Tile Shop Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Second Quarter 2023 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Davis, Vice President of Investor Relations and Chief Accounting Officer.

Speaker 1

Thank you. Good morning to everyone and welcome to the Tile Shop's 2nd quarter earnings call. Joining me today are Tad Loma, our Chief Executive Officer and Carla Noonan, 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.

Speaker 1

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 non GAAP financial measures, which has also been posted on our company website. With that, let me now turn the call over to Cab.

Speaker 2

Thanks, Mark. Good morning, everyone, and thank you for joining us today for an update on our business and our second quarter results. Over the last several quarters, I've shared how rising interest rates Slowing housing turnover have presented challenges for our industry. In the Q2, these challenges contributed to lower levels of traffic in our stores, which negatively impacted our comparable store sales. While we anticipate that macro headwinds will persist in the near term, We have been implementing measures to allow us to better navigate these headwinds.

Speaker 2

For instance, we're taking steps to improve our reach potential retail customers who are considering a remodeling project as well as providing different options for customers financing. Additionally, we continue to expand our relationships with professional customers. As of the end of the second quarter, nearly 70 percent of our sales mix is either referred by 1 of our pros or sold directly to a professional customer. We believe we still have untapped potential To continue to grow our pro sales, especially given the recent introduction of our expanded line of LVT products. In addition to our pro business, we're also seeing continued traction with our e commerce initiatives.

Speaker 2

We saw sequential growth in e commerce orders from Q1, which was fueled by an investment in digital advertising as well as an improvement in conversion rates stemming from enhancements we have made to the online shopping experience. The improvement in online conversion helped grow e commerce orders by over 30% during the Q2 this year when compared to the same period last year. I'm encouraged by the increase we've seen in e commerce orders and believe we continue to have significant room for growth in this area. Turning our attention to our assortment. We continue to have the industry's best assortment of tile products, now augmented with the recent launch of our expanded LVT lines.

Speaker 2

This has long been a competitive advantage of our company and I expect that to continue. Our store teams continue to bring energy to our customers' buying experience, which helped us make progress against our retail excellence goals. Average ticket prices continue to trend positive this quarter and we were able to maintain strong conversion rates despite the challenging macro conditions. We also closed the quarter with our strongest month of LVT orders since our launch and continue to believe has the potential to grow into a meaningful portion of our sales mix over time. We were pleased to open our new store in Colorado Springs in June, which I mentioned last quarter will be our only store opening of this year.

Speaker 2

This is our 5th store in the Colorado market. We're still on track to relocate 1 additional store in 2023 and continue to look for growth opportunities in 2024 within our existing distribution area. With that, I'll now hand the call over to Carla.

Speaker 3

Thanks, Cabbie. Good morning, everyone. 2nd quarter sales at and partially offset by an increase in average ticket value. Our gross margin rate during the Q2 was 64.2%, which is in line with the gross margin rate we reported last quarter, but 180 basis points lower compared to the same quarter last year. The decrease in gross margin is due to an increase in the cost of our products that was partially offset by price increases implemented over the last year.

Speaker 3

Looking ahead, we believe the company is well positioned to see an improvement in gross margin during the second half of twenty twenty three given the decrease in international freight rates We anticipate increases in LVT sales and continued growth of Backshelf will likely put pressure on our overall gross margin rate over time. However, we expect the incremental sales of these products will result in an increase of gross profit dollars and improve our leverage on fixed SG and A expenses. 2nd quarter SG and A expenses decreased by $5,700,000 when compared to the Q2 of 2022. The decrease was largely attributable to a $3,000,000 decrease in variable compensation at a store level, a $1,100,000 decrease in and a $900,000 decrease in depreciation. These decreases were partially offset by a $500,000 impairment charge that was recorded for underperforming stores.

Speaker 3

During the Q2, we adjusted our reserves for amounts that had been set aside for Annual incentives given our performance relative to the financial targets required to achieve bonuses under our annual incentive plans. Additionally, we reversed share based compensation expense on certain restricted share awards containing performance vesting conditions that had been granted earlier in 2023. These adjustments reduced our SG and A expense from what it otherwise would have been inclusive of incentive based compensation at target levels by approximately $1,800,000 Net income was $5,100,000 during the Q2 of 2023 compared to $6,900,000 in the same period last year and adjusted EBITDA was $13,600,000 compared to $16,800,000 in the same period last year. 2nd quarter earnings per share decreased by 0 point 0 $1 from $0.13 during the Q2 of 2022 to $0.12 during the Q2 of 2023. We continue to have a strong balance sheet.

Speaker 3

Inventory decreased sequentially by $8,600,000 from the 1st quarter to $106,900,000 at the end of the second quarter. We also continue to deliver strong cash flow. Year to date, we have generated $41,400,000 of operating cash flow. This has helped us reduce our Additionally, we have been able to grow our cash reserves by $8,600,000 during the 1st 6 months of the year and ended the 2nd quarter with a cash balance of 14 We continue to expect to use excess cash to pay down our debt in the near term. With that, Cabbie and I are happy to take any questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Mark Smith of Lake Street.

Speaker 4

Hey, good morning guys. First question for me is, and I know it's probably early for this, but any updates you can give us or thoughts around the new store, Okay. How it's doing out of the gate? Anything that you guys have learned with First New Store in a while?

Speaker 2

Yes, absolutely, Mark. This is Cab. I was actually able to visit our new store last week and had a nice pro event and Very happy with that location. We're positioned well for traffic and for our pros and the retail customer. I think we've Tested a few things in other stores and put them into action there in Colorado Springs and we have high hopes and so far so good.

Speaker 2

We're happy.

Speaker 4

Okay. And then you spoke a fair amount about LVT, kind of initial thoughts on how that's going. Is it Hitting expectations, outperforming, any additional insights you can give us on LVT would be great.

Speaker 2

Absolutely, Mark. It's continuing to get awareness and we're continuing to see more and more sales out of that segment of our assortment. I always want more And I always will, but I'm happy with the results thus far through the summer and I don't see it slowing down.

Speaker 4

And then I wanted to ask about inventory. You guys had gone out and bought Pretty heavy kind of ahead of some price increases kind of coming down the pipe here. Walk us through and it's come down here in the last couple of quarters, but walk us through kind of your comfort level with your inventory today And how much maybe you still have of, we'll call it kind of pre bought inventory that you can still sell through it at Pretty attractive margin. Any insights there would be great.

Speaker 2

Yes, absolutely. We've been able to bring down our inventory quite a bit. We're Still over $100,000,000 I think we have opportunity to bring it down even more in the future. As our resource product continues to hit our DCs, that's good. It's Better cost structure with lower freight.

Speaker 2

So we're going to continue to get some of that higher price inventory out of our system. We're starting to see that newer stuff come through And more of that is landing in the coming weeks, months. So I feel we can lower inventory even more, but what we're going to have is the same amount of units, Right. So we're buying at a better price. So even though our inventory number comes down, our units are going to be the same or somewhere around there, But that gives us confidence in our margin that we're going to see hopefully an increase here in the coming quarters.

Speaker 4

Okay. And the last question for me is really just what you're seeing in consumer behavior. I know you guys called out in Press release, macroeconomic environment is still being pretty tough here. What is it that you think it takes to Maybe spur or drive some more consumer spending on your products?

Speaker 2

Yes, absolutely. We trend well with Housing turnover. And it's getting better or as we say less worse and it's starting to trend in the right direction. There's still remodeling activity. Our pros are still busy, but it's not what it was last year.

Speaker 2

And I think with rising interest rates, that's going to put a wet blanket on that. But as we get through Q3 and Q4, I feel that the pressure is going to be on. We hear about these larger homebuilders opening up more and more houses We're seeing more permits go through for those, but that has impacted our retail traffic to our stores. We're hoping to see a little bit more in the back half of twenty twenty three with better priced inventory and things will go well, but it's still a challenge, no doubt. Okay,

Speaker 4

perfect. Thank you. You bet.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mark Davis for closing remarks.

Speaker 1

Thank you for listening to our earnings conference call. We anticipate filing our Form 10 ks later today. Thank you for your interest in the Tile Shop and have a great day.

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Earnings Conference Call
Tile Shop Q2 2023
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