Why Tile Shop Hldgs, Inc. Stock Crumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Tile Shop Hldgs  (NASDAQ: TTS  ) were getting hammered today, falling as much 17% in tandem with Lumber Liquidators  (NYSE: LL  ) , which sunk as much as 23% after providing a surprisingly negative preliminary earnings update.

So what: Like Lumber Liquidators, Tile Shop is a flooring retailer with a high valuation, so it makes sense that its shares would sell off if Lumber Liquidators' thesis that traffic worsened as a result of lower existing home sales is correct. Credit Suisse also lowered its estimates for Tile Shop earnings due to the hardwood-flooring seller's ugly quarter, saying that Tile Shop's comps are highly correlated with Lumber Liquidators' and that Tile Shop is also susceptible to weaker macro factors. Lumber Liquidators' comps fell 7.1% in the quarter, a definite warning sign after a jump of 14.9% the year before.

Now what: Tile Shop isn't expected to report earnings til the end of the month, and the sell-off hit other home-improvement retailers, as well, including Home Depot and Lowe's, the industry leaders. As a small niche player with a high valuation, Tile Shop is more volatile than the two megacap stocks, and same-store sales were already sliding in its first quarter after double-digit gains the year before. Lumber Liquidators blamed part of its troubles on operational issues, but I'd expect to see underwhelming comps out of Tile Shop when it reports later this month.

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