Specialty retailer Tile Shop Hldgs, Inc. (NASDAQ:TTSH) reported financial and operating results on October 18, once again delivering steady growth that's starting to become the norm since CEO Chris Homeister took over at the beginning of 2015. The company reported increased comparable sales, strong revenue growth, and a double-digit increase in profits, as a number of key initiatives continue to pay off for the company. 

Here's a closer look at Tile Shop's third-quarter results.

The numbers

MetricQ3 2016Q3 2015Change
Revenue $78.6 $72.4 8.5%
Net Income $4.6 $3.8 21.1%
Gross Margin % 70.2% 70% +20 BPS
Earnings Per Share $0.09 $0.07 28.6%
Comparable-Store Sales 5.7% 9.7% N/A

Revenue and net income in millions. Source: Tile Shop.

What happened in the quarter

Here's a closer look at several keys behind Tile Shop's strong quarter:

  • Sales, general, and administrative expenses increased 7.7%, a slower rate than revenue growth. 
  • Free cash flows through nine months of $31 million. 
  • Total long-term debt of $24.1 million, down 60% from last year and $3.8 million since the second quarter.
  • As a result, interest expense was down 28% versus one year ago. 
  • Average store employee turnover continues to decline, and average tenure continues to increase. 
  • Increased resources at store level, including the creation of two new management positions -- market manager and senior assistant store manager -- in the past two years. Management credits this as one of the keys behind improved turnover and sales results. 
  • Sales to professional customers continues to grow faster than overall sales. 

What management said

CEO Chris Homeister, on growing sales to professional customers:

Sales growth with pro customers again strongly outpaced overall growth, leading to another meaningful increase in Pro mix during the third quarter. Consistent with overall results, the strength with professionals was broad based, even in mature markets that already have a very significant mix of pro business.

Homeister also talked about the importance of investing in store associates to support the company's growth prospects and long-term results:

As we have previously discussed, as part of our efforts to create an improved career path for our retail associates, we launched a senior assistant store manager position in 2016. During the third quarter, we promoted more than 10 candidates to this role. As we continue to increase organic growth in the fourth quarter of 2016 and into 2017 is an important -- it is important that we establish a deeper batch of store leaders, and the development of the senior assistant managers is one of our primary strategies for achieving this goal.

CFO Kirk Geadelmann spoke about revised guidance, including higher earnings and store opening expectations, and a tighter expectation for sales, with a slight increase in the bottom end, and a lowering of the top end of the range for the full year:

From a top-line perspective, our full-year sales expectation has shifted from $322 million to $329 million to $324 million to $327 million. The reduction at the top end of the range is related to the pacing and number of new store openings in 2016. The cadence of new stores this year has been more heavily weighted toward the end of the year than expected, and a couple of openings originally thought possible for 2016 will likely not occur until Q1 of 2017...

...From a bottom line perspective, we now expect non-GAAP earnings per share of $0.45 to $0.47 versus previous guidance of $0.41 to $0.45, and we now expect adjusted EBITDA of $68 million to $70 million versus previous guidance of $66 million to $68 million. Our expectation for new store openings was updated from 10 to 12 openings to approximately 10 openings.

Looking ahead

Since Homeister took over as CEO to start 2015, Tile Shop has steadily delivered sales and earnings growth, while also improving employee retention and building a bench of future store managers. The company has slowed its pace of store openings, instead using its strong cash flows to pay down debt while still growing the store count at a more moderate pace in a relatively strong economy and housing market. 

It may not generate the strong double-digit sales growth of prior years, but this approach is lowering the company's expenses, and that could pay off big down the road, positioning Tile Shop to ride out the inevitable cyclical of the housing market and the greater economy.

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