Earnings Call: Q2 2021

Aug 5, 2021

Quarterly report

Good day and thank you for standing by and welcome to the Q2 2021 Tile Shop Holding Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr. Mark Davis. Thank you. Please go ahead. Thank you, Felicia. Good morning to everyone and welcome to the Tile Shop's 2nd quarter earnings call. Joining me today are Cabbie Lomo, our Chief Executive Officer and Nancy DiMaggia, 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 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 such statements. Those risks and uncertainties are described in our earnings press release issued earlier and in our filings with the SEC. 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 non GAAP financial measures, which has also been posted on our company website. With that, let me now turn the call over to Cabbie. Cabbie? Thanks, Mark. Good morning, everyone, Thank you for joining us today for an update on our business and a review of our Q2 financial results. We had an excellent quarter that was headlined by setting an all time quarterly sales record. The $96,200,000 of revenue reported this morning Represents a 42% increase from the Q2 of 2020, a 4.5% sequential increase in revenue from our Q1 of 2021 and an 8.2% increase from the revenue in the Q2 of 2019, which was prior to the pandemic. While the current strength in the home improvement sector provides a nice tailwind, the success would not be possible without the strong execution of our entire Tile Shop organization. I'd like to take a moment to say thank you to our frontline sales force, our warehouse warriors, our distribution center team and our corporate employees. The incredible results we've been able to achieve would not have been possible without you. Our formula for success is built on doing 3 things incredibly well, Ultimately, it's our people who are the key to our success. Our ability to help our customers navigate our assortment, Design beautiful spaces and create an exceptional experience is rooted in having an engaged, knowledgeable and passionate team. The Tile Shop team has performed at a high level through the first half of twenty twenty one and we're excited to invest in our team to keep our momentum going. This includes: First, we promoted several individuals within our retail sales and pro sales divisions. These positions will help drive the strategy, 2nd, we increased the number of regional sales leaders from 6 to 9. Our regional leaders are instrumental in attracting and retaining talent, training our field teams and ensuring best practices are followed throughout our stores. The expansion of the regional leadership team will help increase the frequency of touch points between our regional leaders in our stores, including more on-site visits. We expect that this investment will accelerate the improvements we've seen with respect to our retail execution goals and help develop our bench of And our store hours, which we reduced due to the COVID pandemic. During the quarter, we increased the number of stores open on Sundays from 29 stores at the end of the first quarter to 38 stores as of the end of the second quarter. We plan to open an additional 17 stores on Sundays during the Q3. We will continue to evaluate the results of these tests, perform additional tests and make adjustments to our store hours As test results show that the incremental business generated by extending store hours supports the additional investment in store overhead expenses. These changes are exciting as they are expected to help grow sales within our existing store base and provide a foundation to support future store growth. At this time, we do not anticipate any further store openings in 2021. We are currently evaluating options for store growth as well as other internal initiatives to drive top line growth in 2022 and beyond. I'd now like to provide an update on the progress we've made with respect to our 3 top priorities for 2021, our first priority is focusing on retail execution. We've continued to see improvements in our key metrics in this area. Our field teams are doing a nice job controlling discounting, improving our collection rate when we deliver product to our customers In keeping inventory shrinkage and damage losses in check, it's this attention to detail that helped us achieve 130 basis point increase in gross margin rates during the 1st 6 months of 2021 when compared to the 1st 6 months of 2020. Our seasoned pro market managers Our year to date probe mix has eclipsed 60% of our total sales. Our second priority is to enhance our customers' online experience. Now it was just 1 year ago that we really ramped efforts to sell our products online in response to the COVID-nineteen pandemic. Our web orders in 2021 are on track to contribute to overall sales performance at a level consistent with 1 of our top stores, and we're just getting started. We feel good about the direction we are headed and how our digital experience complements our in store experience. In addition, Our visualizer has been delivering an improved customer experience to inspire and help select products. During the second half of twenty twenty one, We're planning to refine the way we merchandise our products on our website. The changes we're making will make it easier to browse our assortment online, Enhance the quality of the images on our website and provide recommendations of complementary product needed to complete a tiling project. Our 3rd priority to refine our purchasing and distribution processes has remained a challenge. We continue to see elevated levels of backorders as our suppliers work through production challenges resulting from COVID-nineteen. Our team is actively working with our network of international suppliers Additionally, global shipping capacity constraints have compounded challenges to source inventory in a timely manner. We've also seen an increase in the cost to ship products to the United States. In some cases, our rates have doubled from the inbound freight rates we've seen in the past. We have taken steps to increase our prices and plan to continue to adjust pricing to combat rising costs. Additionally, The diligent execution by our retail teams will continue to be critical to maintaining our strong gross margin rates. Overall, I'm very pleased with the results that we're able to generate during the quarter and the progress we're making on our priorities. I'll now turn the call over to Nancy, who will take you through the financial details. Nancy? Thanks, Cabbie. Good morning, everyone. As Cabbie mentioned, our 2nd quarter results were headlined by the record sales of $96,200,000 This was up 42% year over year, 4.5% sequentially from the Q1 of 2021 and 8.2% when we compare against the Q2 of 2019. Comparable store sales increased by 41.6% during the Q2 of 2021 when compared to the Q2 of 2020. We were very pleased with this top line performance, especially given that we continue to carry a larger than usual backlog at the end of the second quarter due in part to product shortages stemming from manufacturing and as a result of COVID-nineteen. Customer deposits placed by customers to secure delivery of product And future periods also remain elevated over historical norms at $16,500,000 on June 30, 2021, which was down slightly from $17,800,000 at the end of the Q1. Gross profit during the Q2 of 2021 was $66,400,000 an increase by $21,000,000 when compared to the Q2 of 2020, largely due to the increase in sales. Our gross margin rate was 69.1 percent, 200 basis points higher than the Q2 2020. The improvement in our gross margin rate in the Q2 of 2021 compared to the prior year period was primarily due to better pricing and an improvement and customer delivery collection rates. Sequentially, gross margin decreased 60 basis points from 69.7 Thank you, everyone. The sequential decrease in gross margin is due to an increase in product costs, in particular inbound freight costs from international suppliers. Additionally, an increase in customer delivery mix contributed to the lower gross margin rate during the Q2 of 2021 compared to the Q1 of 2021. Our selling, general and administrative costs increased by $11,600,000 during the Q2 of 2021 when compared to the Q2 of 2020. The increase in selling, general and administrative costs was due to a $6,200,000 increase in variable selling expenses, A $1,500,000 increase in transportation costs to move inventory between our distribution centers and our stores, A $1,500,000 increase in wages largely due to an increase in headcount, a $900,000 increase in consulting and temporary labor And a $500,000 increase in marketing expenses. Sequentially, SG and A expenses increased $1,500,000 from the Q1 of 2021 to the Q2 of 2021. The majority of the increase was driven by higher levels of compensation expenses and transportation costs to move products between our distribution centers and our stores. Net income increased $6,300,000 from a net loss of $800,000 during the Q2 of 2020 to a net income of $5,500,000 during the Q2 of 2021. Adjusted EBITDA increased $8,800,000 from $6,600,000 during the Q2 of 2020 to $15,400,000 during the Q2 of 2021. The adjusted EBITDA margin rate improved 620 basis points from 9.8 percent during the Q2 of 2020 to 16% during the Q2 of 2021. Diluted earnings per share increased $0.13 from a loss of $0.02 during the Q2 of 2020 to earnings of $0.11 during the Q2 of 2021. During the Q2, we relocated 1 store in Madison, Wisconsin. As of the end of the quarter, our total store count remained at 143 stores. As Cabby indicated, we do not plan to open any additional During the 1st 6 months of 2021, we generated operating cash flow of $42,000,000 This is strong evidence of the cash generating power of our model. This has been used to fund $6,200,000 of capital expenditures Over the same time frame to finish the build out of the new store opened during the Q1, relocate 1 store during the Q2, Remodel existing stores, invest in information technology and enhanced merchandising assets. We ended the quarter with After spending over 30 years working with companies in the hard surface flooring industry, I've made the decision to retire. When I came to the Tile Shop 2 years ago, I couldn't have imagined we'd go through so much in such a short span of time, I'm proud of all we've been able to accomplish during my tenure. I'm confident that CAB and the rest of the executive leadership team We'll continue to guide the company down the right path. The company has launched a search process, and I'm committed to assist in an orderly transition once the position has filled. With that, Felicia, I'll turn the call back to Cabbie. Thanks, Nancy. I also wanted to make a few comments regarding Nancy's retirement. Nancy has been a great partner to me and our company and she will be missed. Her deep intimate knowledge of our space has been awesome, especially during these unprecedented times. On behalf of our Board and our entire company, thank you, Nancy, for everything you have done for us as we execute our growth strategy. With that, let's move to Q and A. Thank you. One moment please. Our first question comes from Jeff Moore of Burrow Capital. Your line is open. Yes. I was curious about the deposits that you guys have. I think you said it was just under $17,000,000 in customer deposits. How much revenue does that represent over however long it takes to get the supply chain issues resolved? That varies actually depending on the product mix that is in that back order. Our margins vary depending on whether it's stone or it's material. So it's a little difficult to say. And that changes on a daily basis given on the orders that are in process and currently Waiting for fulfillment. Yes. On top of that, Jeff, retail customers put 100% down where pro customers depending Have small deposit or no deposit based on their tiers. So it does impact a different level According to the customer type, so it's obviously going to be a little bit more than the deposit itself. So in terms of the mix of that deposit on your balance sheet, How much of that would be pro customers and how much of that would be just a regular home remodeler that's buying for their own house? Yes, it's a mix. I mean, right now, if you listen to our prepared remarks, I mean, we've eclipsed 60% as pro business. So we have 40% of retail. And so you think that they have to put 100% down, you can do the math. So it is higher than that, but it's That's substantially higher. Okay. Also last conference call, we I asked you about your borrowing facility and whatnot. And I know it's got a long dated maturity and everything. There's nothing drawn on it. But I was curious if you guys have looked into other borrowing facilities that have lower interest rates or more attractive Our existing bank and we're always evaluating our options and what's going to produce the best performance for us and for our shareholders. But at this time, there's nothing new to update or share. Okay. And then what about investigation of return capital to shareholders? That's something that's come up a lot. We continue to be really pleased about the cash flow that we're generating. And frankly, I think having a cash cushion during these unusual times that we're in today is really a good thing. Keep in mind that we've Only been debt free really for 2 full quarters. This isn't something that we feel a need to rush on, but we do continue to evaluate our options and certainly we'll Okay. And then one last question. In terms of valuations for floor covering companies and whatnot, I'm sure you guys have your finger on the pulse of M and A. What kind of multiples and valuations are you seeing for other companies as they kind of get folded up To larger entities? We're really not Looking to discuss M and A or other companies at this time. Any particular reason? It's just not part of a strategy that we're prepared to discuss for competitive reasons. And again, it really varies. Okay. Thanks for your time. Thanks, Jeff. Thank you. Our next question comes from John Hollander of CAG. Your line is open. Good morning, guys, and great quarter. Just a few quick questions. One is I wanted to chat about the store remodeling process. How many stores have been remodeled? And how many do you expect to be remodeled over the next 12 months? Well, thanks for the question. Yes. We want to remodel. We came out with a certain list of stores at the beginning of the year to remodel and enhance. Now we do analysis Based on the tenure of the store, the segments of the customer, the dates of the vignettes and how much we want to spend on these remodels. And we've remodeled around a half dozen so far this year. We've scaled back a little bit just due to some of the Inventory and shipping constraints that we're experiencing, but we're going to continue remodeling some stores throughout the remainder of the year, Over 10, if not a few more, depending on how things shake out here in the next few months. I'm sorry, Colin, was that 10 additional or going from 6 to 10? Hopefully, 10 additional, but we're going to say 10 right now. But we'll see as product continues to come into the multiple ports. Thank you. And what type of returns or lift do you see on the We've done the analysis on this. And depending on how much we invest, It can be anywhere from 2 to 4 years depending if we're investing a smaller amount to a larger amount or a full store remodel. If we're doing just A scrape on some vignettes, we can see the return quite quickly. But if we're investing a substantial amount of the remodel, it could take 2 years. And what is the impact on the employees and the manager of the local store after you do the remodel? Well, from beginning to end, it's exciting. It raises morale. I was a manager for 15 years And the salesman. And when you have remodels going on in stores, the customers get excited. They actually go around and watch this being done. The staff is excited to get new product in the stores. We try to do any demo or anything that's disruptive to the business during the evening hours and setting and grouting of tile and applying fixtures during the day. So it's not disruptive at all and it creates a lot of excitement. Well, I will put in a shameless plug for the Glen Burnie, Maryland store. If you could do a remodel there, it would be very nice. I appreciate it. I'm sure they're happy to hear that too. So thank you. And a follow-up question. In your press release, you track a return on capital employed metric. I was hoping to understand better why this is the metric that the company tracks. Hey, good morning. This is Mark. We feel that the return on capital employed metric is a very good metric to assess The health of the business as well as the quality of the earnings that we're able to produce on our capital over time, We do feel that seeing continued improvement in this metric is helpful, but that's the primary return on capital metric that we think is most Important to us is we evaluate the health of our business. Are management bonuses at all tied to this metric? No. Okay. This metric has dramatically increased. So congratulations for that. Last quarter was 7.2%, this quarter is 13.9%. And when doing any modeling, it's obvious why, because we're taking out 4 quarters from 2020 and adding in these dramatically powerful quarters from 2021. What how does the metric I mean, how does management feel about the different levels? Right now, you're at nearly 14%. What happens if this number goes higher? Does this change on your management's behavior? I think the easiest way to answer that question is we feel really good about the progress we've made over the course of the last year, But we think that we can do better. That doesn't necessarily change our behaviors, but we're continually striving to get a better return as we move forward. Okay. And finally, just about inventory and shipping delays. Could you comment a little bit about The current delays of your orders from your international suppliers, have you delayed shortened at all? Have they lengthened? Has there been any impact, delta variant with what's going on in Asia right now? Just any qualitative commentary would be helpful. Thanks, John. Yes, It's been a struggle for almost a year over a year now. So what we're seeing though are our vendor partners are able to produce the product. People are back at work all over the world, and they're getting the product made. We find a container shortage is continuing to be a struggle. But once we get the containers on the ships, the ships are sitting at ports. And you have longshoreman strikes at the ports of Montreal. We got fires in the Northeast that are I mean there's always going to be challenges in logistics. But the good news is we're still continuing to receive a lot of product more so today than in the past 9 months. So things are slightly opening up. We're able to get a lot of our back orders in our DCs, but we're also opening a lot of businesses as well. So as we receive back orders, we're continually creating some new ones. When you have 6,000 SKUs, it's a balancing act. Who can ship what and when is it going to arrive at what port and what challenges are we going to incur, not only at the ports, but in rail, trucking and everything else. But the good news is it's getting better. Thank you. And do you lose Any deposits because of these delays or are customers not able to cancel? I just wanted to understand how that rolls through. Yes. Customers can cancel whenever they want. We're very lenient with our customers. And I think what I'm seeing, I'm a customer myself, And I'm waiting on furniture. I'm waiting on certain things for my own home. Our customers are seeing this. They're remodeling. They're not just buying tile. They're buying cabinets. They're buying windows. They're buying And everyone is experiencing the same thing. So what I've seen and heard from our leadership in the field and when I talk to customers, Their understanding of the current challenges that everyone is facing. So we're not seeing any elevated cancellation rates. So I don't think that's a concern. If they wanted to, they could, but I'm not seeing that right now. Thank you. And then in terms of deposits, where is the best place to track that in the financials? The deposits are included in the cash that you'll see on our balance sheet. Right now, we've got 16,500,000 and for part of the cash that is from deposits. And is that broken out like in the Because obviously in the press release, I'm only seeing the $44,750,000 in the restricted cash amount. Good morning. This is Mark. It is broken out in the queue. The actual deferred revenue that we have associated with customer deposits This is in other accrued liability and we have a breakdown of other accrued liabilities as part of our Q. Okay. Thank you very much. Those are all my questions. Great quarter, guys, and looking forward to the remodeling of the Glenberry store. All right, John. I made a note of it. Thank you. Our next question comes from Jeff Moore of Burrow Capital. Your line is open. Thanks for taking a follow-up. I was curious about the B. Riley Summer Summit that you guys are going to be attending on August 18 2019. Are you all going to be doing some sort of presentation that will be made public? Hey, Jeff. This is Mark. We're not necessarily going to be making a presentation there that will be made public, But certainly happy to meet with folks that have questions as our Investor Relations line is always open. Okay. And what I guess kind of what color the decision to attend that? It seems Kind of like a large directional change that the company has made in kind of the communications or attendance of these conferences. Just a little bit out of the ordinary, I personally think it's a great thing that you all are attending, but I was kind of curious what prompted that and Kind of what some of the thinking was for that? Hey, Jeff. This is Kev. I'm really excited to attend the conference and meet a bunch of people And talk about the Tile Shop. And we want to increase transparency to our shareholders. As we've relisted on the NASDAQ, I think it's important that We come back and do the Q and As and hit some conferences and just share the excitement that I have about our company and where we're going to be going. So That's pretty much it. Okay. What are some of the other conferences you guys have kind of looked at and we might expect to see you all Doing presentations or doing Q and As at in the future? We'll let you know when we book them. There's a few out there that we're analyzing, but We'll let you know, Jeff. None at this time. Okay. Thanks. Yes. Thank you. Our next question comes from David Cannon of Cannon Wealth Management. Your line is open. Good morning, guys. Congratulations. Appreciate you Thank you for taking my questions. First, I'm traveling. I don't even have Wi Fi. So maybe some of my questions you may They may be in the press release or they may have been covered. But in terms of the deposits, customer deposits, Nancy, could you call out Sequentially, if any, the change from Q4, Q1 to Q2, that would be helpful to me. I don't know off the top of my head exactly what it was for Q4. It was $17,800,000 in Q1 and we're at $16,500,000 in Q2. Okay. So David, I believe we're going to I beg your pardon? It's basically flat. So basically, it was flat. Yes. There's a slight decrease. It is fluctuating and has been over the last three quarters, and it goes back to some of what Kathy had mentioned earlier. It depends on what product is coming in, given the availability for transportation internationally. And as we fulfill some orders, Other products will then go on back order, so it does fluctuate somewhat. I see. Okay. So as the lead times Compress as you can ship product quicker to the customer, that number should work its way down and then ultimately Move over to revenue, correct? Yes. Yes, that's correct. Okay. So in general, Are you seeing that trend where you're able to get product to customers, some of the supply chain issues Are improving? I don't know about resolving, but are they improving? They are improving. Well, they're definitely not resolved yet, But it looks like we're starting to trend in the right direction. Okay. And then in terms of the growth, Cabbie, and I know that you guys spoke about this, but I missed it, unfortunately. How much of the growth is attributable to pro versus retail customer. And then if you could just comment in general on the levers that you see or that were effective in driving business during the quarter for growth? Yes. We anchor back, David to our strategies this year, which was retail execution, enhance our customers' online And really work on our supply chain. All those things impacted our growth. I mean, we're pulling levers in all avenues when it comes to impacting our business. So Yes, our pro business has grown. It eclipsed 60% as in my prepared remarks. And when you can grow your pro business, hopefully, you can grow your retail that comes with it. So I don't want to get into specific numbers, but I think we're doing the right things today and we're going to continue to do these right the things that we've started and That will continue to impact the business in a positive manner, but growth is all we talk about here. So it's a good question. Okay. Well, guys, congratulations. You've done a Very good job. I'm very pleased as a shareholder. I guess I'll just leave you with the comment that obviously having all that cash sitting on the balance sheet returning Almost 0, probably is not a good strategy for the long haul. And I know a previous Caller asked about it or made a comment. I would just like to share my view that And I'm sure you guys are working on this. I have no doubt you guys you have a very good Board and smart management. I'd like to see that cash return to shareholders rather than just sit on the balance sheet. Unless you have a high ROI Activity for it, it seems like that would be wise. So just keep up the great work and hope to chat next quarter. Thanks, David. Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mark Davis for any closing remarks. Thank you 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 November. Thank you for your interest in the Tile Shop and have a great day. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.