Tile Shop is spending more on operations in order to better support its stores. Source: Tile Shop.
Tile Shop Holdings (TTSH 0.63%) released its first-quarter financial results today, reporting growth in same-store sales for the first time in what feels like forever. OK -- it hasn't been that long, but after a difficult 2014, which included comps declining by the time the year was over, this at least feels like the start of something good. By 11 a.m., investors had pushed shares up 15%. Let's take a closer look at the earnings report and highlight the things that most bear watching.
Sales are up, but comparisons are to a tough year-ago quarter
The 4.5% increase in comps is definitely good, but let's remember this follows last year's 2.3% decline. Furthermore, the 13.3% sales growth this quarter actually matches the top-line result from a year ago. However, performance in 2015 looks better all around, as last year's quarter included the opening of seven new stores, versus only two this year.
Total sales of $72.9 million came in solidly ahead of Wall Street's average prediction of $70.7 million, actually beating every analyst reported by Yahoo! Finance. While analyst estimates aren't really that reliable of a performance benchmark, outperformance is a positive.
Focus on operational execution
New CEO Chris Homeister has made no bones about his focus on improving Tile Shop's operations. As was discussed in more detail last quarter, the company has struggled to retain store-level managers in the past, and management has taken steps to reverse this trend and better support its stores. Chances are these efforts are going to lead to higher operational expense in the short term, as evidenced by the fact that adjusted EBITDA margin fell from 21.5% last year to 20.1% and the operating margin rate fell 8% to 9.9%.
Net income actually declined from last year. This was partly due to higher income tax provisions as well as slightly higher interest expense, but selling, general, and administrative (SG&A) expense, increased 15%. Ideally, this expense should increase more in relation to store count growth than any other metric. However, as Homeister described on last quarter's earnings call, they are rolling out the market manager position to the whole company in order to better support stores. While this surely doesn't count for the entire SG&A increase, it's undoubtedly part of it.
In the long run, SG&A growth should probably be closer to store count growth than any other metric, but the company has admittedly done a poor job retaining key store-level employees. It's possible we'll see this line item increase at a similar rate for several more quarters, and that's probably OK for now, especially if it means the company can retain its best managers and better train and support its store staff. Those will likely be positives for the bottom line in the long run.
Financial housekeeping
At the end of last quarter, the company carried $92 million in long-term debt. While not an exorbitant amount, it certainly limits the company's flexibility, especially when you consider that the company has consistently ended each quarter with less than $10 million in cash and equivalents:
TTS Total Long Term Debt (Quarterly) data by YCharts.
Simply put, the company relies heavily on its cash flows to do business, and that debt could expose the company if an unexpected event were to occur. It looks like management sees that same risk, paying down $18.4 million in debt in the quarter, good for a 20% reduction.
The company also ended the quarter with $8.9 million in cash, the highest level since early 2013, and reduced its inventory levels by nearly $5 million. While falling inventory levels can be a bad sign, too, this is something that has been an issue with Tile Shop in the past -- and while it could be partly just timing that cash is up and inventory is down, on the surface it seems like a more disciplined approach to capital management.
Looking ahead
While it looks like there are some real positives happening, don't mistake one quarter for a trend. The reality is that it's going to take several more quarters before we really have a solid idea how Homeister's initiatives are working out and if and when these higher SG&A costs are going to normalize.
Most importantly, the housing market -- especially existing-home sales -- remains relatively soft. Sales are up from last year, but only modestly as inventory remains quite constrained, according to National Association of Realtors economist Lawrence Yun. Home sales are likely to be the biggest catalyst to the company's long-term sales growth.
That's out of Tile Shop's control, but the company can at least continue to focus on building a sound and sustainable business. Looks like it took some steps in that direction this quarter, but only time will tell if that's indeed the case.
