Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why I'm Buying More Tile Shop

By Jim Royal - Mar 5, 2014 at 4:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This small-cap growth stock looks delicious.

It's been a roller-coaster ride since my Special Situations portfolio first bought Tile Shop Holdings ( TTSH 3.15% ) in late 2012 following its entry into the public markets via a special purpose acquisition company.

When it first came to market, Tile Shop was an orphan stock -- the special situation -- and now, its growth prospects are just too hard to ignore. With the stock down following the attack of several short-sellers and some legitimate concerns about the structure and ethics of the company's China segment, I'm adding to my position. I expect to hold Tile Shop for years. It will look expensive, but this is the type of consumer company that has great prospects.

China syndrome
Following allegations that the company was in business with a Chinese company owned by the CEO's brother-in-law and had not publicly disclosed the relationship, Tile Shop undertook an investigation and auditing through outside third parties. The investigation found that, while this related-party relationship did exist, there was no evidence that financial results have been misstated. Tile Shop terminated its relationship with the Chinese company in December, and the brother-in-law's employment was terminated in January.

The policies and structure that the company is putting in place to limit malfeasance in the future are as important. To this end, the company is establishing a new export trading company operated by its own employees in order to control all vendor invoices, relationships, and payments, in addition to rearranging other oversight responsibilities.

I spoke with an ethics and compliance professional about Tile Shop's investigation and changes, and she was cautiously optimistic about the company's solutions. She thought the press release hit the right points of weakness in the organizational structure, but believed that many of the company's prescriptions were too vague for an outsider to fully determine how successfully they would be implemented. In other words, rather than give very specific changes to oversight responsibilities, the company more often provides the effects of those changes. As this professional cautioned, however, this lack of specificity could be simply a result of the company explaining what investors want to know most -- that the problems are being addressed. These types of governance issues bear watching for the future.

The year ahead
The year 2014 looks to be promising for Tile Shop. It continues on its huge growth trajectory, projecting 20 new stores on its base of just 90 stores currently -- unit growth of 22%. There's a long runway for growth here, as the company expands across the U.S.

For 2014, management expects same-store sales of 5% to 7%, below last year's blistering 12.4% comps. Even at this projected lower level, that is still very healthy, and we're looking at housing turning into a tailwind rather than a headwind, as the economy normalizes and grows.

Foolish bottom line
As I stated in my last buy recommendation in November, literally days before the short-sellers' reports, "At $15 or $16, I would add significantly to this position, despite the fact that it would be my fourth purchase of the stock." Well, the stock is around that price now, and the air is clearer.

In the next few days, my Special Situations portfolio will buy $2,000 of Tile Shop stock. The outlook for the company looks as strong as ever, and this could be an excellent multiyear buy-and-hold stock as it builds out its North American operations.

Interested in Tile Shop or have another stock to share? Check out my discussion board or follow me on Twitter: @TMFRoyal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tile Shop Holdings, Inc. Stock Quote
Tile Shop Holdings, Inc.
TTSH
$7.52 (3.15%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.