Q4 2023 Tile Shop Holdings Inc Earnings Call

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Operator: www.thevenusproject.com Good day, and thank you for standing by. Welcome to the fourth quarter 2023 Tile Shop Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode.

Yeah.

Good day, and thank you for standing by and welcome to the fourth quarter 2023 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.

Operator: 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. You will hear a message advising that your hand is raised. To withdraw your question, press star one again.

I ask a question. During this session you will need to press star one on your telephone you were here and message by senior Handpiece raced to withdraw your question Press Star one again.

Mark Burton Davis: Please note that today's conference is being recorded. I would now like to pass the call over to Mark Davis, Vice President of Information. Vice President of Investor Relations and Chief Accounting Officer, please go ahead. Thank you.

Please note that today's conference is being recorded.

I'd now like to pass the call over to Mark Davis, Vice President of it.

Yeah.

But as president of Investor Relations and Chief Accounting Officer. Please go ahead.

Mark Burton Davis: Good morning, everyone, and welcome to the Tile Shop's fourth-quarter earnings call. Joining me today are Cabell Lolmaugh, our Chief Executive Officer, and Karla Lunan, 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.

Thank you good morning to everyone and welcome to the tile shop's fourth quarter earnings call. Joining me today are tab 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 90, 95 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 yes. He see forward looking statements made today are as of the date of this call and we do not undertake any obligation to update them.

Cabell H. Lolmaugh: Those risks and uncertainties are described in our earnings press release issued earlier and in our filings with the SEC. The 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 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 Cab. Thanks, Mark. Good morning, everyone.

These forward looking statements.

Today's call will also include certain non-GAAP measurements. Please see our earnings release for a reconciliation of 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.

Cabell H. Lolmaugh: And thank you for joining us today for an update on our business. During 2023, we will be able to execute our strategy, manage expenses, and reduce inventory levels, which will put us in a position to fully pay off our debt before the end of the year. I'm proud of this accomplishment, which highlights the cash flow-generating strength of our business model, even in the face of a challenging macro environment. However, it's important to note that macroeconomic headwinds presented significant challenges to our business over the last year. During 2023, existing home sales turnover, which we view as a key leading indicator of remodeling activity, continued to decline year over year.

During 2023, we're able to execute our strategy managing expenses and reduced inventory levels, which put us in a position to fully pay off our debt before the end of the year I'm proud of this accomplishment, which highlights the cash flow generating strength of our business model, even in the face of a challenging macro backdrop.

It's important to note that macroeconomic headwinds presented significant challenges to our business over the last year.

In 2023 existing home sales turnover, which we view as a key leading indicator to remodeling activity continued to decline year over year well. This trend appears to be starting to moderate it has created challenges across the home improvement industry and.

Cabell H. Lolmaugh: While this trend appears to be starting to moderate, it has created challenges across the home improvement industry. In recent months, consumer surveys indicated continued pressure on the levels of intent to complete home improvement projects, which extends to the hard surface flooring category. Given this backdrop, it is critical that we continue to execute our strategy to grow our shared wallet with our core customers. Growing our business with our professional customers remains important to us. Professional customers represent a meaningful portion of our sales mix, and the referral business provided by professional customers is critical to our success. We invest in relationships and processes to help simplify the shopping experience for our pros. We're happy to host professionals in our stores as they work with their customers to make product selections or by taking the lead in the design process with the professionals and clients to help maximize the time they can spend on their jobs.

In recent months consumer survey, indicating continued pressure in the levels of intent to complete home improvement projects, which extends to the hard surface flooring category.

Given this backdrop. It is critical that we continue to execute our strategy to grow our share of wallet with our core customers.

Growing our business with our professional customers remains important to our strategy professional customers represent a meaningful portion of our sales mix and the referral business provided by professional customers is critical to our success.

We investor relationships and processes to help simplify the shopping experience for our pros, we're happy to host the pro in our stores as they work with their customers to make product selections or taken a lead in the design process with the pros and clients to help maximize the time they can spend on their job sites.

Cabell H. Lolmaugh: The tiered discounts and cash rebates on referral sales are important benefits of our ProLoyalty program that have helped propel sales connected to pros to over 70% of our sales mix. The combination of pro and referral sales has grown at a faster rate than our overall sales for the last several years. While this reflects progress with one important customer segment, we believe there is an opportunity to refine our strategy to connect with retail customers who are not working directly with a pro. These customers tend to take on smaller projects, such as a backsplash for a kitchen or an LVT project in a front entryway. Historically, we had a strong presence in this segment.

Discounts and cash rebates on referral sales are important benefit of our pro loyalty program that has helped propel sales connected approach over 70% of our sales mix.

The combination of pro referral sales have grown at a faster rate than our overall sales in the last several years well. This reflects progress with one important customer segment, we believe there's opportunity to refine our strategy to connect with retail customers, who are not working directly with a pro these.

These customers tend to take on smaller projects, such as a backsplash, where a kitchen or <unk> project in the front entry way.

Historically, we had a strong presence in this segment however over the past five years or so our assortment moved toward more designed country on trend and expensive products as we targeted at the higher end customer. We believe we have an opportunity to regain share of retail customers seeking a DIY project by introducing more products at price points.

Cabell H. Lolmaugh: However, over the past five years or so, our assortment has moved toward more design-centric, on-trend, and expensive products as we targeted higher-end customers. We believe we have an opportunity to regain share of retail customers seeking a DIY project by introducing more products at price points that are attractive to this customer segment. The introduction of the LVT assortment about a year ago was one step taken to help cater to this type of customer. We've also introduced new retail financing options over the last year. And finally, we're excited to introduce a number of high-quality products in 2024 that will appeal to retail customers seeking value to complete a small project on a budget. We do all this with a continued focus on providing exceptional service to our customers by offering an unparalleled shopping experience where customers have the opportunity to work with our knowledgeable sales associates who are well-versed in design and installation techniques. The knowledge that our team provides to help a DIY customer differentiates the Tile Shop service offering versus our competition.

That are attractive to this customer segment.

The introduction of <unk> assortment about a year ago was one step taken to help cater to this type of customer. We have also introduced new retail financing options over the last year and finally, we're excited to introduce a number of high quality products in 2024 that will appeal to retail customers seeking value to complete a small project on a budget.

We do all this with a continued focus on providing exceptional service to our customers by offering an unparalleled shopping experience where retail customers had the opportunity to work with our knowledgeable sales associates, who are well versed in design and installation techniques than.

The knowledge that our team provides to help the DIY customer differentiate the tile shop service offering versus our competition.

Cabell H. Lolmaugh: Another initiative we have underway relates to our e-commerce platform. We've made a number of subtle changes to our website over the last year that have contributed to strong growth in online order activity. During the fourth quarter, our online orders grew by over 30% when compared to the same period last year.

Another initiative, we have underway relates to our e-commerce platform.

We've made a number of subtle changes to our website over the last year that have contributed to strong growth in online order activity.

During the fourth quarter, our online orders grew by over 30% when compared to the same period last year.

Cabell H. Lolmaugh: I'm particularly excited about the steps taken by our e-commerce, marketing, and distribution teams to revamp our sampling process. We've enhanced the presentation of the samples available to our customers, reduced the time it takes to fulfill a sample order, and improved our processes to follow up with customers who place sample orders to ensure we're meeting our commitment to provide exceptional service. Sampling activity has picked up since making these changes. Moving to store growth, we continue to believe there are ample opportunities to continue to grow our business by focusing on executing our strategy across our existing 142 store base. At this time, we do not intend to open any new stores during 2024. However, we intend to continue to evaluate options to reposition our stores as opportunities arise in connection with lease renewals.

Particularly excited about the steps taken by our e-commerce marketing and distribution teams to revamp our sampling process.

We've enhanced our presentation of the samples available to our customers reduce the time it takes to fulfill it sample order and improved our processes to follow up with customers, who placed sample orders to ensure we're meeting our commitment to provide exceptional service.

Sampling activity has picked up since making those changes.

Moving to store growth. We continue to believe there are ample opportunities to continue to grow our business by focusing on executing our strategy across our existing 142 store base. At this time, we do not intend to open any new stores. During 2024, we intend to continue to evaluate options to reposition our stores there's opportunity.

These arise in connection with lease renewals.

Cabell H. Lolmaugh: I remain enthusiastic about the future of our business. While we are being challenged by macroeconomic headwinds, our team continues to meet the challenge, execute our strategy, and deliver results. I look forward to continued success in 2024. With that, I'll now hand the call over to Karla. Thanks, Cabi. Good morning, everyone.

I remain enthusiastic about the future of our business, while we are being challenged by macroeconomic headwinds. Our team continues to meet the challenge execute our strategy and deliver results.

Look forward to our continued success in 2024 with that I'll now hand, the call over to Carla.

Thanks, Cathy good morning, everyone fourth quarter sales at comparable stores decreased by three 2%. This represents a plus 170 basis point improvement from our third quarter comps.

Karla Lunan: Fourth quarter sales at comparable stores decreased by 3.2%. This represents a plus 170 basis point improvement from our third quarter comp. Our comparable store sales were impacted by lower levels of store traffic, which was partially offset by an increase in average ticket value. For the year, our comparable first sales decreased by 4.1% due to these same reasons.

Our comparable store sales were impacted by lower levels of store traffic, which was partially offset by an increase in average ticket value for.

For the year, our comparable store sales decreased by four 1% due to these same reasons.

Karla Lunan: Our gross margin rate during the fourth quarter was 64.7%, which represented a plus 20 basis point increase compared to the fourth quarter of 2022. As we have outlined in recent quarters, international freight rates have decreased, and we have been able to successfully secure products offered in our assortment at lower price points, which helped drive our inventory costs lower in the second half of 2023. For the full year 2023, our gross margin rates decreased by 120 basis points to 64.4%. The decrease in margin can be attributed to the increase in average costs of inventory throughout 2022 and into the first half of 2023 due to higher international freight rates and inflationary cost increases passed on to us by our suppliers. The increase in average inventory cost peaked in early 2023, as costs decreased in the second half of the year. We believe we are positioned to see continued margin expansion as we move into 2024. However, recent events such as those in the Panama Canal and the Suez Canal have driven international freight rates higher, particularly on inbound containers from Asia.

Our gross margin rate during the fourth quarter was 64, 7%, which represented a plus 20 basis point increase compared to the fourth quarter of 2022.

As we have outlined in recent quarters.

Nashville freight rates have decreased and we have been able to successfully secure products offered in our assortment at lower price points, which helped drive our inventory costs lower in the second half of 2023.

For the full year 2023.

Most margin rates decreased by 120 basis points to 64, 4%.

The decrease in margin can be attributed to the increase in average cost of inventory throughout 2022, and then to the first half of 2023 due to the higher international freight rates and inflationary cost increases passed onto us by our suppliers.

The increase in average inventory cost peaked in early 2023 as costs decreased in the second half of the year. We believe we are positioned to see the continued margin expansion as we move into 2024.

However, recent events such as those in the Panama Canal and the Suez Canal have driven international freight rates higher, particularly on inbound containers from Asia.

Karla Lunan: If this trend continues for an extended period of time, it may impact the gross margin expansion we anticipate we will achieve in 2024. Furthermore, we are pursuing strategies to grow sales of LVT and backshelf products, which carry a lower gross margin profile than our tile assortment. If we outperform our goals with respect to LVT and backshelf sales, we may see a contraction of gross margin rates. However, it's an exchange we are comfortable making as this should increase gross profit dollars and improve our leverage on fixed SG&A expenses. Fourth quarter SG&A expenses of $53.2 million were $700,000 lower than our fourth quarter SG&A expenses in 2022. The decrease is due to a $600,000 decrease in variable compensation, a $500,000 decrease in occupancy costs, a $300,000 decrease in shipping and transportation expenses, and a $200,000 decrease in consulting expenses.

This trend continues for an extended period of time it may impact the gross margin expansion, we anticipate we will achieve in 2024.

Further we are pursuing strategies to grow sales of lvg, ambac shelf products, which carry a lower gross margin profile than our tile assortment. If we outperform our goals with respect to L. V T and back shop sales, we may see a contraction of gross margin rates.

It's an exchange we are comfortable making this should increase gross profit dollars and improve our leverage on fixed SG&A expenses.

Fourth quarter SG&A expenses at $53 $2 million were $700000 lower than our fourth quarter SG&A expenses in 2022.

The decrease is due to a $600000 decrease in variable compensation and $500000 decrease in occupancy costs.

$300000 increase in shipping and transportation expenses and the $200000 decrease in consulting expenses. These favorable variances were partially offset by $600000 increase in <unk> expense related to enhancements of our in store and online customer experiences.

Karla Lunan: These favorable variances were partially offset by a $600,000 increase in IT expense related to enhancements of our in-store and online customer experience. Additionally, benefits expenses increased by $400,000 when compared to the fourth quarter of 2022. For the year, SG&A expenses decreased by $9.4 million, or 4% from 2022. This was largely driven by a $6.6 million decrease in variable compensation related to the decrease in sales, a $3.3 million decrease in shipping and transportation expenses, and a $2.6 million decrease in occupancy costs due to lower levels of depreciation that were partially offset by higher rent expenses. These factors were partially offset by a $1.6 million increase in IT expenses related to enhancements of our in-store and online customer experience. Additionally, marketing expenses increased by $900,000 in 2023.

<unk> benefits expenses increased by $400000 when compared to the fourth quarter of 2022.

For the year SG&A expenses decreased by $9 $4 million or 4% from 2022. This was largely driven by $6 6 million dollar decrease in variable compensation related to the decrease in sales.

$3 3 million dollar decrease in shipping and transportation expenses, and a $2 $6 million decrease in occupancy costs due to lower levels of depreciation that were partially offset by higher rent expenses.

These factors were partially offset by a $1 6 million dollar increase in <unk> expenses related to enhancements of our in store and online customer experiences.

Additionally, marketing expenses increased by $900000 in 2023.

Karla Lunan: We were pleased with the progress made to work our inventory levels down over the last year, which helped us generate over $60 million of operating cash flow in 2023. We used this cash to fund $15.3 million of capital expenditures and reduce our debt balance by $45.4 million. As of the end of the year, we had no outstanding debt, and we carried a cash balance of $8.6 million.

We were pleased with the progress made to work our inventory levels down over the last year, which helped us generate over $60 million of operating cash flow in 2023.

We use this cash to fund $15 $3 million of capital expenditures and reduced our debt balance by $45 $4 million.

As of the ended the year, we had no outstanding debt and we carried a cash balance of $8 $6 million.

Operator: Looking ahead, I share CAB's optimism on the outlook for our business. With that, Cabi and I are happy to take any questions. Thank you. And, as a reminder, press star 11 to get in the queue and wait for your name to be announced. To remove your question, simply press star 11 again. One moment, please. Again, that is star 11 if you do have a question.

Looking ahead I share cabs optimism on the outlook for our business with that Kathy and I are happy to take any questions.

Thank you and Sorry reminder, press star one one to get into queue and wait for your name to be announced to remove your question simply press star one again.

One moment please.

Again that is star one one if you do have a question.

Okay.

Mark Burton Davis: All right, I will pass it back to Mr. Mark Davis for any final comments. Thank you for listening to our earnings conference call. We anticipate filing our Form 10-K later today.

Alright, I will pass it back to Mr. Mark Davis for any final comments.

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.

Mark Burton Davis: Thank you for your interest in The Tile Shop. Have a great day. And I want to thank everybody for tuning in today. Thank you. You may now disconnect. Thank you for watching!

And I want to thank everybody for joining today. Thank you you may now disconnect.

Yeah.

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