Q1 2024 Tile Shop Holdings Inc Earnings Call

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Operator: Good day, and thank you for standing by. Welcome to the Tile Shop Earnings Conference Call.

Good day, and thank you for standing by.

Operator: Welcome to the <unk> shop earnings Conference call at this time, all participants are in a listen only mode. After the speaker's presentation <unk> there will be a question and answer session to ask a question of during the session you would need a press star one one on your telephone.

Operator: 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 that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ken Cooper, Head of Investor Relations.

Ken Cooper: Been here, an automated message advising your hand is raised to.

Operator: To withdraw your question. Please press star one one again, please be advised that today's conference is being recorded Oh.

Operator: Oh, well not like they have a conference over to your first speaker today, Ken Cooper head of Investor Relations.

Ken Cooper: [noise]. Thank you and good morning to everyone welcome to the tile shops first quarter earnings call. Joining me today are capital Mall Chief.

Ken Cooper: Thank you, and good morning to everyone. Welcome to the Tile Shop's first quarter earnings call. Joining me today are Cabell Lolmaugh, Chief Executive Officer, and Mark Davis, 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 those expressed.

Ken Cooper: Officer embark Davis, Chief Financial Officer, certain statements made during the call today constitute forward looking statements made pursuant to get 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.

Ken Cooper: 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 turn the call over to Cab.

Cab: Clearly from such statements.

Cab: 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 or is the date of this call. If you 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 not yet finance.

Cab: Measures, which has also been posted on our company website with that let me turn the call over to cap.

Cabell H. Lolmaugh: Thank you, Ken. Good morning, everyone.

Cab: Thank you again.

Cab: Good morning, everyone and thank you for joining us today for an update on our business. Our first quarter results showcase the cash flow generating power of our business model, despite challenging macro condition, which had an adverse impact on our top line results.

Cabell H. Lolmaugh: And thank you for joining us today for an update on our business. Our first quarter results showcase the cash flow generating power of our business model despite challenging macro conditions, which had an adverse impact on our top line results. Throughout the first quarter, we observed weakness in existing home sales, which continues to present headwinds across the home improvement industry. These challenges extend to the hard surface flooring category and contributed to a decrease in traffic in our stores during the first quarter of 2024 when compared to the same period in the prior year.

Cabell H. Lolmaugh: Throughout the first quarter, we observed weakness an existing home sales, which continues to present headwinds across the home improvement industry.

Cabell H. Lolmaugh: Challenges extended the hard surface flooring category and contributed to a decrease in traffic and our stores during the first quarter of 2024, when compared to the same period in the prior year.

Cabell H. Lolmaugh: The decrease in traffic and the impact this had on our comparable store sales was tempered, in part, due to the strong relationships we have with our network of professional customers. Our Pro Loyalty Program, which includes tier discounts for our pros and cash rebates for referred sales, has proven to be a powerful benefit to pros who choose to grow their business with us. We believe we have the most robust discount and rebate program for pros in the industry, and it is a significant differentiator for us.

Cabell H. Lolmaugh: The decrease in traffic and the impact it's had on a comparable store sales was tempered in part due to the strong relationships, we have with our network of professional customers.

Cabell H. Lolmaugh: Our pro loyalty program, which includes tier discounts for our approach and cash rebates for referred sales has proven to be a powerful benefit to pros who choose to grow their business with us.

Cabell H. Lolmaugh: We believe we have the most robust discount rebate program for pros in the industry and it is a significant.

Cabell H. Lolmaugh: We also carry products that are curated specifically with a professional customer in mind. During the second quarter, we're excited to relaunch our private label superior line of back-shelf products. This includes products such as thinsets and levelers that we manufacture in-house.

Cabell H. Lolmaugh: <unk> for us.

Cabell H. Lolmaugh: We also carry products their curated specifically with a professional customer in mind during the second quarter. We're excited to relaunch our private label superior lineup actual products.

Cabell H. Lolmaugh: This includes products such as students at some level is that we manufacturer in house.

Cabell H. Lolmaugh: Over the last year, we have enhanced our formulas and made significant improvements in product quality and performance. We believe our new lines perform at levels that are competitive with some of the top brands in the industry, and the best part is that we'll be able to offer these products to our pros at exceptional price points. In addition to the enhancements we're making to our back-shelf products, we're also focused on introducing competitively priced tile products to appeal to customers seeking to complete a smaller remodel project on a budget.

Cabell H. Lolmaugh: Over the last year, we have enhanced our formula is it made significant improvements in quality and performance.

Cabell H. Lolmaugh: We believe our new lines performance levels that are competitive with some of the top brands in the industry and the best part is that we'll be able to offer these products to our pros are exceptional price points.

Cabell H. Lolmaugh: In addition to the enhancements were making sure in fact sell products were also focus on introducing competitively priced Cal products to appeal to customers seeking to complete a smaller remodel projects on a budget.

Cabell H. Lolmaugh: A number of the Tile products we have sourced recently are targeted to this type of middle market customer. These products are just starting to land in our distribution centers and work their way into our showrooms. Additionally, we plan to expand our offering of high quality, competitively priced LVT products. Our e-commerce sales increased by over 25% during the first quarter of 2024 when compared to the same period in 2023.

Cabell H. Lolmaugh: A number of the tile products. We have source recently are targeted to this type of middle market customer.

Cabell H. Lolmaugh: These products are just starting to land on our distribution centers and work your way into our showrooms. Additionally, we plan to expand our offerings of high quality competitively priced LDC products.

Cabell H. Lolmaugh: R e-commerce sales increased by over 25% during the first quarter of 2024, when compared to the same period of 2023 now and it gives some contact inside sales through our E Commerce channel or now about the size of one of our larger stores.

Cabell H. Lolmaugh: To give some context of size, sales through our e-commerce channel are now about the size of one of our larger stores. We continue to invest in our e-commerce capabilities and believe we have a long runway for growth. In closing, we intend to maintain our focus on executing our strategy to enhance our relationship with professional customers, expand our assortment of products that cater to middle market customers, and invest in our e-commerce capability.

Cabell H. Lolmaugh: We continue to invest in R e-commerce capabilities and believe we have a long runway for growth.

Cabell H. Lolmaugh: In closing, we intend to maintain our focus on executing our strategy to enhance our relationship with professional customers expand our assortment of products that cater to middle market customers and invest in R. e-commerce capabilities.

Cabell H. Lolmaugh: We believe this positions us well in the near term to navigate the challenges that affect our industry and for continued growth as macro pressures start to ease. Before turning it over to Mark, I'd like to thank Karla for all that she did in her tenure with the Tile Shop. She was a great partner to me and our organization on the back end of the pandemic. We wish her and her family well.

Cabell H. Lolmaugh: We believe that this position is as well in the near term to navigate the challenges that affect our industry and for continued growth as mercury pressures start to ease.

Cabell H. Lolmaugh: Turning it over to Mark I'd like to thank Carla for all that she did in her tenure with the towel shop. She was a great partner to me and our organization on the back end of the pandemic, we wish her and her family wealth I'm excited to partner with Mark David because he assumes the role of CFO for our company. He has been fantastic to work with over the past decade, but especially over the past.

Cabell H. Lolmaugh: I'm excited to partner with Mark Davis as he assumes the role of CFO for our company. He has been fantastic to work with over the past decade, but especially over the past five years while I've been CEO. Mark's knowledge of our business, attention to detail, and command of our finance organization have made for a smooth transition. With that, I'll now hand the call over to Mark. Thanks.

Mark Burton Davis: Five years logged in CER March knowledge of our business attention to detail and command of our finance organizations have made for a smooth transition.

Mark Burton Davis: With that I will now hand to call over to Mark.

Mark Burton Davis: Thanks, Cab. Good morning to everyone.

Mark Burton Davis: Thanks cab good morning to everyone first I'd like to thank tab, and our board of directors the opportunity to be appointed as role for our organization for the last 10 years I've been fortunate to work with some incredible people not only in our finance organization, but throughout our company I look forward to this opportunity.

Mark Burton Davis: First, I'd like to thank Cab and our Board of Directors for the opportunity to be appointed to this role for our organization. Over the last 10 years, I've been fortunate to work with some incredible people, not only in our finance organization but throughout our company. I look forward to this opportunity and helping bring the tile shops new levels of success.

Mark Burton Davis: And helping bring the toss out to new levels of success.

Mark Burton Davis: Let me now take you through our financial highlights. First quarter sales to comparable stores decreased by 10.2% due to lower levels of store traffic. Given that this was a leap year, we had an extra day in our first quarter of 2024. We estimate the additional day resulted in an increase in sales of approximately $1 million during the first quarter of 2024, based on our average daily sales throughout the period. At the same time, we believe that the benefit of this additional day was offset by the timing of Easter, which occurred during April in 2023 and fell at the end of the first quarter in 2024.

Speaker Change: Let me take you through our financial highlights first quarter sales are comparable stores decreased by 10.2% due to lower levels of star Traffic's given that this was a leap year, we had the extra data first quarter in 2024, we estimate the additional dare resulted in an increase in sales of approximately one.

Mark Burton Davis: Million dollars during the first quarter of 2024 based on our average daily sales throughout the period.

Mark Burton Davis: At the same time, we believe that the benefit of this additional data was offset by the timing of Easter which occurred during April in 2023 and fell at the end of the first quarter of 2024.

Mark Burton Davis: Our gross margin rate during the first quarter was 65.8%, which represented a 160 basis point increase compared to the first quarter of 2023. As we've 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 help reduce our inventory costs. It's important to note that reduced water levels in the Panama Canal, which has restricted traffic flow, and hostilities in the Red Sea that have deterred shipping lines from using the Suez Canal, have recently driven international freight rates higher, particularly on inbound containers from Asia.

Mark Burton Davis: Our gross margin right. During the first quarter was 65.8%, which represented a 160 basis points increase compared to the first quarter of 2023.

Mark Burton Davis: As we've outlined in recent quarters international fruit rates or decrease and we have been able to successfully secure products offered in our apartment at lower price points, which help reduce our inventory costs.

Mark Burton Davis: Portland notes that reduced water levels in the Panama Canal has restricted traffic flow and hostilities in the Red Sea have deterred shipping lives using the Suez Canal have recently driven international freight rates higher, particularly have inbound containers from Asia.

Mark Burton Davis: If this trend continues for an extended period of time, this may put pressure on our gross margin rates through the next few quarters. Furthermore, we are pursuing strategic growth sales of LVT and back-end products, which carry a lower gross margin rate profile than our tile assortment. If we outperform our goals with respect to LVT and back shelf sales, we may see a contraction of gross margin rates; however, it would increase gross profit dollars, which ultimately improves our leverage on fixed SG&A expenses.

Mark Burton Davis: This trend continues for an extended period of time. This may put pressure out our gross margin rates through the next few quarters.

Mark Burton Davis: Further we are pursuing strategy to garage sales of LPTA, AMPAC self products, which carrier lower gross margin right profile that are Tyler.

Mark Burton Davis: If we outperformed our goals with respect to <unk> sales, we may see contraction of gross margin growth. However, it would increase gross profit dollars, which ultimately improve our leverage on fixed SG&A expenses.

Mark Burton Davis: First quarter SG&A expenses of $58 million were $3.4 million lower than our first quarter SG&A expenses in 2023. The decrease is due to a $2.9 million decrease in variable expenses and a $1 million decrease in depreciation expenses that was partially offset by a $600,000 increase in rent costs.

Mark Burton Davis: First quarter SG&A expenses of $58 million for $3 $4 million lower that our first quarter SG&A expenses in 2023.

Mark Burton Davis: The decrease is due to a 2.9 million dollar decrease in variable expenses and a $1 million decrease in depreciation expenses that was partially offset by $600000 increase in red costs.

Mark Burton Davis: Looking ahead, we continue to actively pursue a number of expense management initiatives focused on reducing controllable expenses. Turning our attention to the balance sheet, we ended the quarter with $88.8 million in inventory and continue to carry no debt. Capping his remarks, despite the challenging top-line results for the first quarter, we generated $18.6 million of operating cash flow and ended the quarter with a $24 million cash flow.

Mark Burton Davis: Looking ahead, we continue to actively pursue a number of expense management initiatives focused on reducing controllable expenses.

Mark Burton Davis: Turning your attention to the balance sheet, we ended the quarter with $88 $8 million of inventory and continued carrying note at the <unk>.

Mark Burton Davis: <unk> mentioned in his remarks, despite the challenging topline results for the first quarter, we generated $18.6 million operating cash flow and ended the quarter with a $24 million cash to us.

Mark Burton Davis: With that, Cab and I are happy to take any questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1.

Speaker Change: With that cabinet are happy to take any questions.

Mark Burton Davis: [noise]. Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you would need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press Darwin one again, please stand by while the composite Q&A roster.

Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.

Operator: I'm showing no questions in the queue. I would now like to turn the call over back to Canon.

Operator: [noise].

Canon: [noise] I'm showing no questions in the queue I would now like to turn to the call over it back again.

Ken Cooper: Great. Thank you for joining us today for 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.

Canon: Great. Thank you for joining us today for our earnings conference call. We anticipate filing art Form 10-Q later today. Thank you for your interest in Natal shop and have a great day.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Canon: Thank you for your participation in today's conference does that conclude the program you may now disconnect.

Operator: [music].