TTS - Tile Shop Holdings, Inc.

[porcupine]

Tile Shop Holdings is delisting and recently plunged from $3.35 down to where it is currently trading at $1.52. On top of the surprise delisting, the company also discontinued its dividend and buyback program (which was 66% complete).

 

The company has been facing some difficulties as same store sales have been declining for several quarters. Foot traffic has been a problem. They recently switched their ERP system, which led to to difficulties with their POS system. After talking to an employee today, I learned that the system would go down frequently earlier this year and they would have to write out invoices then charge the customers later when the system was back up and running. Management believes that this caused Pro customers (their pro program gives discounts to pro customers) to temporarily stop coming into the store. Additionally, they attributed same store sale declines to weather in Q1 of 2019. There is also the China concern. They have been shifting the sourcing away from China for the past two years. Less than 50% of their sourcing comes from China today. They currently have 142 stores and their goal is to have around 400 in ten years. 

 

They operate in a highly fragmented industry, with local and national competitors. Their main point of differentiation is the breadth of their offerings (they believe that nobody comes close to how many different products they offer).

 

Two board members, Peter Kamin and Peter Jacullo, have purchased 4.3mm and 2.3mm shares (respectively) in the open market since the announcement on the 22nd. I think these purchases warrant further investigation into TTS.

 

Still doing research on this, but it seems like forced selling from institutions and those investors concerned with liquidity has driven the price down to levels where there is simply too much pessimism priced in.

 

They have had some bad press recently. Wynnefield Capital is suing to stop them from delisting, stating that the board broke their fiduciary duty by purposefully plunging the share price so Rucker (the founder) can regain control of the company through Kamin and Jacullo. There were also some related party issues that occurred back in 2013.

 

Looks like an interesting situation.

[Gregmal]

Well there is also the fact that this was introduced as a SPAC and is basically a tale of everything one needs to know in terms of why to stay away.

 

Over the past decade, they've gone from earning about $1 per share to 1/10 of that while nearly quadrupling G&A and increasing total liabilities almost 10x despite being in a blowout housing market and having the corporate tax rate significantly slashed

 

Shares outstanding have nearly doubled, and theres been a huge inventory built.

 

There is a reason this has been a favorite of short sellers more or less since its de-SPAC-ing.

 

Its only productive use is as a piggybank for the chosen ones. I mean even the POS story...that doesnt/no way in hell should happen with a company of this supposed footprint. You dont even hear of that kind of stuff at K-mart. So obviously, there is more going on then just "problems with the system".

 

So personally, I wouldn't really want to hang around solely on the hopes of a buyout.

[Spekulatius]

I don’t understand how they can generate 70% gross margins and then only generate subpar returns. The 70% gross margin is about twice what I would expect in such a business. Weird.

[Foreign Tuffett]

I don’t understand how they can generate 70% gross margins and then only generate subpar returns. The 70% gross margin is about twice what I would expect in such a business. Weird.

 

I think their holding the line on gross margin is why SSS are declining. I'm sure they have some great looking tile, but I suspect that their competitors do too. Floor & Decor does something like ~40% gross margin.

 

[BG2008]

Well there is also the fact that this was introduced as a SPAC and is basically a tale of everything one needs to know in terms of why to stay away.

 

Over the past decade, they've gone from earning about $1 per share to 1/10 of that while nearly quadrupling G&A and increasing total liabilities almost 10x despite being in a blowout housing market and having the corporate tax rate significantly slashed

 

Shares outstanding have nearly doubled, and theres been a huge inventory built.

 

There is a reason this has been a favorite of short sellers more or less since its de-SPAC-ing.

 

Its only productive use is as a piggybank for the chosen ones. I mean even the POS story...that doesnt/no way in hell should happen with a company of this supposed footprint. You dont even hear of that kind of stuff at K-mart. So obviously, there is more going on then just "problems with the system".

 

So personally, I wouldn't really want to hang around solely on the hopes of a buyout.

 

I second this.  This has the dual negative of it being a retail business and a SPAC.  I have never made money in retail. Remember Crumbs Bake Shop?

[writser]

When this was written up as a short in 2013 it had an EV of ~$1500m, operated 71 stores and insiders were selling hand over fist. Terrible. I understand the 'retail SPAC - stay the hell away' reflex. In 2013 I'd have agreed for sure. In 2018 too, probably. However, shares are down an additional 75% YTD and as of today TTS has an EV of ~$140m. The company operates 140 stores and insiders (the same insiders who were dumping shares in 2013) are buying hand over fist. There's a new CEO, they initiated a dividend, were buying back shares, insiders now own ~40% of shares outstanding and Peter Kamin has a decent track record of 'fixing' broken companies while not shafting minority holders. At some point, despite your feelings, you have to start looking at the valuation instead of discarding a name outright and I think we're getting close or closer to that point.

 

That said, I'm not sure I like it too much at the current valuation either. As FT said, not sure if the strategy of maintaining high-end, high-price tile shops works and whether 70% gross margins are sustainable (in fact I'd say they are not). Same store sales were increasing 2014-2018 but are now declining. High operating leverage means it is hard to forecast what will happen. You are basically betting on a turnaround / take-over. Not my favorite kind of situation. And even worse, such a situation is hard for me to put a price tag on. $140m seems cheapish but not obviously super-cheap. Still, Peter Kamin has performed similar tricks before and I wouldn't necessarily bet against him.

[Deepdive]

Very impressed with Peter Kamin's track record at Calloway.  Now Calloway was really a retail operation with free rent because they own the real estate.  Those have a tendency to suck value investors in.  But, it does form a good foundation to turn around a retail operation.  I don't recall TTS having any owned real estate.  At the same time, nurseries in a growth area is likely a better structural play.  When it comes to retail concepts, it needs to really resonate.  It needs to offer something unique.  Undifferentiated retail is where good value dollars go to die. 

[Foreign Tuffett]

Now trading as TTSH

 

https://www.otcmarkets.com/stock/TTSH/overview

 

https://www.globenewswire.com/news-release/2019/11/11/1944600/0/en/Tile-Shop-Holdings-Provides-Update-Regarding-Delisting-and-Deregistration.html

[Foreign Tuffett]

Rucker just quit the board, is angry, and wants everyone to know about it.

 

https://www.sec.gov/Archives/edgar/data/1552800/000110465920022859/0001104659-20-022859-index.htm

 

While I believe there is plenty to criticize the Rucker for, what he is saying is consistent with other publicly available info. I know there has been accusations that the company's new-ish CEO isn't qualified, so the allegation that Livingston is really making all the important decisions is at least plausible. 

 

https://www.msn.com/en-us/sports/nfl/shareholder-sues-to-stop-tile-shop-delisting-that-is-set-for-friday/ar-BBWtgIu

 

Livingston also doesn't seem to have any background in retail, so Rucker may also be right about that he too isn't very qualified to be calling the shots here.

 

https://investors.tileshop.com/board-member/philip-livingston

[Sunrider]

Rucker just quit the board, is angry, and wants everyone to know about it.

 

https://www.sec.gov/Archives/edgar/data/1552800/000110465920022859/0001104659-20-022859-index.htm

 

While I believe there is plenty to criticize the Rucker for, what he is saying is consistent with other publicly available info. I know there has been accusations that the company's new-ish CEO isn't qualified, so the allegation that Livingston is really making all the important decisions is at least plausible. 

 

https://www.msn.com/en-us/sports/nfl/shareholder-sues-to-stop-tile-shop-delisting-that-is-set-for-friday/ar-BBWtgIu

 

Livingston also doesn't seem to have any background in retail, so Rucker may also be right about that he too isn't very qualified to be calling the shots here.

 

https://investors.tileshop.com/board-member/philip-livingston

 

I thought Kamin was one of the revered capital allocators business turn around guys? Not so?

[porcupine]

For those interested in this situation, the publicly available documents filed by Bernstein Litowitz Berger & Grossmann LLP contain some great info (e.g., board considering special div in 2020, 2020 EBITDA guidance, emails between Jacullo and Kamin) within the exhibits and Plaintiffs' Opening Brief.

 

The Rucker resignation letter doesn't hold a candle to the emails between Jacullo and Kamin.

 

https://www.blbglaw.com/cases/Tile-Shop?viewDocs=1

[ragnarisapirate]

Looks like they are settling this, and the company is paying nothing. Insurance is paying 12mm in damages.

 

Company looks crazy cheap right now and paid of a boat load of debt last quarter. Lots of optionality; and, it is very obvious from the court filings that the company will be sold at some point.

 

 

[Foreign Tuffett]

Looks like they are settling this, and the company is paying nothing. Insurance is paying 12mm in damages.

 

Company looks crazy cheap right now and paid of a boat load of debt last quarter. Lots of optionality; and, it is very obvious from the court filings that the company will be sold at some point.

 

Looking at Y/Y #s, it appears that the debt reduction is from liquidating inventory.

 

At 3/31/19 they had 140 stores, $50 million in debt, and $110.8 million in inventory

 

At 3/31/20 they had 142 stores, $37.5 million in debt, and $86.3 million in inventory

[ragnarisapirate]

Looks like they are settling this, and the company is paying nothing. Insurance is paying 12mm in damages.

 

Company looks crazy cheap right now and paid of a boat load of debt last quarter. Lots of optionality; and, it is very obvious from the court filings that the company will be sold at some point.

 

Looking at Y/Y #s, it appears that the debt reduction is from liquidating inventory.

 

At 3/31/19 they had 140 stores, $50 million in debt, and $110.8 million in inventory

 

At 3/31/20 they had 142 stores, $37.5 million in debt, and $86.3 million in inventory

 

If you look at year over year numbers, that would appear to be the case, but the q over q numbers indicate a different story. Especially, because the inventory wasn’t as needed due to covid. Additionally, there was more debt that they paid off, that the y over y numbers don’t reflect.

 

Interestingly, they just filed an 8k where they restored their executives salaries, to pre covid levels, so, I am guessing that store traffic is back. The store here in town seems very busy. Also, there are some new board members.

 

I am very excited to see the new q numbers. I am guessing that Kamin is working his magic.

[mwtorock]

 

I dont know about magic :), but i have checked a few northeast stores and business is apparently better than before. People say that existing house sales got a boost from people moving out of new york so could be a short term tailwind.

[ragnarisapirate]

 

I dont know about magic :), but i have checked a few northeast stores and business is apparently better than before. People say that existing house sales got a boost from people moving out of new york so could be a short term tailwind.

This is good, and google trends seems to indicate that traffic is back.

[/img]

[lemsinge]

How are folks thinking about the CapEx on this one? Historically, it seems to be a pretty hefty portion of operating cash flow, and the original pre-covid guidance for this year was $10-$13mm with one expected store opening (CapEx much less than usual). Take ~$350mm in revenue for 2019 against 142 stores and that gets ~$2.5mm in revenue/store (Some are likely doing better than others). Revenue to operating cash flow conversion has fluctuated from 5% - 20% conversion based upon working capital changes, but even with the upper range on that, it seems like the ROI's on new stores is not that good in a normal environment?

 

Based upon q1, $4mm in maintenance CapEx seems conservative, and this looks very cheap when only factoring in maintenance CapEx. However, the company has also discussed how it sees itself as a 400 store chain. Is this still the case? Am I missing anything here?

[ragnarisapirate]

How are folks thinking about the CapEx on this one? Historically, it seems to be a pretty hefty portion of operating cash flow, and the original pre-covid guidance for this year was $10-$13mm with one expected store opening (CapEx much less than usual). Take ~$350mm in revenue for 2019 against 142 stores and that gets ~$2.5mm in revenue/store (Some are likely doing better than others). Revenue to operating cash flow conversion has fluctuated from 5% - 20% conversion based upon working capital changes, but even with the upper range on that, it seems like the ROI's on new stores is not that good in a normal environment?

 

Based upon q1, $4mm in maintenance CapEx seems conservative, and this looks very cheap when only factoring in maintenance CapEx. However, the company has also discussed how it sees itself as a 400 store chain. Is this still the case? Am I missing anything here?

 

For the time being, it seems like expansion is over. They are paying down debt. And with Kamin in control, capital allocation will make sense- much like it does at Calloway’s Nursery (CLWY). Additionally, in the depositions that recently occurred from the going deregistration that happened, the stated goal is to sell the company. So, we know there is a likely catalyst.

[gfp]

Saw this one move big this morning but can't find the news - anybody know what caused -27% move?

[bci23]

Looks like they are settling this, and the company is paying nothing. Insurance is paying 12mm in damages.

 

Company looks crazy cheap right now and paid of a boat load of debt last quarter. Lots of optionality; and, it is very obvious from the court filings that the company will be sold at some point.

 

Looking at Y/Y #s, it appears that the debt reduction is from liquidating inventory.

 

At 3/31/19 they had 140 stores, $50 million in debt, and $110.8 million in inventory

 

At 3/31/20 they had 142 stores, $37.5 million in debt, and $86.3 million in inventory

 

If you look at year over year numbers, that would appear to be the case, but the q over q numbers indicate a different story. Especially, because the inventory wasn’t as needed due to covid. Additionally, there was more debt that they paid off, that the y over y numbers don’t reflect.

 

Interestingly, they just filed an 8k where they restored their executives salaries, to pre covid levels, so, I am guessing that store traffic is back. The store here in town seems very busy. Also, there are some new board members.

 

I am very excited to see the new q numbers. I am guessing that Kamin is working his magic.

 

Kamin obviously has a great track record but in a company this size i would caution that one guy cannot single-handedly just "work his magic" and immediately fix all the problems. The macro and competitive forces here in the short/medium term are much stronger than any one board members will power. A true enduring turnaround will not be linear and will take 2-3 years minimum imo.

[ragnarisapirate]

New 13d filing from B Riley. This is not bad. Takes an already not huge float, and basically reduces it.

 

https://www.sec.gov/Archives/edgar/data/1464790/000121390020026043/ea126709-13dbriley_tileshop.htm

[porcupine]

Company has formed a special committee to determine if they should uplist or not, as suggested by 10%+ holders B. Riley and 272 Capital. Given that Kamin and Jacullo are not on the special committee, I think there is a pretty high probability of this occurring (would be hypocritical of them to be on the committee that uplists the company when they were the ones who delisted the company in the first place). Congrats to all who are still in this. Funny that the initial thesis revolved around buying from institutions who were forced to sell, and that those same investors may now have the potential to sell back to those same institutions (small cap index funds) who will be forced to buy at much higher prices.

[ragnarisapirate]

I think that this uplisting is a done deal. If they were delisting to save time, energy, and money, they will totally do this, just to avoid a proxy fight.

 

This seems like it will do some wonderful things for the stock price, and really help it to get to full value- sooner, rather than later.

 

Cool thing too, is that I would venture to guess that the business now has $0 debt.

 

Looking forward to the K.