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Here's Why Tile Shop Stock Fell 18% Today

Jason Hall, The Motley Fool

What happened

Shares of Tile Shop Holdings Inc (NASDAQ: TTS) are down 15.5% at 1:05 p.m. EDT on April 30 and were down more than 18% in early trading following the release of the company's first-quarter results before market open today.

Tile Shop reported a disappointing $86.9 million in sales and earnings of $0.03 per share. Sales fell 4.6% from last year, while earnings were down by nearly two-thirds. Both metrics came in well below expectations; Wall Street analysts were looking for $94 million in sales and earnings of $0.07 per share.

So what

Woman with exasperated expression in front of a chart that's fallen sharply.

Image source: Getty Images.

While it's not a good idea to get too caught up in whether a company "beats" or "misses" Wall Street analyst estimates, the reality is, Tile Shop fell well short of even the most modest expectations. Just one quarter removed from reporting a very strong 5% increase in comps -- sales at stores open more than one year -- the company reported comps declined 4.2%, and total sales fell 4.6%. Considering that last year's first quarter included a 1.1% decline in total sales and a painful 6.8% drop in comps, the bar for growth was pretty low this quarter.

Now what

Let's put it another way: The company's sales to start 2019 were actually lower than they were in 2017 -- a painful result as the company's transition to higher-end products seems to be delivering relatively inconsistent results from one quarter to the next. There's no polishing this revenue result in what has proven a relatively strong economic environment. 

Yet, even within the ugliness, there were some positives in its operating and financial results. The upmarket shift is improving profitability, as management says it should. Gross margin was 71.2% in the quarter, up from both the fourth quarter of 2019 and last year's 70.3% gross margin. Moreover, Tile Shop's cash flows have improved. The company generated $19.7 million in operating cash flow and $2.3 million in positive cash after capital and financing expenditures.

Put it all together, and so far, the transition to higher-end products is improving cash flows and profitability, but sales continue to be inconsistent and choppy. Based on today's big sell-off, that seems to have investors concerned the company's move away from lower-cost tile and toward upmarket products simply isn't resonating with enough customers.

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Jason Hall owns shares of Tile Shop Holdings. The Motley Fool recommends Tile Shop Holdings. The Motley Fool has a disclosure policy.