Earnings Call: Q1 2021

May 7, 2021

Quarterly report

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2021 Tile Shop Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Davis. Sir, please begin. Thank you, Dexter. Good morning to everyone and welcome to the Tile Shop's 1st quarter earnings call. Joining me today are Cabby Loma, our Chief Executive Officer and Nancy DiMaggio, 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 1995 as amended. Such forward looking statements are subject to both known and unknown risks and uncertainties It 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 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 measurements. Please see our earnings release for a reconciliation of those and non GAAP financial measures, which has been posted to our company website. With that, let me now turn the call over to Cabbie. Thanks, Mark. Good morning, everyone, and thank you for joining us today for an update on our business and a review of our Q1 financial results. We started the year on a positive note with meaningful improvements in net income and adjusted EBITDA when compared to the Q1 of 2020. Our adjusted EBITDA and adjusted EBITDA margin were the highest levels we've reported since fiscal 2018. These improvements were made possible by our commitment to maintaining disciplined management practices, which resulted in improved gross margin and a substantial reduction in selling, general and administrative expenses. Our stores continue to operate at reduced hours during the Q1 of 20 21, which allowed us to maintain a lean expense structure. However, it did contribute to lower levels of traffic and sales when compared to the Q1 of 2020. During the quarter, we tested expanded hours at a subset of our stores. We will continue to evaluate the results of these tests, perform additional tests and make adjustments to our store hours as results show that the incremental business generated by extending store hours supports the additional investment in store overhead expenses. In the Q1, we continued to experience elevated levels of product backorders stemming from delays and replenishment from several international tile suppliers. In many cases, this was the result of production challenges at the supplier's factory due to COVID-nineteen. We also experienced an increase in delays due to international shipping capacity constraints. Since many building products are dealing with shortages and delays, This seems to have been accepted by our pros and homeowners reasonably well, but we are still working hard to eliminate these delays. Although it has only been a short time since our last earnings call, I'd like to provide a brief update on our 3 key priorities for 2021. Our first priority is focusing on retail execution. We've continued to see improvements in our key metrics in this area. Specifically, we were able to achieve an 80 basis point increase in gross margin during the quarter that was largely due to lower levels of discounting and improved delivery collection rates. Additionally, our training and development initiatives are helping us achieve gains in our conversion rate and average ticket size. We also saw strong enrollment in our Pro Loyalty program in the quarter. Our second priority is to enhance our customers' online experience. During the quarter, we invested in content and outreach with the goal of increasing the number of impressions, site visits and conversions with prospective customers shopping for tile. We are pleased with the progress made during the quarter, which included growth of online order activity, but we recognize that we're just starting to tap into the potential of what we hope to accomplish. We're also making great progress working on a number of different projects to refine the way our products are merchandised online. The samples I've reviewed are a nice upgrade to what we have. Our team is doing a wonderful job evolving our customers' digital experience. These enhancements will further strengthen online engagement with prospective customers in the future. Our initiative to refine our purchasing and distribution processes has been hampered by several factors. COVID-nineteen has forced us, like many consumer companies, to take a hard look at all aspects of our supply chain. This includes ensuring we are able Our team is actively working with our network of international suppliers to secure delivery of back ordered product. As I mentioned earlier, Shipping capacity constraints are also adding pressure on product availability and cost. We are seeing an increase in the cost to transport products to the U. S. And are actively exploring alternatives to combat rising costs. Over the last 3 years, we have made substantial headway in diversifying our supplier base across the world. We continually weigh options to shift purchases to suppliers that meet our high quality standards while providing better pricing options. Overall, I'm pleased with the strong start to 2021. I'll now turn the call over to Nancy, who will take you through the financial details. Nancy? Thanks, Cabbie. Good morning, everyone. From a financial point of view, the theme continues to be around driving profitability and cash flow. Net income for the Q1 was $5,300,000 and fully diluted earnings per share were $0.10 Adjusted EBITDA increased 3 point $3,000,000 from $11,400,000 during the Q1 of 2020 to $14,700,000 during the Q1 of 2021. Adjusted EBITDA margin was 16% for the Q1 of 2021, a 390 basis point improvement compared to the Q1 of 2020. We continue to manage our top line through headwinds stemming from reduced hours and product shortages. Net sales decreased $2,200,000 or 2.3 percent from $94,300,000 during the Q1 of 2020 to $92,100,000 during the Q1 of 2021. Sales at comparable stores decreased 2.3%. It is important to note that total revenue dollars and comp sales performance during Q1 of 2020 were at our highest levels that we have reported in any quarter during the prior 3 years. While the onset of COVID-nineteen in 2020 started to affect our traffic during the Q1, We continued to post strong sales results through the end of March. We helped our professional customers secure delivery of product they needed to complete jobs before state and local government We did not see a significant impact of the pandemic in our sales until the initial weeks of the Q2 in 2020. The decrease in sales at comparable stores during the Q1 of 2021 was primarily due to a decrease in traffic that was driven in part Our reduced store hours were implemented in the Q2 of 2020. Additionally, product shortages were a headwind during the Q1 of 2021. Despite the challenges, we're seeing a notable increase in our backlog and customer deposits. Deposits placed by customers to secure delivery of products in future periods increased by $5,600,000 from $12,200,000 in December 31, 2020, to $17,800,000 on March 31, 2021. Gross Profit during the Q1 of 2021 was $64,200,000 and decreased by $800,000 or 1.2 percent when compared to the Q1 of 2020. Our gross margin was 69.7%, 80 basis points higher than the Q1 of 2020. The improvement in our gross margin rate in the Q1 of 2021 compared to the prior year period was primarily due to the better pricing and an improvement and customer delivery collection rates, partially offset by an increase in customer delivery mix. Our selling, general and administrative costs decreased by $5,100,000 from $62,400,000 during the Q1 of 2020 to $57,300,000 during the Q1 of 21. The decrease in SG and A from the Q1 of last year was partially due to our reduced hours, which contributed to a $1,500,000 reduction in compensation and benefit expenses. Additionally, We incurred $2,200,000 of asset impairment charges and $1,100,000 of legal costs in connection with shareholder litigation during the Q1 of 2020. During the Q1 of 2021, we did not incur any asset impairment charges or legal costs in connection with the shareholder litigation, which was finalized in October 2020. During the Q1, we opened New store in Wayne, New Jersey bringing our total store count to 143 stores. During the Q1 of 2021, Cash provided by operating activities totaled $30,100,000 Cash generated during the quarter was used to fund $3,200,000 of capital expenditures to finish the build out of the new store opened during the quarter, remodel existing stores, invest in information technology We continue to anticipate $12,000,000 to $15,000,000 of capital expenditures during 2021. We ended the quarter with a $35,900,000 cash balance and no debt. With that, Dexter, Cabbie and I are happy to take any questions. Our first question or comment comes from the line of David Cannon from Cannon Wealth Management, your line is open. Good morning. Thanks for taking my questions. First question is in regards to hours, both being open on Sunday and then daily hours Monday through Saturday. What is the difference now starting in April versus in Q1 when you were not You know I am fully open, so to speak. Hey, David, this is Cabby. Good question. Yes, right now, we are running a couple of different tests in different markets And individual stores across the chain. So some stores are open on Sundays in full markets or individual island stores. Some stores, controlled stores are not open and some stores were running extended hours through Monday through Friday into the evening. So we're monitoring the data and the results, looking at traffic, looking at sales, looking at cannibalization from other days. So As we read this data and it's starting to push one way or the other, it helps us define what the go forward strategy is going to be. I look at A lot of our regional competitors, kind of the true competitor to the Tile Shop, most of them are not even open on Sundays. Some are, but very few and some are even closed on Saturdays. But I want to make sure that we can get all the traffic we can To make profitable sales. Sales come at a cost and that's what I analyze every day. So good question. Okay. I mean, I recall you more or less saying the same thing during the Q4 call. I know it wasn't that long ago. Are there any anecdotal findings at this point? And then if you could give a percentage perhaps, I believe by Total store hours versus normal were down close to 20%. Is that right? In Q3, Q4, what are we looking at now? Is it more or less the same given the tests? Or Is it are there significantly more hours? Sure. Yes. We've expanded our tests in some areas. Primarily, it's about the same. We've opened a few more hours in some locations, but anecdotally, it's about the same. During this COVID pandemic, it's tough to staff the stores to make sure that we're getting the true data. It hasn't been that long before our last Call. And some stores are showing some results and some stores are showing very different results. So that's why I want to avoid a knee jerk decision to add a lot of cost I'm going to let data drive that decision and that's what we're doing, every day monitoring the data and expanding the tests. Okay. And then in general, restrictions are alleviating across the nation. Could you I'd like to know if this is translating to improvements in sales for you guys. So could you speak to the cadence of Sales throughout the quarter, did it start off slower and then gain was there any momentum towards the end of the quarter and did that potentially carry through into April May as many of these restrictions have alleviated? Sure. Yes. Can't speak to Q2. I am excited too when that time comes. But in Q1, Due to our seasonality of our business, it's a strong quarter typically and we do see it ramp up through January, February, March and It held with that same cadence. It was a little different than prior years due to the pandemic, but that cadence pretty much stayed the same. Okay. And then just one more question in regards to the uplisting. And I know you can't Tell us exactly when it's going to happen, but I'm going to ask you a more of a philosophical question. Does management and the Board see the benefits and agree that it is a way to maximize shareholder value? Or do they philosophically disagree, but they're sort of going through the motions in terms based on the pressure that they're seeing? That's a really good question, David. I want to kick that over to Nancy a little bit as she's really tied close to this. Go ahead, Nancy. Yes. Thank you, David. So I think you're following the company very closely and you read our releases. So on March 1, we had Special committee that did all of the review and the analysis to make a really sound recommendation to the Board. And they made the recommendation on March 1. The entire Board voted unanimously for the uplift listing rather Feeling that it made the best sense for the company and for the shareholders. So it was a unanimous decision. Thank you. Our next question or comment comes from the line of John Hollander from Chesapeake Advisors. Your line is open. Hi. Thank you for the time. Quick question on just cash flow and cash on the balance sheet. I noticed that cash increased substantially to over $30,000,000 Congratulations on that. I was hoping you could comment on the impact of the customer deposits on that cash And also your thoughts for minimum cash balances that are necessary in the business. It's a great question, John. Nancy, why don't you take this one as well? Sure. So when we talk about cash, we Are really happy that we've been able to generate good cash flow during the Q1. And we think it's going to offer us some future flexibility. But we recognize that there's still a number of ongoing risks associated with COVID that we're going to need to navigate. So while we seem to We pointed in the right direction in the U. S. At the moment. We're also seeing headlines that I think everybody is aware of that many companies across the world are still Really struggling with the virus. So as Cabbie mentioned in his earlier comments, this has had an impact on our supply chain and the levels of product outages that we're currently experiencing. So at this time, we really feel that it's prudent to build a cash reserve in light of the ongoing Risks still stem from COVID and the uncertainty that, that is still playing in the market. But certainly, we'll continue to evaluate our capital needs as we move through the year. With respect to the balances, Certainly, we've seen an uptick in that and that is related to a number of suppliers that have been affected by COVID. So we're working closely with our suppliers to secure delivery of the products that are currently back ordered, but that has increased Back order product and that's the reason that we're seeing customer deposit balances increase from $12,200,000 December 31 to 17,800,000 in March 31. We do anticipate those deposits coming down as we're able to get products in. Again, so much of that is tied to COVID and the global situation. And we just, at this point, really can't predict what that's going to look like. Okay. Thank you for that. And I guess my only follow-up to that question is if you could give any discussion. I know in the Q1 conference call we spoke about one additional store. Has there been any change and also $12,000,000 to $15,000,000 CapEx? Is there any change in that guidance? No. We're still anticipating the $12,000,000 to $15,000,000 in CapEx and we are going to be Relocating one store, certainly we'll announce that when that's done and we will be closing the store the existing store once the new one has Thank you. Our next question or comment comes from the line of John O'Coyne from Family Office. Your line is open. Hey, guys. Thanks for taking my call. You actually answered a lot with that previous question. But I was just Wondering, what the plans were in terms of capital allocation going forward, given that there are no new plans to open any more stores? So again, it's something that we are continuing to actively monitor. We know that it's really important, But we're still waiting to see how things are going to flush out through the year with COVID. Again, we monitor it very closely. We do anticipate that we are going to be spending have some capital expense, the $12,000,000 to 15 $1,000,000 which we're expecting $9,000,000 to $13,000,000 still left to spend this year and we're going to see an increase in inventory. While we think it will remain below $90,000,000 it's Going to ramp up somewhat from the $71,000,000 where we're currently at. But again, we're tied to constraints With some of the suppliers due to COVID. Got it. Yes. I mean, just to echo a comment that was made on the last call, given the valuation currently, just a recommendation to the Board, It would seem prudent to maybe deploy some of excess cash After COVID subsides a little bit, subsides a little bit, maybe tender shares prior to the uplift, but just a suggestion, I guess. That's all I have. Yes. We appreciate the comment. Thank you. Thank you. Our next question or comment comes from the line of Jeff Moore from Bur Oak Capital. Your line is open. Thanks for taking my question. In regards To both the kind of the inventory buildup that seems to be coming and the NASDAQ uplisting, What inning would you say we are in of those items? It's a great question, Jeff. When you look at the global constraints on shipping and when I look at our inventory, You hope to be in the 9th inning, but it changes weekly. We just had a strike in the port of Montreal. We have COVID wreaking havoc across Europe. And it's a battle I see that we're going to continue through Q2 and into Q3. So I can't really give you an inning that we are in for inventory buildup. And with the uplisting, That's not in our hands. So we're going to wait and see. Okay. Thanks. Yes. Thank you. Our next question or comment comes from the line of David Kanan from Kanan Wealth Management. Your line is open. Hi. Just a follow-up on capital allocation. The other callers bringing up that subject. Another category, people typically think in terms of building stores, Let's call that greenfield buying back stock, paying dividends. But have you guys vetted opportunities Potentially for acquisitions, your industry is littered with many mom and pops that are These regional operators, I recall, for example, where I grew up in Long Island, there was a very strong regional player there They had a great loyal customer base. They did a great job of executing. Have you vetted those opportunities? And maybe it's better to buy versus Still maybe by EBITDA at a very high ROI, well above what you'd get in a greenfield. So if you could comment on that and if that is something that you would consider? I'd appreciate that. Sure. So right now, Frankly, we appreciate the fact that we have some opportunities within our existing store base to continue to grow that And deliver better performance. And that's really where we're focused on for 2021. But we Do feel that we always look at opportunities. But again, we're really focused on improving the existing store base, focusing Getting that in line with where we want, we're certainly making progress and we're really happy to see that, but we want to continue to execute the strategy that we have in place. But again, being debt free certainly offers us some flexibility in the future. We're looking to see Where we're at once we come out of the COVID environment. Thank you. Thank you. Our next question comes from the line of John Hollander from Chesapeake Advisory. Your line is open. Hi, I apologize. I meant to ask this earlier, but I noticed in your earnings reports you track a pretax return on capital employed. And congratulations on showing a positive number for the Altium basis. I'd like to know how you think about this number and why you Track this metric and what your goals are for it. For pretax capital employed, let me kick that. Nancy, why don't you take that one? I'm sorry, can you repeat the question, please? Yes. In your earnings releases, you track and you show calculations for For the LTM basis, your numbers are substantially higher. Congratulations on such powerful figures. I'd like to know why the company tracks this metric and how you evaluate the metric and the reason for it. Well, we do feel it's an important metric to track. It helps us understand potential liquidity Going forward and the structure of the organization and we take all of that into consideration when we think about Assets, how to deploy them, what the bottom line is going to look like as we move forward and refine our plans for the year. Okay. Is there a goal for this metric? Because like to go from negative 0 0.9 percent, right, to positive 7.3 percent is a substantial increase. Yes. We don't We're not ready to share what those numbers are. We don't want to offer forward looking guidance. But it is something that we are keeping an eye on and it's an indicator of the direction that we're moving in. Okay. In my analysis, Q2 of 2020 has a negative EBIT, which obviously drags down the LTM EBIT used in this calculation. For Q2 of 2021, it will have a large swing because that will become some sort of a positive number, Which will lead to a substantial increase in the LTM basis of the pre tax return on capital? That's correct. But there is no thoughts on how to deploy this capital? It all goes into our overall capital plan. And again, that's something that we continue to watch throughout the year And more to come as we progress through the year. Okay. And just my final question. Obviously, we saw today's payrolls reports Disappointing in terms of the number of jobs being created and many much commentaries about labor shortages. Is that something that you're running into from your Contractors and also who are buying your materials for your ultimate end user and home owners and also for your staffing levels, are you running Yes, John, that's a great question and observation. And I think Anyone on this call who went out to buy anything home related in the past 3 to 6 months has experienced either delays in product or Sub levels of service in certain industries. We're lucky enough to be adequately staffed to expand hours. Staffing is a challenge. With millions of jobs open, it's become a much more competitive market for people to get a job. And we are going to see increases across all industries and wages. And hopefully, the articles I am reading are wrong, but it could potentially lead to inflation. So staffing is a challenge. And when you think about contractor base, yes, there is a backlog For customers using PROs to get jobs installed in their home, it's by region, but all regions are suffering from it. We see that a delay in the tile job isn't due to always just the tile. They're waiting on windows. They are waiting on concrete. They are waiting on lumber. They are waiting on all these different things to finish the job. So everyone in our industry seems to be Backed up on existing jobs that they are waiting to complete. All right. Thank you. And just my final question. Do you at all think about like ASPs or average prices. And the reason I bring it up is top line was down 2.3% year over year. Well, what we and I'm trying to gauge that we know that there's lower foot traffic, But did average price per tiles increase over that time or did that also come down or is that flat? We adjust pricing where we see it adequate or where we need to adjust pricing. But we have also focused on one of our strategies is retail execution. So continuing to Get the skill level of our associates in our stores, raise that through training and we have seen lower discounting, which is a big reason why we have We've seen an increase in our margin. But yes, we evaluate pricing week in and week out and it's something that We are very diligent when looking at all the aspects that challenge a business, be it product availability, Look at what the sell through is on certain SKUs. So yes, it's a great question, but it's something we look at and we monitor because Execution of the pricing and of the sales of the product is what drives our profitability. So it's a good question. Okay. Thank you very much. Appreciate the time. We'll wrap you again on a great quarter and very good SG and A performance. Thank you. Thank you. Our next question or comment comes from the line of Jeff Moore from Bur Oak Capital. Your line is open. Thanks for taking a second question. I was curious about your all's debt facility and if you could briefly go over that. And also, are you actively looking at other debt options right now? So our existing agreement with the bank goes for another 2 years. We have had conversations with our existing bank and other banks to see what our options are. It's something that we look at on a regular basis. So in particular, as you look at the market, it's changed radically from last year to this year. Banks have Eased some restrictions in our lowering rates. There was quite a run up that happened last year with companies really needing additional Liquidity, due to COVID, fortunately, we were able to survive that. That was not an issue for us. We're in a very good At the moment, we don't think that we're going to need to advance any money anytime soon. Our goal is to remain debt free. That being said, we realize that it is an important consideration for flexibility and future growth. Again, where our current agreement is 2 years, but we have talked to other banks in light of the new world that we're living in just to Okay. Thanks for that info. As part of your NASDAQ Uplifting application. Is there any restriction currently on you all for buying back shares? No. But at the moment, we are waiting to hear a final decision from NASDAQ. And again, we'll be revisiting that as we move further into the year. Okay. So just for clarification, though, there's presently no I would have to confirm that, but no, I don't believe so. Okay. Because I'm going to speak for every single outside shareholder that is not part of the executive or Board suite that is on or not on this call and say that we all want for you to be buying back stock like crazy. I mean, this company right now, if you put a run rate on this quarter's cash flow, it's trading for something like 3 times cash flow. And certainly no one thinks that that will continue necessarily, but the cash flow generation ability of this business because of the great work you all have done is immense. And it seems to be frankly just not getting any credit from the market as a whole. And even with the headwinds of COVID, that uncertainty creates a great opportunity for you all to buy back lots of stock Create just a whole lot of shareholder value. And I would also think that the shareholder base being what it is, if there would ever be liquidity requirement for the company would be more than happy to inject capital into the business at a favorable rate for the company. So I just I don't understand why you guys are not if you're not actively looking at share buybacks, you should be. It's just absurd how cheap this company is relative to peers, relative to other companies in the market and relative to its future cash flows Discounted to the present. But again, I don't want to discount the great job you guys have been doing operating the business. The debt pay down you have had over the Years or so has been absolutely incredible. So thank you for that. Yes. I really appreciate the comment and do know that this is something that we really do take seriously, Both Cabbie and I from a company perspective and certainly our Board of Directors, we evaluate all of that on an ongoing basis. When we think about capital, how to deploy it, what makes the most sense for the organization and ultimately for the shareholders, right? That's something that we always keep in mind. So again, I appreciate the comment. We do want to get a little further into the year, but this is something that Certainly, it's a topic for discussion that we've been having internally. Okay. But to stress again on the share buybacks, you all have the opportunity of the Decade probably to be buying back shares because it's no secret that you're all's former that you're all's founder is spite selling shares right He doesn't care about the price and he would be I would think he would be willing to sell his remaining probably 2,000,000 after what he probably dumped yesterday, to you guys in just a private transaction just to be out, so he can go about his business. That alone could buy back a substantial amount of the company at A favorable rate for the company. And if you all would do that, I mean, that would just that would reduce your cost of capital. It would help the share price, I've talked to probably a dozen shareholders that are baffled as to why you guys are not tendering for those shares Right now. So we would all definitely appreciate you doing that, I think. So that's something that you That I would would be great for you all to look into at the Board level as soon as possible, because he's I mean, he was selling in the past week, And it seems like he doesn't mind to suppress the price to do it. So please look into that. I appreciate it, Jeff. And just like Taco and Nancy, it's something that we do review a lot with at the Board level and internally And what the best course is to do with our cash. So thank you very much for your commentary. No problem. Thank you. Our next question or call up is a follow-up from Mr. David Kanan from Kanan Wealth Management. Your line is open. Sorry guys, I thought I was done, but the other caller sort of woke me up there. So I just wanted to express, we're a large holder. We own almost probably at least 4,000,000 shares. So I actually concur with the I think it would be great if you guys can retire shares at this kind of a valuation and help him move on to other things. And that's it for the comment. Thank you. Thank you, David. Appreciate it. Thank you. Our next question or comment comes from the line of John O'Coyne from Family Office. Your line is open. Hey, guys. Yes, just to echo Jeff's comments. Did Rucker reach out to you guys at all About selling his state? No, he has not. Okay. That's all I got really. Might it be better for you guys to reach out to him just to see if you're able We can't really speak to that right now, John, but it's a I get the question and it's a good one. So I appreciate it. Thanks guys. Thanks for all your hard work. You bet. Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks. Thank you, Dexter, and thank you to everyone for listening to our earnings conference call. We anticipate filing our Form 10 Q later today. We look forward to providing our next update in August. Thank you for your interest in the Tile Shop and have a great day. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.