Tile Shop Holdings: Near-Term Catalysts To Drive Shares Back To The Double Digits

Summary

• Tile Shop had a strong 2020, improving EBITDA over 2019 despite COVID impacts.
• The housing sector and the NAHB Remodeling Market Index show increased strength even after a strong finish in 2020.
• Shares have been steady while absorbing significant selling from former CEO and founder Robert Rucker.
• Tile Shop paid down $63 million in debt last year from operating cash flow and enters 2021 debt free.
• Relisting on the NASDAQ and resuming the dividend and share repurchases are catalysts that could return shares to double digits.

Photo by hikesterson/iStock via Getty Images

Tile Shop Holdings, Inc. (NASDAQ:TTSH) is a specialty tile retailer with 142 stores throughout the country. I won't go into too much detail on the recent, dramatic history of the company (you can read a great summary here and from other SA contributors) but a combination of de-listing of its shares (and associated forced selling), weak growth, a botched ERP rollout, and then finally COVID drove the stock from near $20 down into the low single digits.

Since then, Tile Shop has streamlined its operations and is now set to benefit from the US housing boom. They enter 2021 debt free, having used their operating cash flow to pay off all $63 million of their outstanding debt last year. They enter 2021 as a key beneficiary of the hottest housing market in over a decade, while the shares are still 60% below levels seen in 2017.

Data by YCharts

Industry

Tile Shop is a large, pure play specialty retailer of man-made and natural stone tiles and one of the largest publicly traded flooring companies. The biggest competitor in the flooring space, Floor & Decor (FND), generates 43% of their revenue from tile. Lumber Liquidators (LL) sells a small amount of tile (they do not break out an exact number; it's lumped together with laminate, vinyl, and engineered vinyl plank.) While Tile Shop does indirectly compete with Home Depot (HD) and Lowe's (LOW), it serves a higher end, specialty tile market, not catered to by the big box retailers.

In truth, I don't consider Lumber Liquidators a competitor, but included it for comparison. Floor and Decor is a formidable competitor, but they also operate towards the lower end of the market. Tile Shop, in my view, has a unique niche that should do well in the current market.

TileShop - Brandywine, Delaware Location. Author's pictures.

Financials and Operating Performance

Tile Shop performed well in 2016 and 2017, posting adjusted EBITDA margins in the high teens while growing store count, before taking a hit from a weaker housing market in 2018, a botched ERP rollout in 2019, and finally the COVID crisis last year.

But even with the COVID crisis, despite posting a -5.6% same stores sales comp, they were still able to generate $65 million in cash (partly from an inventory drawdown) and $40 million in adjusted EBITDA. Considering the circumstances, this was an impressive rebound from 2019.

Source : SEC Filings

I think returning to 2017 levels of EBITDA is very likely and there may be significant upside to that. Remember that EBITDA increased $5 million to $40 million in 2020, despite several headwinds that should all hopefully resolve in early/mid 2021

• Comparable Per Store Sales dropping 5.6%, most of which occurred in Q2 because of COVID related store closures.
• Gross margin slipping 130 basis points (69.4% down to 68.1%) primarily driven by "delivery mix" and "higher levels of inventory write-downs", according to the Q4 Conference Call. (To me, this sounds like Corporate Speak for "We were panicked for a while like everyone else and were willing to price aggressively to move inventory and generate cash.")
• Adverse sales impact from supplier delays in Q3/Q4 from certain international tile suppliers.

On top of the COVID related impacts not being present in 2021, the NAHB Remodeling Market Index is extremely strong, and I believe it will stay that way for a long time. New Homes Sales also continues to be strong.

Source: NAHB Remodeling Market Index

Future conditions are especially bullish and took a big step up even after a strong rebound in 2020.

Source: NAHB Remodeling Market Index

My personal view is that with the extreme cost of new housing, driven by both high demand and high raw materials prices (lumber, copper, etc.) could drive more home buyers towards "fixer upper" properties which would benefit retailers like Tile Shop.

Shares steady despite former CEO selling out

Tile Shop shares have been risen about 10% since early March, which is impressive because founder and former CEO Robert Rucker has been liquidating his stake in the company.

Rucker did not leave the company on a good note. He clashed with new owners and directors, and his colorful February 2020 resignation letter claimed that a then-current director "doesn't have the sense to run The Tile Shop, he could not run a gas station."

Via Jeff Moore on Twitter, Rucker's selling has comprised nearly 40% of the dollar volume over the last few months.

Source: Jeff Moore on Twitter

He has since continued selling, dumping another 120,000 shares May 3rd and 4th.

The good news is, he's liquidated the majority of his stake at this point, with around 2.3 million shares remaining. Perhaps the company can purchase his remaining shares directly.

Conclusion

Given the current hot housing environment and the progress made over the past year, I believe Tile Shop returning to $60 million in EBITDA this year is probable. With the high margin/high fixed cost nature of their business, there could be significant upside to this number.

At the current market cap of $360 million, $60 million in EBITDA would put TTSH at an EV/EBITDA of ~6 and a Price/Sales of ~1. Considering that interest expense is zero (they paid off all debt last year) I see this as a cheap valuation - even more so when industry leader FND trades at an eye popping EV/EBITDA of nearly 40 and a Price/Sales over 5.

I'm not implying TTSH deserves a FND valuation; FND has executed far better than TTSH and has grown same store sales significantly. But the enormous difference is valuations is noteworthy. After a terrible 2019, everything seems to be aligning for Tile Shop to continue higher into the double digits

• Continued sales momentum from Q4 and returning to same store sales growth, fueled by a hot housing and remodeling market.
• Rejoining the NASDAQ that was announced earlier this year.
• Possible resumption of the dividend and share repurchases that were suspended in late 2019 to focus on debt reduction, which is now complete.

Some of this optimism is priced in already with TTSH up 50% from early January, but I believe there is significant upside left with several catalysts on the horizon to move shares higher.

Analyst’s Disclosure: I am/we are long TTSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.