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The Tile Shop Reports Third Quarter 2019 Results; Suspends Dividend; Cancels Share Repurchase Program

MINNEAPOLIS, Oct. 22, 2019 (GLOBE NEWSWIRE) -- Tile Shop Holdings, Inc. (TTS) (the “Company”), a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories, today announced results for its third quarter ended September 30, 2019.  

Third Quarter Summary

Net Sales Decreased 3.7%
Comparable Store Sales Decreased 3.5%
Gross Margin of 68.8%
Net Loss of $1.4 million; Adjusted EBITDA of $8.3 million

                           
                           
    Three Months Ended   Nine Months Ended  
(unaudited, amounts in thousands, except per   September 30,   September 30,  
share data)   2019     2018   2019     2018    
Net sales   $  85,944     $  89,259   $  261,755     $  273,307    
Net sales (decline) growth(1)      (3.7 )%      5.7 %    (4.2 )%      2.7  
Comparable store sales (decline) growth(2)      (3.5 )%      2.1 %    (4.0 )%      (2.3 )%  
Gross margin rate      68.8      70.6 %    69.7      70.4  
(Loss) income from operations as a % of net sales      (0.7 )%      4.3 %    1.2      6.4  
Net (loss) income   $  (1,383 )   $  2,553   $  (217 )   $  11,522    
Net (loss) income per diluted share   $  (0.03 )   $  0.05   $  (0.00 )   $  0.22    
Adjusted EBITDA   $  8,338     $  11,857   $  29,756     $  40,675    
Adjusted EBITDA as a % of net sales      9.7      13.3 %    11.4      14.9  
Number of stores open at the end of period     140       140     140       140    

(1)       As compared to the prior year period.
(2)     Comparable store sales (decline) growth is the percentage change in sales of comparable stores period over period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable store sales (decline) growth calculation. Comparable store sales (decline) growth amounts include total charges to customers less any actual returns. Comparable store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing the Company’s results to those of other businesses.

THIRD QUARTER 2019

Net Sales
Net sales decreased $3.3 million, or 3.7%, from $89.3 million in the third quarter of 2018 to $85.9 million in the third quarter of 2019. Comparable store sales decreased $3.1 million, or 3.5%, for the third quarter of 2019 compared to the third quarter of 2018 primarily due to lower customer traffic. Net sales generated by stores not included in the comparable store base decreased $0.2 million.

Gross Profit
Gross profit decreased $3.8 million, or 6.1%, from $63.0 million in the third quarter of 2018 to $59.2 million in the third quarter of 2019. The gross margin rate was 68.8% for the third quarter of 2019 and 70.6% for the third quarter of 2018. The decrease in the gross margin rate during the third quarter of 2019 was primarily due to higher levels of shrink and damaged inventory write-offs combined with a lower freight collection rate.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.7 million, or 1.1%, from $59.1 million in the third quarter of 2018 to $59.8 million in the third quarter of 2019. The increase in selling, general and administrative expenses was driven primarily by an increase in advertising costs, partially offset by a decrease in legal expense and variable store compensation expense.

Inventory
Inventory decreased 9.1% to $100.1 million at the end of the third quarter of 2019 from $110.1 million at the end of the fourth quarter of 2018.

Long-Term Debt
Long-term debt increased $10.0 million from $53.0 million in the fourth quarter of 2018 to $63.0 million at the end of the third quarter of 2019. The increase reflects additional amounts drawn on the line of credit to fund share repurchases in the second quarter of 2019.

Dividend and Share Repurchase
The Board of Directors decided to suspend the Company’s quarterly cash dividend and cancel the Company’s share repurchase program, each effective immediately, to focus on debt reduction and continued investment in strategic initiatives.

Director Resignation
Christopher T. Cook resigned from the Board of Directors effective October 19, 2019.

NON-GAAP INFORMATION

Adjusted EBITDA

Adjusted EBITDA for the third quarter of 2019 was $8.3 million compared with $11.9 million for the third quarter of 2018.  See the table below for a reconciliation of GAAP net (loss) income to Adjusted EBITDA.

                           
                           
    Three Months Ended  
($ in thousands)   September 30,  
    2019     % of net
sales(1)
  2018   % of net sales  
Net (loss) income   $  (1,383 )    (1.6 )%     $  2,553    2.9 %  
Interest expense      1,027      1.2        715    0.8 %  
Income taxes      (274 )    (0.3 )%        652    0.7 %  
Depreciation & amortization      8,308      9.7        7,202    8.1 %  
Stock based compensation      660      0.8        735    0.8 %  
Adjusted EBITDA   $  8,338      9.7     $  11,857    13.3 %  


                           
    Nine Months Ended  
($ in thousands)   September 30,  
    2019     % of net
sales(1)
    2018 % of net sales  
Net (loss) income   $  (217 )    (0.1 )%     $  11,522    4.2 %  
Interest expense      2,948      1.1        1,866    0.7 %  
Income taxes      348      0.1        4,157    1.5 %  
Depreciation & amortization      24,508      9.4        21,180    7.7 %  
Stock based compensation      2,169      0.8        1,950    0.7 %  
Adjusted EBITDA   $  29,756      11.4     $  40,675    14.9 %  

(1) Amounts do not foot due to rounding.

Pretax Return on Capital Employed

Pretax Return on Capital Employed was 1.7% for the trailing twelve months as of the end of the third quarter of 2019 compared to 7.7% for the trailing twelve months as of the end of the third quarter of 2018. See the table below for a calculation of Pretax Return on Capital Employed.

               
               
($ in thousands)   September 30,  
    2019(1)   2018(1)  
Income from Operations (trailing twelve months)   $  3,762     $  13,769    
               
Total Assets      389,561        281,996    
Less: Accounts payable      (25,280 )      (29,015 )  
Less: Income tax payable      (72 )      (71 )  
Less: Other accrued liabilities      (26,119 )      (26,751 )  
Less: Lease liability(2)      (114,490 )      (42,401 )  
Less: Other long-term liabilities      (3,669 )      (4,346 )  
Capital Employed      219,931        179,412    
               
Pretax Return on Capital Employed      1.7      7.7  

(1) Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.
(2) Represents the average lease liability and deferred rent account balances for the four quarters ended as of each of the balance sheet dates.

Webcast and Conference Call

The Company will not hold its previously scheduled third quarter 2019 earnings call at 9:00 a.m. Eastern Time today, Tuesday, October 22, 2019.

About The Tile Shop

The Tile Shop (TTS) is a leading specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. The Tile Shop offers a wide selection of high-quality products, exclusive designs, knowledgeable staff and exceptional customer service in an extensive showroom environment. Each store is outfitted with full-room tiled displays which are enhanced by the complimentary Design Studio, a collaborative platform to create customized 3D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 141 stores in 31 states and the District of Columbia.

The Tile Shop is a proud member of the American Society of Interior Designers (ASID), National Association of Homebuilders (NAHB), National Kitchen and Bath Association (NKBA), and the National Tile Contractors Association (NTCA). Visit www.tileshop.com. Join The Tile Shop (#thetileshop) on Facebook, Instagram, Pinterest and Twitter.

Non-GAAP Financial Measures

The Company calculates Adjusted EBITDA by taking net income calculated in accordance with GAAP, and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. The Company calculates Pretax Return on Capital Employed by taking income from operations divided by capital employed. Capital employed equals total assets less accounts payable, income taxes payable, other accrued liabilities, deferred rent, lease liability and other long-term liabilities. Other companies may calculate both Adjusted EBITDA and Pretax Return on Capital Employed differently, limiting the usefulness of these measures for comparative purposes.

The Company believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. Company management uses these non-GAAP measures to compare Company performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, for budgeting and planning purposes, and for assessing the effectiveness of capital allocation over time. These measures are used in monthly financial reports prepared for management and the Board of Directors. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.

Company management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP.  The principal limitations of these non-GAAP financial measures are that they exclude significant expenses and income that are required by GAAP to be recognized in the Company’s consolidated financial statements.  In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financial measures in connection with GAAP results.  The Company urges investors to review the reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate the business.                                                                           

FORWARD LOOKING STATEMENTS

This press release includes “forward looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward looking statements may be identified by the use of words such as “anticipate”, “believe”, “expect”, “estimate”, “plan”, “outlook”, and “project” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward looking statements include any statements regarding the Company’s strategic and operational plan and expected financial performance. Forward looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward looking statements, including but not limited to unforeseen events that may affect the retail market or the performance of the Company’s stores. The Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances.  Investors are referred to the most recent reports filed with the SEC by the Company. 

Contacts:
Investors and Media:
Mark Davis
763-852-2978
mark.davis@tileshop.com

Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except share data)

             
             
    (Unaudited)   (Audited)
    September 30,   December 31,
    2019     2018  
Assets            
Current assets:            
Cash and cash equivalents   $  8,371     $  5,557  
Restricted cash      825        825  
Receivables, net      4,611        3,084  
Inventories      100,080        110,095  
Income tax receivable      3,854        3,548  
Other current assets, net      7,042        7,181  
Total Current Assets      124,783        130,290  
Property, plant and equipment, net      137,151        158,356  
Right of use asset      143,789        -  
Deferred tax assets      5,385        7,225  
Other assets      1,251        1,759  
Total Assets   $  412,359     $  297,630  
             
Liabilities and Stockholders' Equity            
Current liabilities:            
Accounts payable   $  19,855     $  25,853  
Income tax payable      13        179  
Current portion of lease liability      26,653        -  
Other accrued liabilities      25,871        24,484  
Total Current Liabilities      72,392        50,516  
Long-term debt      63,000        53,000  
Long-term lease liability, net      138,489        -  
Financing lease obligation, net      317        436  
Deferred rent      -        43,579  
Other long-term liabilities      3,482        3,752  
Total Liabilities      277,680        151,283  
             
Stockholders’ Equity:            
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 50,812,054 and 52,707,879 shares, respectively      5        5  
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares      -        -  
Additional paid-in-capital      156,037        172,255  
Accumulated deficit      (21,272 )      (25,857 )
Accumulated other comprehensive loss      (91 )      (56 )
Total Stockholders' Equity      134,679        146,347  
Total Liabilities and Stockholders' Equity   $  412,359     $  297,630  


Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except share, and per share data)
(Unaudited)

                         
                         
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2019     2018     2019     2018  
Net sales   $  85,944     $  89,259     $  261,755     $  273,307  
Cost of sales      26,775        26,248        79,384        80,946  
Gross profit      59,169        63,011        182,371        192,361  
Selling, general and administrative expenses      59,804        59,131        179,314        174,928  
(Loss) income from operations      (635 )      3,880        3,057        17,433  
Interest expense      (1,027 )      (715 )      (2,948 )      (1,866 )
Other income      5        40        22        112  
(Loss) income before income taxes      (1,657 )      3,205        131        15,679  
Benefit from (provision for) income taxes      274        (652 )      (348 )      (4,157 )
Net (loss) income   $  (1,383 )   $  2,553     $  (217 )   $  11,522  
                         
(Loss) income per common share:                        
Basic   $  (0.03 )   $  0.05     $  (0.00 )   $  0.22  
Diluted   $  (0.03 )   $  0.05     $  (0.00 )   $  0.22  
                         
Weighted average shares outstanding:                        
Basic      49,769,739        51,920,830        50,901,289        51,896,678  
Diluted      49,769,739        52,303,777        50,901,289        52,056,136  
                         
Dividends declared per share   $  0.05     $  0.05     $  0.15     $  0.15  

Tile Shop Holdings, Inc. and Subsidiaries
Rate Analysis
(Unaudited)

                         
                         
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2019   2018   2019   2018
Gross margin rate    68.8      70.6 %    69.7 %    70.4 %
SG&A expense rate    69.6      66.2 %    68.5 %    64.0 %
(Loss) income from operations margin rate    (0.7 )%      4.3 %    1.2 %    6.4 %
Adjusted EBITDA margin rate    9.7      13.3 %    11.4 %    14.9 %


Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)

             
             
    Nine Months Ended
    September 30,
    2019     2018  
Cash Flows From Operating Activities            
Net (loss) income   $  (217 )   $  11,522  
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation & amortization      24,508        21,180  
Amortization of debt issuance costs      446        607  
Loss on disposals of property, plant and equipment      90        76  
Impairment charges on property, plant and equipment      -        319  
Change in leases      (1,267 )      2,345  
Stock based compensation      2,169        1,950  
Deferred income taxes      190        1,415  
Changes in operating assets and liabilities:            
Receivables      (1,527 )      (1,342 )
Inventories      10,015        (21,051 )
Prepaid expenses and other assets      47        (2,374 )
Accounts payable      (3,307 )      (6,550 )
Income tax receivable / payable      (362 )      2,520  
Accrued expenses and other liabilities      2,827        5,104  
Net cash provided by operating activities      33,612        15,721  
Cash Flows From Investing Activities            
Purchases of property, plant and equipment      (22,839 )      (22,893 )
Proceeds from insurance      610        13  
Net cash used in investing activities      (22,229 )      (22,880 )
Cash Flows From Financing Activities            
Payments of long-term debt and financing lease obligations      (43,153 )      (95,235 )
Advances on line of credit      53,000        114,095  
Dividends paid      (7,706 )      (7,800 )
Repurchases of common stock      (10,455 )      -  
Employee taxes paid for shares withheld      (226 )      (52 )
Debt issuance costs      -        (374 )
Net cash (used in) provided by financing activities      (8,540 )      10,634  
Effect of exchange rate changes on cash      (29 )      (11 )
Net change in cash      2,814        3,464  
Cash, cash equivalents and restricted cash beginning of period      6,382        7,476  
Cash, cash equivalents and restricted cash end of period   $  9,196     $  10,940  
             
Cash and cash equivalents   $  8,371     $  10,105  
Restricted cash      825        835  
Cash, cash equivalents and restricted cash end of period   $  9,196     $  10,940  
             
Supplemental disclosure of cash flow information            
Purchases of property, plant and equipment included in accounts payable and accrued expenses   $  1,320     $  2,229  
Cash paid for interest      2,853        1,846  
Cash paid for income taxes, net      471        240