So far this year, shares of Tile Shop Holdings(NASDAQ:TTS) are up a stellar 62%. Of course, that is partially because of how very beaten down the stock was, having hit its all-time low in mid-January after a really difficult 2014 saw its sales growth stagnate and profits plummet.
But since those depths, the company, under new CEO Chris Homeister, has taken a number of steps to strengthen the business and jump-start growth. The housing market has also begun showing signs of life. Let's take a closer look at some key things you should look for when Tile Shop reports earnings next week.
Setting the stage
An important metric for the success of Tile Shop and other specialty home-improvement retailers is existing home sales. The company gets a measurable amount of its business from recent homebuyers, who are more likely to be remodeling bathrooms or kitchens. Existing home sales growth has also been a decent reflection of the overall economy, since more people buying homes tends to correlate with a strong job market.
With that said, it is not completely clear just how soon homebuyers turn into shoppers at Tile Shop, but home sales have begun rebounding over the past several months after a pretty bad 2014.
This is likely a trailing indicator, as it will take a few months for homebuyers to turn into Tile Shop customers, but if the trend holds, this could be a real positive for sales. Factor in a relatively strong U.S. economy, with job and income numbers that have gotten better, and there could be more good news ahead for Tile Shop.
Business execution steps will increase costs but seem to be paying off
Homeister is new to the big chair, but he is quickly putting his stamp on the company and clearly sees a need to strengthen in-store execution. He said the following on the earnings call:
Our stores led by market managers outperformed the balance of chains with respect to comparable store sales growth, sales performance to plan, and sales associate turnover reductions. Additionally, they continued to develop strong store manager candidates that will serve us well as we open new stores in the coming quarters. We are happy with the leadership role that the market managers are playing and the results they are driving. With this success, we are planning to have the entire chain covered by market managers by the end of 2015.
Adding an extra layer of management will add costs, and we did see an increase in operating expenses last quarter in excess of sales or the store count growth. But it sounds like the right move if it helps the company retain its best people and develop new talent. Retail is hard, and steps to reduce turnover and retain good people are important.
Homeister went on to describe that the company has already seen meaningful improvements in turnover in the past couple of quarters, and he said that average store management tenure is at its highest level since 2012. In an ideal world, the incremental cost of this program will pay off in higher customer service and better sales. Time will tell.
These programs may increase costs, but free cash flow is bouncing back -- probably at least partly because of the slowed rate of expansion:
Tile Shop is also taking steps to increase engagement with home improvement professionals, including more direct marketing, in-store events, and improving the pro section of its website. The company says that this is a growth opportunity in new and more mature markets and that it is already paying off. Sales to pros grew at a faster rate than overall and increased as a percentage of total sales by 100 basis points. That may seem relatively small, but pro sales are still a relatively small part of the company's mix.
The company reaffirmed full-year guidance last quarter but does not give quarterly projections. It has plans to open between eight and 10 new stores in 2015 (about half the rate of openings last year). With three new locations open so far this year, the total is at 110, up from 93 through March of 2014.
With the smaller expansion plan this year, growth of the pro business, and better store-level employee retention, management looks to be focused on improved execution and financial performance, with a more measured approach to growth. The company paid off $18 million in debt last quarter, and while Homeister did not outright say they would continue to do so, this is evidence that he wants to reduce the leverage and give the company greater financial flexibility going forward.
Analyst consensus estimates are for $73.54 million in sales and $0.09 earnings per share. Tile Shop is expecting same-store sales to be slightly up to flat for the full year. It should be able to hit the analyst sales target just based on the new store count, with upside based on the improvement in the housing market.
With that said, there are a number of variables at play that make it too difficult to pinpoint the final numbers. Besides, it is probably more important to focus on the company's operations and capital execution. In other words, how well is management investing in the business, and are those efforts leading to better service and sales?
As long as the housing market and economy continue to improve, sales should eventually grow, but what happens on the bottom line will depend on improving the customer experience. If efforts to keep its best people and draw in more pros succeed, it could pay off handsomely.
Jason Hall owns shares of and options for 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.