The Tile Shop Reports Fourth Quarter and Full Year 2017 Results; Declares Cash Dividend

2018-02-21 / @nasdaq

 

MINNEAPOLIS, Feb. 21, 2018 (GLOBE NEWSWIRE) -- Tile Shop Holdings, Inc. (Nasdaq:TTS) (the “Company”), a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories, today announced results for its fourth quarter and full year ended December 31, 2017. 

Fourth Quarter and Full Year Summary

2.6% Net Sales Growth in Q4; 6.3% Full Year
Comparable Store Sales Declined 4.9% in Q4, Up 0.5% Full Year
66.8% Gross Margin in Q4; 68.5% Full Year
Diluted Earnings per Share of $0.21 Full Year; Non-GAAP Diluted Earnings per Share of $0.32 Full Year
Opened 4 stores in Q4; 15 stores for Full Year – 138 stores open at year-end

Management Commentary
“During the fourth quarter, we focused on improving our product assortment, identifying opportunities to better serve our professional customers, and de-emphasizing price promotions.  We have acted swiftly and decisively and we are confident in our long-term strategy,” said Robert Rucker, interim CEO. “Company performance in the second half of the year was not reflective of our position within the flooring industry as the preeminent place to romance your home with unique and premium tile.  We are committed to providing the best product assortment, best service, and best presentation in the tile industry.  We believe we are taking the right steps to deliver better financial results and best position the Company for long-term success.”

                
  Three Months Ended
 Full Year Ended
(unaudited, amounts in thousands, except share and per December 31,
 December 31,
share data) 2017 2016
 2017
 2016
Net sales $  78,580  $  76,614  $  344,600  $  324,157 
Net sales growth(1)    2.6 %   6.5 %    6.3 %    10.6 %
Comparable store sales growth(2)    (4.9)%   3.1 %    0.5 %    7.6 %
Gross margin rate    66.8 %   69.6 %    68.5 %    70.0 %
(Loss) income from operations as a % of net sales    (4.7)%   2.2 %    7.5 %    10.2 %
Net (loss) income $  (7,351) $  273  $  10,819  $  18,463 
Non-GAAP net (loss) income(3) $  (2,376) $  3,797  $  16,493  $  23,095 
Net (loss) income per share $  (0.14) $  0.01  $  0.21  $  0.36 
Non-GAAP net (loss) income per share(3) $  (0.05) $  0.07  $  0.32  $  0.45 
Adjusted EBITDA(3) $  4,293  $  14,507  $  57,173  $  68,047 
Adjusted EBITDA as a % of net sales    5.5 %   18.9 %    16.6 %    21.0 %
Number of stores open at the end of period  138   123   138   123 
                 


(1)  As compared to the prior year period.
(2)  Same store sales 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 same stores sales growth calculation. Same store sales growth amounts include total charges to customers less any actual returns. Same store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing our results to those of other businesses.
(3)  Amounts are adjusted to exclude tax reform and shareholder and other litigation costs. See the “Non-GAAP Information” section below for a reconciliation of non-GAAP measures to GAAP measures.
    

HIGHLIGHTS FOR THE FOURTH QUARTER AND FULL YEAR 2017

Changes in Management
As announced on October 27, 2017, the Company’s founder and former CEO, Robert Rucker, is serving as the interim CEO until the Company’s Board of Directors identifies a permanent replacement.  Effective February 19, 2018, the Company appointed Cabell Lolmaugh as the Company’s Senior Vice President and Chief Operating Officer.

Net Sales
Net sales grew 2.6% in the fourth quarter of 2017 as compared to the fourth quarter of 2016.  The increase was due to net sales of $5.7 million from stores not included in the comparable store base, offset by a comparable store sales decrease of 4.9%, or $3.7 million. Full year 2017 net sales grew 6.3% compared to 2016.  This was driven by 15 stores opened in 2017 and an increase of 0.5% in comparable store sales in 2017.  Traffic weakened during the fourth quarter due in part to the Company’s shift in promotional strategy.

Gross Margin Rate
Gross margin for the fourth quarter of 2017 was 66.8% compared with 69.6% for the fourth quarter of 2016. Full year gross margin for 2017 was 68.5% compared with 70.0% in 2016. The gross margin rate decline for the fourth quarter was driven primarily by promotions and competitive pricing activity tied to orders initiated during third quarter that were closed in the fourth quarter and orders generated over the Black Friday weekend.  Inventory control costs and product mix changes also contributed to the decrease in gross margin for the quarter.  The gross margin rate decline for the year was primarily due to promotions and competitive pricing activity and product mix changes.

Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fourth quarter of 2017 were $56.1 million compared with $51.7 million for the fourth quarter of 2016.  The $4.4 million increase was driven by approximately $6.0 million of costs associated with opening and operating fifteen new stores.  In addition, the fourth quarter of 2017 included $1.1 million of non-cash impairment charges and $0.9 million of incremental expenses related to work to identify and prioritize growth and expansion opportunities.  The increase in expenses was partially offset by a $5.2 million decrease in special charges related to litigation. Full year 2017 selling, general and administrative expenses were $210.4 million in 2017 and $194.0 million in 2016.  The $16.4 million increase was primarily due to costs associated with opening and operating fifteen new stores during the year.

Tax and Tax Reform
Income tax expense for the fourth quarter of 2017 was $3.3 million compared with $1.1 million for the fourth quarter of 2016.  For the year, the Company’s effective tax rate was 55.2% in 2017 and 41.1% in 2016.  The increase in tax expense and the Company’s overall tax rate was primarily due to a $4.6 million charge taken during the fourth quarter to reduce the value of the Company’s deferred tax assets in accordance with the Tax Cuts and Jobs Act of 2017. The Company anticipates an annual effective tax rate of approximately 26% to 28% in 2018.

Store Expansion
The Company opened four new retail stores in the fourth quarter of 2017, consisting of three Houston, TX area locations (The Woodlands, Houston, and Willowbrook) and its second location in the Orlando, FL market. As of December 31, 2017, the Company operated 138 stores in 31 states and the District of Columbia.

DIVIDEND
The Board of Directors has declared a quarterly dividend of $0.05 per common share. The dividend is payable March 16, 2018 to shareholders of record at the close of business March 5, 2018.  The Company initiated its quarterly dividend in the first quarter of 2017. 

OUTLOOK
The Company’s return to its historical focus on product, service, and presentation, rather than price, will likely result in continued volatility of comparable store traffic and sales in the near term.  As a result, the Company is limiting its outlook to the following:

  • Three new store openings in 2018 including one store in Hartford, CT that opened on January 19, 2018 and one store in Austin, TX that opened on January 31, 2018.
  • Capital investment of approximately $27 to $32 million, including remodeling approximately 30 stores to support our product presentation strategy.
  • Inventory investment of approximately 25% to 35% year over year, over the next several quarters, to support our product assortment strategy.
  • SG&A expense increase of approximately $5 to $7 million to support our service strategy, including increased expenses for (1) the addition of regional sales leader positions, (2) sales and warehouse staff compensation, and (3) customer relationship management and content management capabilities.  The $5 to $7 million increase in SG&A expense is incremental to the expected SG&A expense increases associated with a full year of operations for the fifteen stores opened in 2017 and the three new stores opening in 2018.

Longer term, the Company remains committed to achieving both Adjusted EBITDA margin and pretax return on capital employed of greater than 20%.

Non-GAAP Information

The Company presents non-GAAP (loss) income and Adjusted EBITDA to provide useful information to investors regarding the Company’s normalized operating performance. 

On a non-GAAP basis, net loss for the fourth quarter of 2017 was $2.4 million compared with net income of $3.8 million for the fourth quarter of 2016.  Full year non-GAAP net income for 2017 was $16.5 million compared with $23.1 million in 2016. Non-GAAP diluted loss per share for the fourth quarter of 2017 was $0.05 compared with $0.07 per share for the fourth quarter of 2016. Full year non-GAAP diluted earnings per share for 2017 was $0.32 compared with $0.45 per share in 2016.  See the “Non-GAAP (Loss) Income Reconciliation” table and the “Non-GAAP Financial Measures” section below for a reconciliation of GAAP to non-GAAP income. 

Non-GAAP (Loss) Income Reconciliation

                   
  Three Months Ended
  December 31, 2017 December 31, 2016
      Per Share     Per Share
  Pretax Net of Tax Amounts Pretax Net of Tax Amounts
(in thousands, except share and per share data)                  
GAAP income $  (4,045) $  (7,351) $  (0.14) $  1,356 $  273 $  0.01
Special charges:                  
Shareholder and other litigation costs    678     413     0.01     5,791    3,524    0.07
Tax reform(1)    -     4,562     0.09     -    -    -
Non-GAAP (loss) income(2) $  (3,367) $  (2,376) $  (0.05) $  7,147 $  3,797 $  0.07


    
(1)  Represents an adjustment for impacts of a change in the income tax provision due to the re-measurement of deferred income tax positions to reflect the new corporate tax rates pursuant to the Tax Cuts and Job Act of 2017. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the Tax Cuts and Jobs Act, as provided by recent SEC guidance.
(2)  Amounts may not foot due to rounding.
    


                   
  Twelve Months Ended
  December 31, 2017 December 31, 2016
      Per Share     Per Share
  Pretax Net of Tax Amounts Pretax Net of Tax Amounts
(in thousands, except share and per share data)                  
GAAP income $  24,159 $  10,819 $  0.21 $  31,339 $  18,463 $  0.36
Special charges:                  
Shareholder and other litigation costs    1,762    1,112    0.02    7,618    4,632    0.09
Tax reform(1)    -    4,562    0.09    -    -    -
Non-GAAP income(2) $  25,921 $  16,493 $  0.32 $  38,957 $  23,095 $  0.45
           


(1)  Represents an adjustment for impacts of a change in the income tax provision due to the re-measurement of deferred income tax positions to reflect the new corporate tax rates pursuant to the Tax Cuts and Job Act of 2017. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the Tax Cuts and Jobs Act, as provided by recent SEC guidance.
(2)  Amounts may not foot due to rounding.
    

Adjusted EBITDA for the fourth quarter of 2017 was $4.3 million compared with $14.5 million for the fourth quarter of 2016.  Full year Adjusted EBITDA for 2017 was $57.2 million compared with $68.0 million in 2016. See the “Adjusted EBITDA Reconciliation” table and the “Non-GAAP Financial Measures” section below for a reconciliation of GAAP net (loss) income to Adjusted EBITDA.

Adjusted EBITDA Reconciliation 

              
  Three Months Ended Twelve Months Ended 
  December 31, December 31, 
($ in thousands)  2017 2016 2017 2016 
GAAP net (loss) income $  (7,351) $  273 $  10,819 $  18,463 
Interest expense    419     333    1,857    1,715 
Income taxes    3,306     1,083    13,340    12,876 
Depreciation and amortization    6,844     6,088    26,239    23,042 
Special charges: shareholder and other litigation costs    678     5,791    1,762    7,618 
Stock-based compensation    397     939    3,156    4,333 
Adjusted EBITDA $  4,293  $  14,507 $  57,173 $  68,047 
              

Webcast and Conference Call

As announced on February 1, 2018, the Company will host a conference call via live webcast for investors and other interested parties beginning at 9:00 a.m. Eastern Time on Wednesday, February 21, 2018.  The call will be hosted by Bob Rucker, interim CEO, Kirk Geadelmann, CFO, Cabell Lolmaugh, Senior Vice President and COO, and Ken Cooper, Investor Relations. 

Participants may access the live webcast by visiting the Company’s Investor Relations page at www.tileshop.com. The call can also be accessed by dialing (844) 421-0597, or (716) 247-5787 for international participants. A webcast replay of the call will be available on the Company’s Investor Relations page at www.tileshop.com.

Additional details can be located at www.tileshop.com under the Financial Information – SEC Filings section of the Company’s Investor Relations page.  

Contacts:
Investors and Media:
Ken Cooper
763-852-2950
ken.cooper@tileshop.com


About The Tile Shop

The Tile Shop (Nasdaq:TTS) is a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company 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 up to 50 full-room tiled displays which are enhanced by the complimentary Design Studio, a collaborative platform to create customized 3-D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 140 stores in 31 states and the District of Columbia, with an average size of 20,300 square feet and sells products online at www.tileshop.com.

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, stock based compensation and special charges, including shareholder and other litigation costs.  Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. Non-GAAP net income excludes special charges related to tax reform and shareholder and other litigation costs, and is net of tax.  The Company calculates pretax return on capital employed by taking income from operations divided by total assets net of non-interest bearing debt.  Non-interest bearing debt includes accounts payable, income taxes payable, other accrued liabilities, deferred rent and other long-term liabilities. 

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, and for budgeting and planning purposes.  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 (including the financial performance of new stores).  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.  


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

        
   December 31,   December 31,  
  2017 2016 
  (unaudited) (audited) 
Assets       
Current assets:       
Cash and cash equivalents $  6,621  $  6,067  
Restricted cash    855     3,000  
Trade receivables, net    2,381     2,414  
Inventories    85,259     74,295  
Income tax receivable    5,726     1,670  
Other current assets, net    4,717     8,755  
Total Current Assets    105,559     96,201  
Property, plant and equipment, net    151,405     141,037  
Deferred tax assets    11,654     21,391  
Long-term restricted cash    -     3,881  
Other assets    2,107     2,763  
Total Assets $  270,725  $  265,273  
        
Liabilities and Stockholders' Equity       
Current liabilities:       
Accounts payable $  30,771  $  20,321  
Current portion of long-term debt    8,833     6,286  
Income tax payable    17       120  
Other accrued liabilities    22,413     33,461  
Total Current Liabilities    62,034     60,188  
Long-term debt, net    18,182     22,126  
Capital lease obligation, net    576     697  
Deferred rent     41,290     37,595  
Other long-term liabilities    4,769     5,768  
Total Liabilities    126,851     126,374  
        
Stockholders’ Equity:       
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding:
52,156,850 and 51,607,143 shares, respectively
    5     5  
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding:
0 shares
    -     -  
Additional paid-in-capital    180,109     185,998  
Accumulated deficit    (36,239)    (47,058) 
Accumulated other comprehensive loss    (1)    (46) 
Total Stockholders' Equity    143,874     138,899  
Total Liabilities and Stockholders' Equity $  270,725  $  265,273  
        


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

             
  Three Months Ended Twelve Months Ended,
  December 31, December 31,
  2017  2016  2017  2016 
Net sales $  78,580  $  76,614  $  344,600  $  324,157 
Cost of sales    26,113     23,281     108,378     97,261 
Gross profit    52,467     53,333     236,222     226,896 
Selling, general and administrative expenses    56,131     51,683     210,376     193,983 
(Loss) Income from operations    (3,664)    1,650     25,846     32,913 
Interest expense    (419)    (333)    (1,857)    (1,715)
Other income    38     39     170     141 
(Loss) Income before income taxes    (4,045)    1,356     24,159     31,339 
Provision for income taxes    (3,306)    (1,083)    (13,340)    (12,876)
Net (loss) income $  (7,351) $  273   $  10,819   $  18,463  
             
(Loss) Earnings per common share:            
Basic $  (0.14) $  0.01  $  0.21  $  0.36 
Diluted $  (0.14) $  0.01  $  0.21  $  0.36 
             
Weighted average shares outstanding:            
Basic    51,881,591     51,497,198     51,700,045     51,418,600 
Diluted    51,881,591     52,112,609     51,927,877     51,880,113 
             


 

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

             
  Three Months Ended Twelve Months Ended
  December 31, December 31,
  2017 2016 2017 2016
Gross margin rate   66.8 %   69.6  %   68.5  %   70.0  %
SG&A expense rate   71.4 %   67.5  %   61.0  %   59.8  %
(Loss) Income from operations margin rate   (4.7)%   2.2  %   7.5  %   10.2  %
Adjusted EBITDA margin rate   5.5 %   18.9  %   16.6  %   21.0  %


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

       
  For the years ended,
  2017 2016
Cash Flows From Operating Activities      
Net income $  10,819  $  18,463 
Adjustments to reconcile net income to net cash provided by operating
activities:
      
Depreciation & amortization    26,239     23,042 
Amortization of debt issuance costs    691     487 
Loss on disposals of property, plant and equipment    210     447 
Impairment charges of property, plant and equipment    1,072     - 
Deferred rent    3,884     2,382 
Stock based compensation    3,156     4,333 
Deferred income taxes    9,737     (395)
Changes in operating assets and liabilities:      
 Trade receivables    33     (448)
 Inventories    (10,964)    (4,417)
 Prepaid expenses and other current assets    4,159     (5,849)
 Accounts payable    12,048     4,195 
 Income tax receivable/ payable    (4,159)    (1,917)
 Accrued expenses and other liabilities    (11,234)    13,229 
  Net cash provided by operating activities    45,691     53,552 
Cash Flows From Investing Activities      
Purchases of property, plant and equipment    (40,556)    (27,256)
Proceeds from the sale of property, plant and equipment    7     4 
  Net cash used in investing activities    (40,549)    (27,252)
Cash Flows From Financing Activities      
Release of restricted cash    6,026     1,926 
Payments of long-term debt and capital lease obligations    (36,575)    (37,822)
Advances on line of credit    35,000     10,000 
Dividends paid    (10,366)    - 
Contributions to NMTC fund    -     (6,683)
Payment of NMTC closing costs    -     1,269 
Proceeds from exercise of stock options    1,639     842 
Employee taxes paid for shares withheld    (318)    (56)
Security deposits    -     (4)
  Net cash used in financing activities    (4,594)    (30,528)
Effect of exchange rate changes on cash    6     (35)
Net change in cash    554     (4,263)
Cash and cash equivalents beginning of period    6,067     10,330 
Cash and cash equivalents end of period $  6,621  $  6,067 
       
Supplemental disclosure of cash flow information      
Purchases of property, plant and equipment included in accounts payable
and accrued expenses
 $  636  $  2,271 
Cash paid for interest    1,822     1,811 
Cash paid for income taxes, net of refunds    7,603     15,162 
         

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