have actively worked with our suppliers to expand our assortment of lvg products that launched at the end of October we've.

We've added over 40 products to our assortment at a range of price points that we believe will resonate with our customers.

While the margin profile of an LPT sales lower than the margin profile of a tire sale. We believe that the additional volume will help us leverage our investments in store and distribution assets.

And improve overall profitability.

Second.

We're planning to open new stores in 2023.

New store openings have been a pause since our Wayne New Jersey store opened in the first quarter of 2021, we felt it was prudent to focus on our existing store base until the vast majority of our stores were operating with historical norms.

We have made significant progress over the last two years and believe we have a path for continued improvements within our existing store base.

Given the volatile macro environment, we are planning to take a conservative approach to store growth.

At this time, we anticipate opening two new stores and relocating a third store in 2023.

Over the last year, we've added to our construction and design teams to help position the company for growth we've invested in talent initiatives to establish a bunch of managers ready to take on new stores.

We're currently refining our new store opening process and I'm excited for the opportunity for measured growth in 2023.

Third we will continue to invest in initiatives to expand our digital capabilities and reach.

We've made some nice progress over the last year in this area, but believe there is still significant untapped potential.

We've recently added to our e-commerce team and look forward to accelerating the pace of change and effectiveness of our digital strategies.

Last and perhaps most importantly, we will continue to focus on developing our team and improving execution in our existing stores.

We've seen some nice improvements in pro growth conversion rates discretionary discounting practices and shrink losses across many of our stores.

This has helped drive improvement in store level financial measures, such as sales per store and store level EBITDA.

As we look ahead to 2023.

I believe continued focus on talent development and sales excellence will be a key catalyst to propel the company's performance to the next level.

With that I'll now hand, the call over to Karla to walk us through the third quarter results Carla.

Thanks, Cathy good morning, everyone.

Third quarter sales at comparable stores increased by five 3%. The increase in sales was largely driven by an increase in our average ticket partially offset by a decrease in sales volumes.

The gross margin rate during the third quarter was 66, 5%.

We were pleased to see this result, which was primarily due to a decrease in discretionary pricing adjustments.

We continue to see elevated levels of inventory receipts at higher price points throughout the third quarter and as we started the fourth quarter.

Given the softening macro environment, we are maintaining a more conservative approach to adjusting prices in the near term Accordingly, we anticipate modest decreases in gross margin rates during the fourth quarter.

Further as we move into 2023, we anticipate that the expansion into Lvg will drive incremental gross profit dollars. However, we anticipate the gross margin rate will decrease as our sales mix changes.

SG&A expenses decreased by $700000 during the third quarter of 2022, when compared to the third quarter of 2021.

This variance was related to a onetime $700000 asset impairment, which was recorded last year and not repeated this year.

Also during the third quarter, we entered into an agreement to terminate one of our store leases with the landlords who plans to redevelop the center.

Under the terms of this agreement we will vacate the space during the fourth quarter.

In exchange for this concession the landlord has agreed to pay us a $1 4 million lease termination fee, we recognized an $800000.

SG&A associated with this transaction during the third quarter and plan to recognize the remaining $600000 benefit during the fourth quarter.

We anticipate relocated the business from the store to another nearby start within the same market.

Benefit recognized in connection with the lease incentives during the third quarter of 2022 was offset by a $700000 increase in pain benefits expenses during the third quarter of 2022, when compared to the third quarter of 2021.

Net income was $3 $8 million during the third quarter of 2022, and adjusted EBITDA was $12 $2 million.

Our adjusted EBITDA margin rate improved by 130 basis points to 12, 6% largely due to the increase in sales and favorable SG&A expense leverage.

Earnings per share during the third quarter doubled from <unk> during the third quarter of 2021 to eight during the third quarter of 2022.

During the third quarter of 2022, our board of directors approved a $30 million share repurchase plan as of September 32022, we have repurchased $4 1 million shares under the plan for $15 $5 million inclusive of brokerage commissions.

Or an average share price of $3 80 per share.

Following the end of the third quarter, we completed the share repurchase program.

In total we repurchased seven 8 million shares for $32 million.

Inclusive of brokerage commissions or an average share price of $3 87 per share.

Turning our attention to the balance sheet, we closed the quarter with $121 $5 million of inventory. This represents a sequential increase in inventory from the second quarter of $11 $5 million.

The increase in inventory was largely driven by our decision to accelerate purchases ahead of expected price increases, particularly from our European suppliers in response to inflationary cost pressure due to rising energy raw materials and labor costs.

We anticipate that inventory will remain at elevated levels through the end of the year and begin to decline in 2023.

As of the ended the quarter, we had $34 million of debt outstanding on our line of credit the.

The $25 $4 million sequential increase in debt from the second quarter of 2022 with largely due to the increase in inventory and share repurchase activity that took place during the quarter.

On September 30th we entered into a new credit agreement led by Jpmorgan Chase.

This was a straightforward deal as compared to our prior facility, which was fully paid off and terminated the new credit agreement provides the company with access to a $75 million line of credit for the next five years provided the company remains in compliance with certain financial and nonfinancial covenants.

We believe this facility will provide the company with sufficient capital to sustain operations and fund growth initiatives.

In closing, we're incredibly pleased with the strong results with that caveat and I are happy to take any questions.

As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

And our first question comes from the line of Conor Jensen with Lake Street. Your line is open.

Hey, guys. This is counter Jensen from Lake Street for Mark Smith, Thanks for taking my call today.

Good morning, guys, thanks for being on.

Yeah. So gross profit margin looked pretty good on a sequential basis can you talk about your outlook for the margin kind of where you're seeing pressures on your costs and your ability to continue to pass through price increases.

Yeah definitely Conor this is Carlos good morning.

So as I spoke about in the comments.

We do expect some continued pressure on the gross margin we have some very good things happening we have some improvement in freight rates.

Are experiencing the benefit of the price increases earlier in the year. We also have strong inventory controls and have the ability to keep our reserves fairly low.

Guarding the inventory.

However, the inflationary cost pressures continue.

We are working to diversify our supplier base and we are mindful of the price increases and working to control our cost to mitigate the need for future price increases.

We're also very excited about <unk> and we know that the <unk> has a different margin profile and so that is going to affect that going forward, but we do think that we will continue to grow and we will continue we're working hard to grow the gross profit dollars.

For the company.

Yeah definitely makes sense there.

And then another question.

What's kind of your appetite for store growth I know you said the one in 2023, but maybe some additional color on how are you.

They are thinking about allocating capital between the store growth and the share buybacks.

You bet.

We said too.

We're very conservative.

I'm not happy with two but thats, the right and prudent thing to do for the business at this time.

We.

<unk> said in the comments refining new store process. So we're looking at things a little different when it comes to real estate when it comes to size when it comes to how we can operate more efficiently and so we've identified a few spots that we want to be in and we will watch the macro we'll do our analysis when we do it by store by market and make sure it's right.

Susan now what I would love to grow more absolutely, but let's get it started with two and see where we go from there.

Got you that makes sense and then youre still looking to kind of do those buybacks you've been doing in the past.

Yeah.

No not at this point I think right now we were able to execute at very efficient timeframe, we're happy with the results, but let's let's make sure we're doing what's right for the business.

A tough macro environment.

Yes, definitely makes sense I'll turn it over thanks guys.

Thanks Scott.

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

One moment please.

Alright. Our next question comes from the line of Charles <unk> with <unk> wealth management. Your line is open.

Okay.

Hello, Charles Your line is open.

Good morning can you hear me.

Yes got you Charles Okay. This is this is Dave came in.

I apologize I was confusing.

So yes.

First question is in regards to gross margins.

Hi.

Given.

The Nord stream pipeline issues in energy prices, especially not cast surging in Europe , how much of your sourcing comes from there and then.

And in terms of percentage and then what are you hearing.

From your sourcing partners in terms of cost increases and the effect on pricing.

Hey, Dave Thanks for the question, it's a really good question because the tile shop.

We got our finger on the policy when it comes to global economic some challenges at our vendor partners see everyday and when you think about assortment and percentage that comes from Europe .

It's different by segment and we really don't typically disclose that but its roughly anywhere from <unk>.

<unk> 30 to 50, but it changes quarter by quarter. So it's something that we've seen early on I remember the tariffs and anti dumping happening in China. We saw this happening at a time.

So we've been moving quite a bit all around the world and our vendor partners are feeling the pain.

Some more so than others, and so youre going to see a shift in a lots of South America Youre seeing it too.

Some more back to Asia, but it's.

It's something that it's a healthy balance that I believe actually strengthens the company because it forces you to find new partners and you find new opportunities. So we see the struggles are having freight rates are going down, though and they are stabilizing some of the raw materials. It is the natural gas that is having a big impact youre right. So we're moving.

So.

That's the answer.

So is the answer that <unk> been able to diversify some of your sourcing away from Europe , where there is the Nat gas effect.

What youre, saying, yes, yes, absolutely great great.

Great and then.

For the quarter.

What percent was LDC.

Going longer term, what do you think that percent growth too.

Yes for the quarter. It was it was still our pilot skus, so it's less than 10% and it's something that we're going to look to grow I don't want to throw a percentage of where it is going to go we just launched it at the end of October . So we all have our hopes, but we figured it should it should grow.

At least to that if not further.

What was the early read cab in the stores, where you Ram pilot.

Was it accepted what could you share with us kind of qualitatively, we were actually excited to see where the product's landed on the ticket we saw both retail and pro and we saw it where it wasn't cannibalising, we figured out that people are still buying the tile for their bathrooms in their bag spices, a fireplace mud rooms, but typically instead of going.

Down the street to get their Lv TVA, So we had it.

And they would add it to the ticket for their basements living rooms bedrooms, and we realized throughout the year that hey, we have a bigger opportunity. We only had I mean, it was a single account skus.

For the pilot and now we have a healthy assortment, that's launched with new boards, new merchandising new marketing. So we feel it's going to really help propel us going forward.

Okay. Thanks.

Guys. Good luck.

Coming year appreciate it thanks, Thanks, David.

Yeah.

Thank you and ask a question. Please press star one one.

Please standby.

And I'm showing no further questions at this time I would now like to turn the conference back to Mark Davis for 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.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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