With the housing market finally staging a recovery, consumers are spending more of their cash on home improvements. We've seen proof in the market recently, with Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) both reporting stronger-than-expected quarterly earnings. However, I have my eye on a lesser-known stock that's quickly climbing the home-improvement ranks.
Comparable sales at Home Depot increased at a double-digit rate for the first time in more than a decade. Lowe's also posted impressive results recently, as the company's second-quarter profit climbed 26%. Both companies raised their full-year outlook.
In addition, Home Depot and Lowe's reward shareholders with reliable dividend payouts and yields of 2.10% and 1.63%, respectively. And both of these home-improvement stocks have outperformed the S&P 500 index over the past year.
But while both these stocks are reliable, Tile Shop Holdings (NASDAQ: TTS ) looks even more enticing. Shares of Tile Shop have gained more than 134% since they began trading on the Nasdaq last August. That's an impressive feat for a specialty tile retailer.
With help from the ongoing housing recovery, as well as new Tile Shop store openings, I suspect the stock's momentum will continue. As of June 30, the company operated 77 stores in 25 U.S. states. Over the next three years, it plans to add locations in Canada and operate 100 retail stores throughout the United States.
Still, the company isn't only counting on new store openings to drive future growth. For its latest quarter, Tile Shop posted double-digit comparable sales growth. Sales at existing stores increased 14.3%, or $6.6 million, in the period. That's a key metric for retail stocks because it measures the performance of stores open at least a year and signals, in this case, to investors that Tile Shop is healthy from an operational standpoint. The next question, then, is where the company's robust demand is coming from.
You may be surprised to learn that tile is one of the hottest home-decor trends today. That trend, together with a turnaround in the housing market, creates an ideal opportunity for shares of Tile Shop. From accent walls to headboards, consumers are discovering new ways to use tile. Moreover, increased demand for the stuff should only work to Tile Shop's benefit, particularly as the company aims to become the first nationwide ceramic and stone tile retailer.
Of course, like any worthwhile investment, Tile Shop is not without risk. Tile is in vogue today. However, interior design tastes tend to change over time. "First came textured wallpaper and fabrics for walls, and now tiles are becoming popular to add color and interest," reports The Wall Street Journal. That could be problematic for Tile Shop if the style falls out of favor. Even so, this trend is just starting to take off, and the uptick in housing is still in the early stages. It also helps that Tile Shop is doing more than a few things right.
For starters, the company's tile experts are on the ground in 17 countries worldwide, where they directly source the tile found in its stores, helping keep costs down. A wide selection of tiles and a range of price points let Tile Shop appeal to a broader swath of customers. That should help the niche retailer grab a meaningful share of the growing $3.3 billion tile market.
And by offering free in-store do-it-yourself classes, the company is taking advantage of today's prevalent DIY culture. Frugal consumers are increasingly willing to get their hands dirty if they can save money on renovations and installation. Free classes and top-notch customer service help the company generate repeat business.
Fool for thought
During the first quarter of this year, the ceramic-tile market grew 8.4%, according to the Tile Council of North America. Tile Shop has emerged as a trusted leader in this growing market. I believe shares of Tile Shop Holdings will continue their impressive run in the quarters to come as the company opens new stores and expands its distribution centers nationwide.
The big-box stores that compete in the tile and flooring market may offer more stability than this specialty retailer. However, if Tile Shop accomplishes its goal of becoming a nationwide seller of ceramic and stone tile, it could be one of the next big growth stocks.
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