Tile Shop Hldgs, Inc. (NASDAQ:TTS) reported first-quarter results on April 18, and delivered another quarter of strong operating results, sales growth, and improved profits. While a generally healthy economy and housing market are helping drive the specialty tile retailer's results, the business strategy and capital allocation under CEO Chris Homeister deserves a lot of the credit as well. 

Installing tile on a floor.

Image source: Getty Images.

A look at the results

MetricQ1 2017Q1 2016 Year-Over-Year Change
Revenue  $92.1 million  $84.7 million  8.8%
Net income   $8.0 million  $6.8 million  18.4%
Earnings per share  $0.15  $0.13  15.4%

Data source: Tile Shop Holdings.

Tile Shop also reported that comparable store sales (that is, sales at stores open more than one year) increased 4.9% in the quarter. This was a sequential improvement from the 3.1% comps growth the company reported in the fourth quarter of 2016. Comps growth generated $4 million of Tile Shop's revenue growth. The rest of the company's increased revenue was generated by new stores opened over the course of the past year. 

Key numbers to know

Tile Shop's strong results have been driven by management's focus on its stores, its balance sheet, and capital allocation. A major focus under Homeister has been store associates, specifically retaining the best employees through a variety of improved benefits (increased 401(k) match and time off), more career advancement opportunities, and better training. Homeister said this has helped significantly when it comes to keeping the company's best store associates:

  • Sales associate turnover was down 25% year over year.
  • Assistant manager turnover was down 40% year over year. 
  • The average tenure of a store manager continued to climb higher. 

Furthermore, management said on the earnings call that this effort has aided the company's expansion, providing a deeper bench of prospective managers, which has led to better results more quickly from new stores. This focus on training and retention has also played a part in the company's strategy to grow sales with professionals, including interior designers and contractors. Management said that pro sales continue to grow at a faster pace than sales to DIY customers. Not only should this help drive recurring sales over time, but sales to pros tend to be bigger-ticket as well. 

The company has also done a solid job managing increased expenses as it builds out its store base. Sales, general, and administrative -- or SG&A -- expense increased $3 million, or 6.8%, a fairly slower rate of expansion than the 8.8% sales growth the company reported. In general terms, this is a good thing since, as a percentage of sales, SG&A expense fell from 56.6% to 55.6%. One contributing factor has been the company's new store format, which is smaller than legacy locations. Not only has it helped reduce store-opening capital costs by 30%, but it has lowered recurring operating expenses as well. The new stores are easier for employees and customers to navigate, and still deliver solid sales and profits. 

On the balance sheet, Tile Shop ended the quarter with $13.6 million in cash, up $7.5 million, and $27.2 million in long-term debt, down $1.2 million. Management said that the goal is to reduce total long-term debt to about $10 million by year-end. Inventory, too, was down about $5 million, but was within the level management was comfortable with. 

Tile Shop also announced a $0.05 per-share regular quarterly dividend, the same amount it paid last quarter (which was the first-ever for the company). It may not be much, yielding slightly less than 1% at recent stock prices, but Homeister's leadership and strong capital allocation has allowed the company to start returning cash to shareholders, while still paying down debt and opening new stores at about 10% base growth per year. 

Looking ahead

Tile Shop's full-year guidance remained unchanged from what management provided at the end of 2016. Expectations are for revenue growth between 8% and 14%, and adjusted earnings between $0.50 and $0.57 per share, an increase of 11% to 27%. The company plans to open 12 to 15 new stores. Management did say on the earnings call that they expect to be at the "high end" of the store openings target, and that they will open more stores in the second quarter than the three opened in Q1. 

The company also added a new executive position, hiring Joyce Maruniak as senior vice president of supply chain, transportation, and manufacturing operations. Homeister said that her addition is an important part of the company's success, because effective management of supply chain and logistics will be key as the company expands its store and distribution center base.  

Put it all together, and Tile Shop is running on all cylinders, effectively executing across all the key areas management has implemented change, while also making big improvements to a balance sheet that was debt-heavy only a couple of years ago. Not only has this helped the company perform admirably in a healthy economy and housing market, but it should also position it to ride out future weakness. 

Jason Hall owns shares of Tile Shop Holdings. The Motley Fool owns shares of and recommends Tile Shop Holdings. The Motley Fool has a disclosure policy.