Tile Shop Q4 2023 Earnings Call Transcript

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February 29, 2024

There are 4 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the 4th Quarter 2023 Tile Shop Holdings, Inc. 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 note that today's conference is being recorded.

Operator

I would now like to pass the call over to Mark Davis, Investor Relations and Chief Accounting Officer. Please go ahead.

Speaker 1

Thank you. Good morning to everyone and welcome to the Tile Shop's 4th quarter earnings call. Joining me today are Tav 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. 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 Cam.

Speaker 2

Thanks, Mark. Good morning, everyone, and thank you for joining us today for an update on our business. During 2023, we're able to execute our strategy, manage expenses and reduce inventory levels, which put us in a position to fully pay off our debt before the end of the year. I'm proud of this accomplishment, which highlights the cash flow generating strength of our business model even in the face of a challenging macro backdrop. It's important to note that macroeconomic headwinds presented significant challenges to our business over the last year.

Speaker 2

During 2023, existing home sales turnover, which we view as a key leading indicator to remodeling activity, continued to decline year over year. While this trend appears to be starting to moderate, it has created challenges across the home improvement industry. In recent months, consumer surveys indicated continued pressure in the levels of intent to complete home improvement projects, which extends to the hard surface flooring category. Given this backdrop, it is critical that we continue to execute our strategy to grow our share of wallet with our core customers. Growing our business with our professional customers remains important to our strategy.

Speaker 2

Professional customers represent a meaningful portion of our sales mix and the referral business provided by professional customers is critical to our success. We invest in relationships and processes to help simplify the shopping experience for our pros. We're happy to host the pro in our stores as they work with their customers to make product selections or by taking the lead in the design process with the pros and client to help maximize the time they can spend on their job sites. The tiered discounts and cash rebates on referral sales are important benefits of our PRO loyalty program that have helped propel sales connected to PROS over 70% of our sales mix. The combination of PRO referral sales have grown at a fast rate than our overall sales in the last several years.

Speaker 2

While this reflects progress with one important customer segment, we believe there's an opportunity to refine our strategy to connect with retail customers who are not working directly with a pro. These customers tend to take on smaller projects such as a back splash for a kitchen or an LVT project in the front entryway. Historically, we had a strong presence in this segment. However, over the past 5 years or so, our assortment moved toward more design centric, on trend and expensive products as we targeted the higher end customer. We believe we have an opportunity to regain share of retail customers seeking a DIY project by introducing more products at price points that are attractive to this customer segment.

Speaker 2

The introduction of LVT assortment about a year ago was one step taken to help cater to this type of customer. We've also introduced new retail financing options over the last year. And finally, we're excited to introduce a number of high quality products in 2024 that will appeal to retail customers seeking value to complete a small project on a budget. We do all this with a continued focus on providing exceptional service to our customers by offering an unparalleled shopping experience where retail customers have the opportunity to work with our knowledgeable sales associates who are well versed in design and installation techniques. The knowledge that our team provides to help a DIY customer differentiates the Tile Shop service offering versus our competition.

Speaker 2

Another initiative we have underway relates to our e commerce platform. We've made a number of subtle changes to our website over the last year that have contributed to strong growth in online order activity. During the Q4, our online orders grew by over 30% when compared to the same period last year. I'm particularly excited about the steps taken by our e commerce, marketing and distribution teams to revamp our sampling process. We've enhanced the presentation of the samples available to our customers, reduced the time it takes to fulfill a sample order and improved our processes to follow-up with customers who place sample orders to ensure we're meeting our commitment to provide exceptional service.

Speaker 2

Sampling activity has picked up since making these changes. Moving to store growth. We continue to believe there are ample opportunities to continue to grow our business by focusing on executing our strategy across our existing 142 store base. At this time, we do not intend to open any new stores during 2024. We intend to continue to evaluate options to reposition our stores as opportunities arise in connection with lease renewals.

Speaker 2

I remain enthusiastic about the future of our business. While we are being challenged by macroeconomic headwinds, our team continues to meet the challenge, execute our strategy and deliver results. I look forward to a continued success in 2024. With that, I'll now hand the call over to Carla.

Speaker 3

Thanks, Cabbie. Good morning, everyone. 4th quarter sales at comparable stores decreased by 3.2%. This represents a +170 basis point improvement from our 3rd quarter comps. Our comparable store sales were impacted by lower levels of store traffic, which was partially offset by an increase in average ticket value.

Speaker 3

For the year, our comparable store sales decreased by 4.1% due to these same reasons. Our gross margin rate during the Q4 was 64.7%, which represented a +20basis point increase compared to the Q4 of 2022. As we have outlined in recent quarters, international freight rates have decreased and we have been able to successfully secure products offered in our assortment at lower price points, which help drive our inventory costs lower in the second half of twenty twenty three. For the full year 2023, our gross margin rates decreased by 120 basis points to 64.4%. The decrease in margin can be attributed to the increase in average costs of inventory throughout 2022 and into the first half of twenty twenty three due to the higher international freight rates and inflationary cost increases passed on to us by our suppliers.

Speaker 3

The increase in average inventory cost peaked in early 2023 as costs decreased in the second half of the year. We believe we are positioned to see the continued margin expansion as we move into 2024. However, recent events such as those in the Panama Canal and the Suez Canal have driven international freight rates higher, particularly on inbound containers from Asia. If this trend continues for an extended period of time, it may impact the gross margin expansion we anticipate we will achieve in 2024. Further, we are pursuing strategies to grow sales of LVT and back shelf products, which carry a lower gross margin profile than our tile assortment.

Speaker 3

If we outperform our goals with respect to LVT and back shelf sales, we may see a contraction of gross margin rates. However, it's an exchange we are comfortable making as this should increase gross profit dollars and improve our leverage on fixed SG and A expenses. 4th quarter SG and A expenses of $53,200,000 were $700,000 lower than our 4th quarter SG and SG and A expenses in 2022. The decrease is due to a $600,000 decrease in variable compensation, a $500,000 decrease in occupancy costs, a $300,000 decrease in shipping and transportation expenses and a $200,000 decrease in consulting expenses. These favorable variances were partially offset by a $600,000 increase expense related to enhancements of our in store and online customer experiences.

Speaker 3

Additionally, benefits expenses increased by $400,000 when compared to the Q4 of 2022. For the year, SG and A expenses decreased by $9,400,000 or 4% from 2022. This was largely driven by a $6,600,000 decrease in variable compensation related to the decrease in sales, a $3,300,000 decrease in shipping and transportation expenses and a $2,600,000 decrease in occupancy costs due to lower levels of depreciation that were partially offset by higher rent expenses. These factors were partially offset by a $1,600,000 increase in IT expenses related to enhancements of our in store and online customer experiences. Additionally, marketing expenses increased by $900,000 in 2023.

Speaker 3

We were pleased with the progress made to work our inventory levels down over the last year, which helped us generate over $60,000,000 of operating cash flow in 2023. We used this cash to fund $15,300,000 of capital expenditures and reduced our debt balance by 45 $400,000 As of the end of the year, we had no outstanding debt and we carried a cash balance of $8,600,000 Looking ahead, I share CAB's optimism on the outlook for our business. With that, Cabbie and I are happy to take any questions.

Operator

Thank All right. I will pass it back to Mr. Mark Davis for any final comments.

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.

Operator

And I want to thank everybody for tuning today. Thank you. You may now disconnect.

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Earnings Conference Call
Tile Shop Q4 2023
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