What happened

Shares of retail tile-sales and installation specialist Tile Shop Holdings (NASDAQ:TTS) were down 15% at 1:09 p.m. EST on Tuesday following the release of the company's fourth-quarter and full-year 2018 results this morning. The company reported fourth-quarter sales of $83.96 million, up 7% from last year, and a net loss of $1.1 million, or $0.02 per share. 

Both of these measures fell short of Wall Street analysts' expectations for sales of $84.1 million and a break-even bottom line. 

Tile work in an entry way.

Image source: Tile Shop.

So what

While today's sellers clearly didn't like Tile Shop's results, a more balanced look indicates it's not all bad. To start, comparable-store sales were up a very strong 5% in the quarter. Mid-single-digit comps growth is a strong result for any retailer; it's also Tile Shop's second consecutive quarter of comps growth and more than double the growth rate from the third quarter

And there's evidence that the company's strategy to move upmarket with its products is paying off, as gross margin remained well above year-over-year levels, at 70.3%. Furthermore, adjusted EBITDA more than doubled to $8.7 million in the fourth quarter. 

Now what

While Mr. Market clearly wasn't pleased (and it usually isn't when there's a miss on analyst estimates), Tile Shop's results probably weren't as bad as today's heavy selling made them seem, as noted above. But there are a few items investors should continue to watch closely.

Tile Shop finished the year with a $25 million increase in inventory, part of its strategy to move to higher-end products. A lot of this new inventory was paid for with debt; total long-term debt increased $35 million over the course of the year to $53 million, which will cost the company more money to service. Over the course of the year, the company expects to reduce inventory by $10 million to $15 million as it better utilizes new supply-chain management tools it invested in during 2018. 

And there's good news on the growth front. Recently named CEO Cabell Lolmaugh said: "We ended the year on a strong note with our best comp performance since the third quarter of fiscal 2016. This has given us confidence to resume our store growth in 2019, primarily in the back half of the year." Tile Shop plans to open five to seven new stores in 2019, after having opened only two in 2018. 

As for 2019 sales and profits, we got only a general idea from management, with expectations for gross margin between 69% and 70%, and selling, general, and administrative expenses to increase relative to revenue growth and new-store openings later this year. Over the long term, management continues to expect Tile Shop to generate 20%-plus adjusted EBITDA margins and to attain 20% or greater returns on capital employed. Both of those targets would be about double 2018 levels, so there's a lot to achieve on those fronts. 

On balance, there clearly remains work to do before Tile Shop delivers on the profitability that management says the high-end focus will deliver, but the fourth quarter wasn't nearly as bad as today's 15% drubbing makes it appear.