Q3 2023 Tile Shop Holdings Inc Earnings Call
Yeah.
Good day, and thank you for standing by.
Welcome to the quarter three 2023 tile Shop Holdings, Inc Earnings Conference call.
At this time all participants are in a listen only mode.
Yeah.
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 would then here in automated message advising your hand this way.
Draw a question. Please press star one one again.
I would now like to hand, the conference over to your first speaker today.
Mark Davis, Vice President of Investor Relations.
Chief Accounting officer.
Please go ahead.
Yeah.
Okay.
Thank you good morning, everyone and welcome to the tile Shop's third quarter earnings call. Joining me today are cabin Miller, 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 1995 as amended.
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 at 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 measurement. 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 cat.
Thanks, Mark Good morning, everyone and thank you for joining us today for an update on our business while the macro environment continues to present challenges, we continue to make changes to our assortment expand services and invest in e-commerce capabilities to help mitigate the impact on our business as we have discussed previously the challenging economic.
Exasperated by significantly higher interest rates has created headwinds across our industry over the last year.
Factors that contributed to lower levels of traffic in our stores, which negatively impacted our sales during the third quarter. Despite these challenges I am pleased with the progress we have made implementing changes to adapt to the current environment. For example, we took steps to improve our offering to middle market and customers by adding new tile products for assortment that look great for <unk>.
Well enterprise competitively, we also expanded our line of luxury vinyl tile products over the past few quarters that provide options for customers seeking to refresh their homes or making more economical choice. Additionally, we believe the services we offer in our stores our key point of differentiation, we continue to invest in training and tools to ensure.
She started equipped with the latest design trends and installation techniques to help our customers.
Taking these steps impairing, our offering with competitive financing options. We believe we are well positioned to appeal to both higher Ed and budget conscious customers.
We continue to pursue opportunities to enhance our relationship with our professional customers for example.
We ended the assortment of competitively priced skus combined with our luxury vinyl tile offerings provide budget friendly options for our approach presents for the homeowners they serve.
Our pro market managers play a key role in cultivating relationships with professional customers and hosting in store trainings with industry experts.
The combination of these benefits paired with our pro loyalty program extensive assortments and exceptional service helped us strengthen our relationship with this customer segment.
I am pleased with our go forward plan and I'm confident that our value proposition remains as strong as that for both retail and professional customers.
Turning to our assortment, we've made nice progress against our goals in 2023.
This time last year, we incurred unprecedented cost increases across our supply chain due to a variety of factors, we've worked with both existing and new suppliers to source, our pals at lower costs, while maintaining or in some cases exceeding our high quality standards.
We believe our vast assortment of over 6000, Tyler products is another key point of differentiation when compared to big box regional and local players with a more limited pilot assortment.
Our supplier base is global and diversified which we believe is a competitive advantage.
Our e-commerce initiatives continue to gain traction.
It's definitely taken to invest in digital advertising, improving our sampling program and enhance the online shopping experience has helped us grow our e-commerce orders by over 25% during the third quarter when compared to the same quarter in the prior year.
Im encouraged by the results we've seen to date and believe that the investments we're making in our website position us for continued E Commerce order growth.
Earlier this summer we opened a new store in Colorado Springs, the stores off to a nice start and I am pleased with the early results at this time I do not anticipate any additional new store openings in 2023.
We completed our project to relocate one of our stores near Milwaukee, Wisconsin last month. We also made the decision to close one store during the fourth quarter, which will bring our store count for 142 at the end of the year.
<unk> foods, you're asking about the prospects for our business, while we expect macro headwinds to persist in the near term.
Have a great team that is doing an excellent job navigating the challenges presented in the current environment.
To thank the entire tile shop team for their hard work and dedication.
With that I'll now hand, the call over to Carlos.
Thanks, Kevin and good morning, everyone third quarter sales at comparable stores decreased by four 9% from the third quarter last year. This was due to lower levels of store traffic, partially offset by an increase in average ticket value.
Our gross margin rates during the third quarter was 64, 7%, which represents a 50 basis point improvement in gross margins sequentially from the second quarter of 2023, and a 180 basis point decline compared to the same quarter last year the year over year decrease in gross margin is due to an increase in the cost of our products.
That was partially offset by price increases implemented over the last year.
The inflationary cost pressures have seemingly subsided and we believe the company is well positioned to see sequential improvement in gross margin in the near term, especially if we continue to have success sourcing quality products at better cost as Kevin mentioned, however, it's important to remember that several of our products like our luxury vinyl.
Tayo and backstop products carry lower gross margin rates than most of our tile products. We anticipate increases in luxury vinyl tile sales and continued growth in backstop items will likely put pressure on our overall gross margin rate over time. However, it's an exchange we are comfortable making this should increase gross profit.
And improve our leverage on fixed SG&A expenses.
Third quarter SG&A expenses decreased by $2 4 million when compared to the third quarter of 2022.
The decrease was largely due to a $1 7 million dollar decrease in variable compensation at a store level and $1 1 million increase in depreciation expense and a 1 million dollar decrease in shipping and transportation expenses.
These decreases were partially offset by a one time lease exit benefit of $800000 that was recognized in the third quarter of 2022 and not repeated in 2023.
And a 700000 dollar increase in marketing expenses.
We continue to have a strong balance sheet inventory decreased sequentially by $8 $2 million from the second quarter to $98 $7 million at the end of the third quarter. We're pleased with the progress we have made working inventory levels down this year, so France capital to invest in other areas of the business.
In the near term, we anticipate inventory will trend downwards, as we continue to optimize inventory levels and as inventory received at lower cost replaces inventory, we had purchased at higher price points.
We also continued to deliver strong cash flow year to date, we generated 56 $2 million of operating cash flow.
This has helped us reduce our outstanding debt from $45 4 million at the beginning of the year to $10 million at the end of the third quarter Fund.
And $11 billion of capital expenditures year to date and grow our cash balance on the balance sheet to $16 4 million. We continue to expect to use excess cash to pay down our debt in the near term with that Kevin and I are happy to take any questions.
Okay.
Yes.
Thank you.
At this time.
We will conduct a question and answer session.
As a reminder to ask a question you will need to Crestar one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one thank you.
Please standby, while we compile the Q&A roster.
Okay.
Okay.
Our first.
Comes from the line of Maxwell.
Mike Hill list with the Lake Street Capital markets. Your line is now open.
Alright.
Hey, guys. Thanks for taking my questions first one for me I'm wondering if you could discuss any changes in consumer trends maybe for Q2.
Q3, then maybe now what you see in Q4.
Okay.
First one.
Hi, Good morning. This is Ravi thanks for the question the consumer continues to be.
With the heightened the interest rates that we're seeing a decrease in traffic, but we are still increasing our average order which is great.
We're selling more of our <unk> product line. So we're seeing more of a budget conscious consumer and.
That's why we're tailoring a lot of our assortment to that while providing our high end then designed forward assortment to our other designers and pro is that that really liked this stuff continuing to focus on remodels.
So yes, decreasing traffic were not surprised by that with the interest rates and where the housing is at right now, but overall, it's pretty much been the same Maxwell.
Alright. Thank you our next one for me.
The new store opening has been going well.
Wondering if there's any new learnings from opening in Colorado.
I'd say that's a good question, we focused on a little bit of a smaller footprint and there are more design forward approach to working directly with our with our pro customers and our retail customers. So we're monitoring that carefully looking at different segments of the business and the sales that are coming out of that store in a smaller footprint.
So far so good we're going to continue to experiment with our remodels across the chain.
We're happy with the result.
Okay.
Alright. Thank you couple more from me it sounds like inventories worked down over this past quarter I just wanted to get a sense of where you are comfortable at how low.
Yes.
We have some more room to burn on inventory as prices come down.
We still carry a healthy amount of units for our customers.
Watches our order fulfillment rate and we feel we can lower our inventory and continue to have a 90, 598% fulfillment rate to our customers. So we're we monitor that closely and feel there is still room to go on our inventory balance.
Okay, and then lastly for me.
Just looking at.
Traffic over the quarter I wanted to get a sense of how much of a decrease in same store sales decline was from volume driven.
Yes.
Okay.
Yes, it's mainly volume driven Maxwell I mean, it is we outperformed our declines which I am proud of the team for executing but.
It's I don't think it is pricing.
I mean pricing is up but our.
Traffic has been declining due to the macro environment.
Alright, Thank you guys.
You bet.
Thank you.
So much for that.
Yeah.
All right.
And Im showing no further questions at this time I would now like to turn it back to Mark Davis for closing remarks.
Thank you for listening to our earnings conference call. We appreciate your interest in the tile shop and have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Yes.
Okay.
Okay.
[music].
Okay.
[music].