Why I'm Buying More Tile Shop

It's been a roller-coaster ride since my Special Situations portfolio first bought Tile Shop Holdings (NASDAQ: TTS  ) in late 2012 following its entry into the public markets via a special purpose acquisition company.

When it first came to market, Tile Shop was an orphan stock -- the special situation -- and now, its growth prospects are just too hard to ignore. With the stock down following the attack of several short-sellers and some legitimate concerns about the structure and ethics of the company's China segment, I'm adding to my position. I expect to hold Tile Shop for years. It will look expensive, but this is the type of consumer company that has great prospects.

China syndrome
Following allegations that the company was in business with a Chinese company owned by the CEO's brother-in-law and had not publicly disclosed the relationship, Tile Shop undertook an investigation and auditing through outside third parties. The investigation found that, while this related-party relationship did exist, there was no evidence that financial results have been misstated. Tile Shop terminated its relationship with the Chinese company in December, and the brother-in-law's employment was terminated in January.

The policies and structure that the company is putting in place to limit malfeasance in the future are as important. To this end, the company is establishing a new export trading company operated by its own employees in order to control all vendor invoices, relationships, and payments, in addition to rearranging other oversight responsibilities.

I spoke with an ethics and compliance professional about Tile Shop's investigation and changes, and she was cautiously optimistic about the company's solutions. She thought the press release hit the right points of weakness in the organizational structure, but believed that many of the company's prescriptions were too vague for an outsider to fully determine how successfully they would be implemented. In other words, rather than give very specific changes to oversight responsibilities, the company more often provides the effects of those changes. As this professional cautioned, however, this lack of specificity could be simply a result of the company explaining what investors want to know most -- that the problems are being addressed. These types of governance issues bear watching for the future.

The year ahead
The year 2014 looks to be promising for Tile Shop. It continues on its huge growth trajectory, projecting 20 new stores on its base of just 90 stores currently -- unit growth of 22%. There's a long runway for growth here, as the company expands across the U.S.

For 2014, management expects same-store sales of 5% to 7%, below last year's blistering 12.4% comps. Even at this projected lower level, that is still very healthy, and we're looking at housing turning into a tailwind rather than a headwind, as the economy normalizes and grows.

Foolish bottom line
As I stated in my last buy recommendation in November, literally days before the short-sellers' reports, "At $15 or $16, I would add significantly to this position, despite the fact that it would be my fourth purchase of the stock." Well, the stock is around that price now, and the air is clearer.

In the next few days, my Special Situations portfolio will buy $2,000 of Tile Shop stock. The outlook for the company looks as strong as ever, and this could be an excellent multiyear buy-and-hold stock as it builds out its North American operations.

Stocks to retire wealthy
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Interested in Tile Shop or have another stock to share? Check out my discussion board or follow me on Twitter: @TMFRoyal.


Read/Post Comments (1) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2865382, ~/Articles/ArticleHandler.aspx, 11/26/2014 12:34:34 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement