TILE SHOP HOLDINGS, INC. The following discussion and analysis of
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. In some cases, you can identify these statements by words
such as, but not limited to, "anticipate," "believe," "can," "continue,"
"could," "depend," "estimate," "expect," "intend," "may," "might," "plan,"
"predict," "project," "seek," "should," "target," "will," "will likely result,"
"would," and similar expressions or variations, although some forward-looking
statements are expressed differently. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements.
The forward-looking statements in this Quarterly Report on Form 10-Q are based
on current expectations and assumptions that are subject to risks and
uncertainties, many of which are difficult to predict and are outside of our
control, that may cause our actual results, performance, or achievements to
differ materially from any expected future results, performance, or achievements
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, our anticipated new store
openings, remodeling plans, and growth opportunities; our business strengths,
marketing strategies, competitive advantages and role in our industry and
markets; an overall decline in the health of the economy, the tile industry,
consumer confidence and spending, and the housing market, including as a result
of rising inflation or interest rates, instability in the global banking system,
the possibility of an economic recession, or the COVID-19 pandemic; our
expectations regarding the potential impacts on our business of the COVID-19
pandemic, including its effect on general economic conditions and credit
markets, the supply chain and product availability, labor, and customer traffic
to our stores; the impact of ongoing supply chain disruptions and inflationary
cost pressures, including increased materials, labor, energy, and transportation
costs and decreased discretionary consumer spending; our ability to successfully
implement and realize the anticipated benefits of our strategic plan; our
ability to successfully anticipate consumer trends; any statements with respect
to dividends or stock repurchases and timing, methods, and payment of same; the
effectiveness of our marketing strategy; potential fluctuations in our
comparable store sales; our expectations regarding our and our customers'
financing arrangements and our ability to obtain additional capital, including
potential difficulties of obtaining financing due to market conditions resulting
from the COVID-19 pandemic, geopolitical conditions, including any failure by
the
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and those factors set forth in the section captioned "Risk Factors" in our
Annual Report on Form 10-K for the year ended
There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
We intend to use our website, investors.tileshop.com, as a means of disclosing
material non-public information and for complying with our disclosure
obligations under Regulation FD of the
Overview and Recent Trends
We are a specialty retailer of natural stone and man-made tiles, setting and
maintenance materials, and related accessories in
We purchase our tile products and accessories directly from suppliers and
manufacture our own setting and maintenance materials, such as thinset, grout,
and sealers. We believe that our long-term supplier relationships, together with
our design, manufacturing and distribution capabilities, enable us to offer a
broad assortment of high-quality products to our customers, who are primarily
homeowners and professionals, at competitive prices. We have invested
significant resources to develop our proprietary brands and product sources, and
we believe that we are a leading retailer of natural stone and man-made tiles,
accessories, and related materials in
Our business continues to be impacted by a number of macro-economic factors including rising interest rates, and slowing existing home turnover. We believe this is contributing to a slowdown in demand for home improvement products. While the macro challenges persisted during the first quarter of 2023, we were able to generate revenues that were in line with levels reported in the first quarter of 2022. Comparable store sales increased by 0.1% due to an increase in average ticket that was partially offset by a decrease in traffic.
We also continued to see an increase in the average cost of the inventory we sold during the first quarter of 2023 due to inflationary cost pressures. We were encouraged to see the rate of gross margin decline start to taper from a 200 basis point decrease in gross margin between the third and fourth quarter of 2022 to a 30 basis point decline in gross margin between the fourth quarter of 2022 and the first quarter of 2023. We have observed a decrease in international freight rates in recent months. Further, we are actively working to resource portions of our assortment to suppliers who can provide high quality products at lower price points.
Selling, general and administrative expenses decreased by
During the first quarter of 2023, we generated
Key Components of our Consolidated Statements of Operations
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do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.
Comparable 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 comparable store sales growth calculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation. 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 our results to those of other businesses. Company management believes the comparable store sales growth (decline) metric provides useful information to both management and investors to evaluate the Company's performance, the effectiveness of its strategy and its competitive position.
Cost of Sales - Cost of sales consists primarily of material costs, freight, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.
Gross Profit - Gross profit is net sales less cost of sales. Gross margin rate is the percentage determined by dividing gross profit by
net sales.
Selling, General, and Administrative Expenses - Selling, general, and administrative expenses consist primarily of compensation costs, occupancy, utilities, maintenance costs, advertising costs, shipping and transportation expenses to move inventory from our distribution centers to our stores, and depreciation and amortization.
Income Taxes - We are subject to income tax in
Results of Operations
Comparison of the three months ended
March 31, 2022
($ in thousands)
2023 % of sales(1) 2022 % of sales(1)
Net sales $ 102,019 100.0 % $ 102,471 100.0 %
Cost of sales 36,481 35.8 % 35,626 34.8 %
Gross profit 65,538 64.2 % 66,845 65.2 %
Selling, general and administrative
expenses 61,413 60.2 % 62,109 60.6 %
Income from operations 4,125 4.0 % 4,736 4.6 %
Interest expense (798) (0.8) % (266) (0.3) %
Income before income taxes 3,327 3.3 % 4,470 4.4 %
Provision for income taxes (815) (0.8) % (957) (0.9) %
Net income $ 2,512 2.5 % $ 3,513 3.4 %
(1) Amounts do not foot due to rounding.
Gross Profit Gross profit for the first quarter of 2023 decreased
Selling, General, and Administrative Expenses Selling, general, and
administrative expenses for the first quarter of 2023 decreased
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Interest Expense Interest expense was
Provision for Income Taxes The provision for income taxes was
Non-GAAP Measures
We calculate Adjusted EBITDA by taking net income calculated in accordance with
accounting principles generally accepted in
We believe that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our 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 our Board of Directors. We believe 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 our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.
Our 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 our 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. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.
The reconciliation of Adjusted EBITDA to net income for the three months ended
($ in thousands)
Three Months Ended
March 31,
2023 % of sales(1) 2022 % of sales
Net income $ 2,512 2.5 % $ 3,513 3.4 %
Interest expense 798 0.8 % 266 0.3 %Provision for income taxes 815 0.8 % 957 0.9 % Depreciation and amortization 5,783 5.7 % 6,439 6.3 % Stock based compensation
405 0.4 % 492 0.5 %
Adjusted EBITDA $ 10,313 10.1 % $ 11,667 11.4 %
(1) Amounts do not foot due to rounding.
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The calculation of pretax return on capital employed is as follows:
($ in thousands)
March 31,
2023 (1) 2022(1)
Income from Operations (trailing twelve months)
Total Assets 346,695 350,217 Less: Accounts payable (28,002) (23,724) Less: Income tax payable (850) (409) Less: Other accrued liabilities (37,696) (42,174) Less: Lease liability (130,385) (138,478) Less: Other long-term liabilities (4,623) (5,086) Capital Employed$ 145,139 $ 140,346 Pretax Return on Capital Employed 15.2 % 13.1 %
(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.
Liquidity and Capital Resources
Our principal liquidity requirements have been for working capital and capital
expenditures. Our principal sources of liquidity are
On
The Credit Agreement is secured by virtually all of our assets, including but
not limited to, inventory, accounts receivable, equipment and general
intangibles. The Credit Agreement contains customary events of default,
conditions to borrowing and restrictive covenants, including restrictions on our
ability to dispose of assets, engage in acquisitions or mergers, make
distributions on or repurchases of capital stock, incur additional debt, incur
liens or make investments. The Credit Agreement also includes financial and
other covenants, including covenants to maintain a Fixed Charge Coverage Ratio
(as defined in the Credit Agreement) of no less than 1.20 to 1.00 and a Rent
Adjusted Leverage Ratio (as defined in the Credit Agreement) of no greater than
3.50 to 1.00. We were in compliance with the covenants as of
Borrowings outstanding consisted of
We believe that our cash flow from operations, together with our existing cash and cash equivalents and borrowings available under our Credit Agreement, will be sufficient to fund our operations and anticipated capital expenditures over at least the next twelve months and our long-term liquidity requirements.
Capital Expenditures
Capital expenditures were
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Cash flows
The following table summarizes our cash flow data for the three months endedMarch 31, 2023 and 2022. (in thousands) Three Months EndedMarch 31, 2023 2022
Net cash provided by operating activities
Operating activities
Net cash provided by operating activities during the three months ended
Investing activities
Net cash used in investing activities totaled
Financing activities
Net cash used in financing activities was
Cash and cash equivalents totaled
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