Tile Shop Holdings Earnings Preview: 3 Things to Look For

Tile Shop Holdings is likely to report declining comps again. It's probably more important to look at the bigger picture.

Jason Hall
Jason Hall
Oct 27, 2014 at 6:11PM
Consumer Goods

Specialty hard-surface retailer Tile Shop Holdings (NASDAQ:TTS) and wood flooring specialist Lumber Liquidators (NYSE:LL) have seen their stocks fall in near-lockstep in 2014:

TTS Chart

TTS data by YCharts.

In many ways, this makes sense. Both companies sell a big-ticket item to homeowners and remodeling contractors, and that business has stalled big time in 2014. However, Tile Shop's business -- though it hasn't seen its same-store sales fall at the rate Lumber Liquidators has -- has struggled as of late. With that in mind, here are three key things I'll give the most attention when Tile Shop reports quarterly earnings tomorrow morning. 

1. What's the trend on comps? 
While Lumber Liquidators has seen its same-store sales, or comps, stay below year-ago levels throughout 2014, Tile Shop only saw comps fall in the first quarter before they rebounded by a slight 0.3% in the last quarter. Lumber Liquidators reported that its comps -- though still negative -- did improve from the second quarter to the third, though there's no guarantee that will prove the same for Tile Shop. We also just learned that Trex (NYSE:TREX) -- the maker of the No. 1 brand in outdoor composite decking -- saw low single-digit growth in its industry this past quarter. 

In all, these data points suggest Tile Shop could report better than expected comps tomorrow, indicating demand for remodeling is beginning to turn for the better. While one or two quarters' results should not matter for the long-term investor, getting some indication of what is going on with demand remains valuable. 

2. Store expansion plans 
As of last quarter, Tile Shop operated 100 stores in 30 states.  At the end of the second quarter, the company had opened 12 stores in 2014 and planned to open another eight, bringing the total to 108 at year-end. Of the 20 stores to open in 2014, 14 will be in new markets for the company. 

While the company has not yet given any guidance on store expansion beyond this year (and probably won't until next quarter), COO Chris Homeister said during the second-quarter earnings call that 2015 store openings would probably not be more than 2014. If existing home sales -- a key leading indicator of demand for Tile Shop -- rebound strongly, the company's plans could change. Most importantly, though, is seeing the company continue to execute on its expansion plans 

3. Inventory and capital allocation 
This is significantly related to expansion. In the past, Tile Shop's inventory growth has been brought into question. Through the first half of 2014, inventory was more than $8 million less than it was at the beginning of the year, even with sales rising and the company having 12 more stores to stock. At the same time, the company reported that it had expanded its supplier base, which will grow to be even more important as Tile Shop expands over coming years.

Sales, general, and administrative, or SG&A, expenses, increased 30% in the first half of the year, more than double the 14% revenue growth over the same period. On the surface this looks bad, but as CFO Timothy Clayton pointed out recently, you can't really draw a line between revenue and SG&A expense growth right now. As a retail business, much of Tile Shop's SG&A expenses will grow relative to its store growth rate, and the store count increased 29% in the first half of 2014. 

Over time, SG&A should increase more relative to sales growth, but it's going to take time for Tile Shop's store growth percentage rate to moderate before that happens. For now, don't get too caught up on that detail, because it's more a product of the growth rate for a retailer than poor capital management. 

Looking ahead 
While seeing comps stay low or even fall would be disappointing, it's probably not something to get too worked up over if it does happen. I'm cautiously optimistic that we will see small growth again, but that's not what matters the most.

What does matter?

Iterative improvement. Pay attention to the progress on inventory, store openings, and capital allocation. Tile Shop management is building the foundation for a much larger future, and the weak environment of 2014 has been largely out of its control. Keep that in mind when earnings are released. Is management building the business to reap the rewards of the housing market's recovery? That matters the most.