When specialty home improvement retailer Tile Shop Holdings (NASDAQ:TTS) last reported earnings in February, its results were mostly in line with expectations, meaning another underwhelming quarter in a disappointing year.
However, the company's stock has climbed 25% since then and is actually up a whopping 80% since bottoming out in late January:
With earnings for the first quarter just around the corner, is it reasonable to expect the company will turn in financial results that "earn" the big gains? Let's take a closer look at where things stand and what to expect.
Emerging from a tough year
The best one-word description of 2014 is "disappointing." Tile Shop headed into last year with relatively high hopes, but the year started off with a terrible first quarter, at least partly the result of severe winter weather in the Northeast, a major market for the company.
Things never really got better, either, as the housing market -- especially existing home sales -- remained well below historical sales rates. The company finished the year with sales growth of 12%, but that was entirely driven by a 22% increase in the store count for the year, as comps actually declined almost a half percent.
As things stand today, the stock is still well down from its 2013 peak:
Founder Bob Rucker also retired from his role as CEO near the end of last year, with COO Chris Homeister taking over in January. While Rucker's move was a bit of a surprise, it could turn out to be a good thing if it facilitates the company moving beyond some of the scandal that happened under his tenure in recent years.
Will new leadership's strategies pay off?
Chris Homeister was at Best Buy before coming to Tile Shop, and while the long struggling electronics retailer isn't exactly a model company, it may be unfair to sell Homeister short because of that association. The bottom line is, Tile Shop appears to have muddled through a lot of its growing pains, moving from a regional player to a national chain. Having a leader with a background in retail operations at a company with more than a thousand locations is very likely a good thing.
Tile Shop has implemented several new strategies to help it grow, including a focus on commercial installers. This may be a hard market to fully break, but if the company can establish beneficial relationships with kitchen and bath contractors, there's serious upside there. At the end of the day, professionals install more tile than homeowners, and if the company can prove itself valuable to contractors, it becomes essentially an outside sales force.
This can be a big boost. Homeister said that in mature markets with established relationships with local contractors, as much as half of sales come from them, versus around 30% for the average store. That's a huge untapped market.
The company also added a layer of management support for its stores, called market managers. While added bureaucracy is as often bad as good, the reality is, Tile Shop has run lean for years, and it may be past time to better support its stores. Homeister summed up the early success of this initiative thusly:
With the market manager structure in place, we saw meaningful sales associate and store manager turnover declines from Q3 levels, with Q4 representing the lowest store level turnover rates of the year. Average store manager tenure had a meaningful increase in the fourth quarter, following numerous quarters of sequential declines. As we have discussed in the past, manager tenure is the key in successfully deploying our in-store strategies.
The bottom line is, Tile Shop's small store concept relies heavily on the store manager, and clearly there's been a lack of support for this critical role. If the early results hold true, adding the market manager will lead to happier and more focused store managers. And that will likely improve customer service and sales.
What to expect?
Tile Shop issues guidance for the full year, not individual quarters, and its revenue target for all of 2015 is between 7% and 13% sales growth, with the bulk of that growth coming from the new 8-10 stores the company will open this year.
On the positive side, existing home sales were up the first few months of the year, if only slightly. However, National Association of Realtors chief economist Lawrence Yun says inventory of existing homes for sale is very tight, and this is likely to put a strain on home sales.
Consequently, this is causing home prices to rise, which could further affect sales at Tile Shop if new homeowners are forced to delay remodeling projects. But frankly, it's hard to speculate how things will play out, and what the impact will be for Tile Shop this year.
While we do know that the housing cycle has a clear impact on its sales, it's one of those things that's just hard to predict when it will turn -- though eventually it should improve. In the meantime, we should pay close attention to the things management can control, and how those efforts are impacting results. While it's probably still too early to really see the full impact, added focus on commercial customers, and better support for stores and store managers are two major initiatives that should bear fruit. Keep an eye on these things, and what management has to say about them.
Tile Shop reports earnings on April 21. Tune in here for more analysis then.
Jason Hall owns shares of Tile Shop Holdings. The Motley Fool recommends Tile Shop Holdings. The Motley Fool owns shares of Tile Shop Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.