- Tile Shop's share price dropped from $20 in mid-2017 to under $2 in November 2019, following the company's delisting decision that was not viewed favorably.
- Tile Shop's share price has more than tripled in the past year, and this was driven by better-than-expected 3Q 2020 results and the entry of activist investors.
- Tile Shop trades at 9.3 times trailing twelve months' EV/EBITDA, assuming that operating leases are excluded from the calculation of debt and enterprise value.
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I have a Bullish rating for specialty retailer Tile Shop Holdings, Inc. (NASDAQ:TTSH).
Tile Shop's share price dropped from $20 in mid-2017 to under $2 in November 2019, following the company's delisting decision that was not viewed favorably. However, Tile Shop's share price has more than tripled in the past year, and this was driven by better-than-expected 3Q 2020 results and the entry of a number of activist investors.
Tile Shop currently trades at 9.3 times trailing twelve months' EV/EBITDA, on the assumption that operating leases are excluded from the calculation of debt and enterprise value. It is not unreasonable that Tile Shop will trade closer to its FY2014-2018 mid-point EV/EBITDA multiple of 15 times when it up-lists to a major stock exchange, and COVID-19 is no longer a drag on the company's business operations. This justifies a Bullish rating for Tile Shop, in my opinion.
Established in 1985, Tile Shop Holdings refers to itself as "a leading specialty retailer of man-made and natural stone tiles, setting and maintenance materials, and related accessories in the United States" on the company's corporate website.
In terms of product category, the company derived 46% and 29% of its revenue from man-made tiles and natural stone tiles, respectively in the first nine months of FY 2020. Setting & maintenance materials, accessories, and delivery service contributed the remaining 14%, 9%, and 2% of Tile Shop's 9M 2020 top line, respectively.
With respect to product supply, Tile Shop sourced 36%, 32%, 23%, and 9% of its products from suppliers based in Europe, North America, Asia, and South America, respectively in FY 2019. Supplier concentration risks are less of a concern, as Tile Shop has around 200 suppliers with the largest supplier only representing 12% of the company's FY 2019 purchases.
Delisting Decision Was Responsible For Share Price Plunge In Late-2019
Tile Shop's share price was trading above $20 as recent as mid-2017, but the company's share price fell below $2 in November 2019 after it planned to delist its shares from the Nasdaq and its shares were traded on the OTC market. Tile Shop's share price subsequently dropped to an all-time low of $0.46 on March 20, 2020, with the COVID-19 outbreak. The company's shares last traded at $6.24 as of March 4, 2021.
Tile Shop's Historical Share Price Chart
Tile Shop explained in October 2019 that it decided to delist and deregister (the company eventually did delist, but did not deregister) its shares because there are "significant expenses and indirect costs associated with being a public company" and that "the reduction in time spent by our management and employees complying with the requirements applicable to SEC reporting companies will enable them to focus more on managing our business".
There have been significant developments following Tile Shop's delisting decision, that not everyone was convinced about. In July 2020, Star Tribune reported that "Tile Shop Holdings reached a tentative settlement with shareholders angered by its plan to delist from the Nasdaq stock market." Earlier, Tile Shop's founder and former CEO Robert Rucker resigned in February 2020.
Share Price Recovery Driven By Better-Than-Expected Results And Activist Investors
Tile Shop's share price has more than tripled from $1.76 as of March 5, 2020, to $6.24 as of March 4, 2021. This was partly attributable to better-than-expected results in 3Q 2020, and partly the result of the entry of activist investors.
The company announced its 3Q 2020 financial results on November 9, 2020, and its financial performance represented a significant turnaround as compared to the weak results in 2Q 2020 which suffered from store closures. This sent a strong signal to the market that Tile Shop was in the process of recovering from the negative effects of the coronavirus pandemic.
The company's revenue grew by +20.3% QoQ from $67.7 million in 2Q 2020 to $81.5 million in 3Q 2020, and it reversed from a -$760,000 net loss to a positive $1.9 million net profit over the same period. Tile Shop noted in its 3Q 2020 10-Q that "traffic and sales started to recover toward the end of the second quarter of 2020", but it also disclosed that it "maintained a reduced hours schedule throughout the third quarter of 2020." This suggests that there is room for further earnings recovery for Tile Shop in the quarters ahead.
Separately, B. Riley Capital Management, LLC filed a 13D in early September 2020, where it revealed that it had acquired more than a 5% equity interest in Tile Shop. Based on data from S&P Capital IQ, B. Riley Capital Management currently owns a 9.1% equity stake in Tile Shop. On B. Riley Capital Management's website, it is highlighted that "the portfolio managers' expertise spans equity, distressed and shareholder activism to identify value dislocations in the small- and mid-cap company universe." (author emphasis)
Cannell Capital, LLC, Savitr Capital LLC, Kanen Wealth Management, LLC, and 272 Capital, L.P. are the institutional investors who have either initiated new positions or added significantly to their existing positions in Tile Shop in the past few months. Cannell Capital, Savitr Capital, and Kanen Wealth Management have all been involved in activist campaigns with other listed companies in the past if one does a search on the Internet.
Specifically, 272 Capital has sent two letters to Tile Shop's board of directors on October 27, 2020, and February 26, 2021, respectively. It is clear from the activist investor's letters that "up-listing to a major stock exchange" is a key re-rating catalyst for Tile Shop, and I couldn't agree more.
Tile Shop is valued by the market at 9.3 times trailing twelve months' EV/EBITDA based on its share price of $6.24 as of March 4, 2021, assuming that operating leases are excluded from the calculation of debt and enterprise value.
Prior to the de-listing, Tile Shop used to trade in the trailing twelve months' EV/EBITDA range of 10-20 times between FY 2014 and FY 2018, which represents a mid-point EV/EBITDA multiple of approximately 15 times.
The key risk factors for Tile Shop are the company maintaining reduced operating hours for most of its stores for a prolonged period of time assuming that COVID-19 fails to be brought under control, and a longer-than-expected time taken for the company to up-list to a major stock exchange.
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This article was written by
The Value Pendulum is an Asian equity market specialist with over a decade of experience on both the buy and sell sides.
He is the author of the investing group Asia Value & Moat Stocks, providing ideas for value investors seeking investment opportunities listed in Asia, with a particular focus on the Hong Kong market. He hunts for deep value balance sheet bargains and wide moat stocks and provides a range of watch lists with monthly updates within his investing group.
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