"All things tile" retailer Tile Shop Holdings (NASDAQ:TTS) reported financial results for the fourth quarter and full year 2014 on Feb. 17, and in short, it was another underwhelming result. The highlights:
- Quarterly sales of $63.3 million,up 9.5% from the year-ago quarter, but $1.4 million short of analyst expectations.
- Comparable store sales were flat, with all growth from new store openings.
- Adjusted earnings per share fell 25% in the quarter and more than 40% for the full year.
- Debt expense and operating costs increased in the year.
While the results where underwhelming, they weren't exactly terrible, as the company continues to operate in a weak demand environment. Let's take a closer look at some key takeaways from the earnings release.
Market remains very challenging, based on one important metric
Many long-term Tile Shop investors are probably just happy to see the company put some of the scandalous events of the past couple of years in the rearview mirror. New CEO Chris Homeister stated the company is:
[A]ctively executing numerous initiatives focused on returning the Company to higher levels of growth and profitability. Although much work remains ahead, we look forward to delivering comparable store sales growth, strong growth in earnings per share.
It's also worth remembering that 2014's comparable sales result -- an unexpected 0.4% decline in sales at locations open at least one year -- follows 2013's 12.4% comps growth. That's a tough act to follow in any industry, much less one that is largely affected by such cyclical trends as home sales:
Existing-home sales are an important source of new business for the Tile Shop, and, as you can see in the table above, they really fell off beginning late in 2013 and never fully rebounded to 2013's peak. For the full year, existing-home sales in 2014 were down 3%, according to the National Association of Realtors (NAR). This came on the heels of a 2013 when existing-home sales reached the highest levels since before the recession. The NAR also reported that sales in the second half of 2014 were up 8% versus the first half, with the last three months of the year reporting better results than the same period in 2013.
Only time will tell if this national trend provides a lift for Tile Shop in coming months.
Operating and debt costs rising, but look reasonable
In the quarter, sales, general, and administrative (SG&A) expense increased $3.4 million, or about 9%. Management says the majority of this increase is related to store openings, and considering the store count increased 20% to 107 stores in the quarter, this makes sense.
However, debt expense also increased $560,000 in 2014, even though total long-term debt actually decreased more than $3 million from the year before. This is tied to the way Tile Shop uses its revolving credit facility to provide liquidity for operation of the business, and not necessarily a good or a bad thing. However, it will remain very important for the new CEO to practice a disciplined approach to managing capital and funding expansion going forward.
It looks like management is already taking its foot off of the accelerator, at least for now. After opening almost 20 new stores in 2014, the company is only planning for eight to 10 new locations in 2015. The forecast for sales growth in 2015 is similarly conservative, falling between 7% and 13% growth from 2014 sales, based on the company's guidance of $275 million to $290 million, with the majority of that growth coming from new stores.
In short, it looks like management isn't counting on a big bounce-back year in 2015, but instead a steady march forward.
Keeping the long view
Tile Shop investors should continue to keep the long-term view in mind, from two perspectives. First, it's become quite clear that home sales -- especially existing homes -- are an important source of business for Tile Shop, and as long as home sales remain below historical levels, the company's sales could continue to underwhelm. However, if management can continue to expand in a way that doesn't add significant debt, the opportunity to grow remains very solid. After all, there isn't another national retailer in its business, besides the "big box" home improvement retailers, but even they only account for a small percentage of U.S. tile sales.
Second, investors need to keep an eye on new CEO Chris Homeister. For the most part, Tile Shop doesn't appear to need a major shift in direction, but a steady hand that practices a conservative approach to growing and expanding the business. Furthermore, retired CEO and founder Bob Rucker will remain active on the board, and only time will tell if his presence is beneficial, or a distraction for Homeister.
The bottom line? It's going to continue to take time for these things to play out, and investors should remain patient.