TTSH - Tile Shop: Things Are Getting Better (Rating Upgrade)

2023-09-21 08:15:00 ET

Summary

• Tile Shop's revenue outlook has improved following the opening of its new store in Colorado and the good sales performance of luxury vinyl tiles.
• TTSH's operating margin is expected to improve meaningfully by next year, as its inventory purchasing costs decline with the improvement in the supply chain environment.
• My rating for TTSH stock is changed to a Buy, considering positive developments in recent times.

Elevator Pitch

I have a Buy investment rating awarded to Tile Shop Holdings, Inc. ( TTSH ) stock.

My prior July 13, 2023 write-up was focused on evaluating the key negatives and positives for TTSH. I turn my attention to favorable developments for Tile Shop in the current article.

My rating for TTSH is upgraded from a Hold earlier to a Buy now, based on the premise that the company's future has become brighter in many ways. The performance of Tile Shop's new store in Colorado is decent, and the company's new product, luxury vinyl tiles, is witnessing strong sales growth. There are also expectations of margin improvement for Tile Shop pertaining to lower-cost inventories.

Upward Revision In Consensus Financial Estimates For TTSH

The sell side has turned more bullish on Tile Shop in recent months as seen with the changes made to the company's consensus financial metrics.

In the past three months, the market's consensus full-year fiscal 2023 EBIT estimate for the company was increased by +13% (source: S&P Capital IQ ) from around $15 million to approximately $17 million. Also, the analysts' consensus FY 2023 earnings per share or EPS for Tile Shop was raised by +14% in the recent month to $0.24.

An improvement in analyst sentiment for TTSH might help to push up the company's share price. The current consensus sell side target price of $9.00 for Tile Shop translates into a substantial upside of +67% as compared to the company's last done share price of $5.39 as of September 20, 2023.

New Store Openings

In my earlier mid-July update for TTSH, I highlighted that Tile Shop "doesn't have plans to expand its store network in a big way" which I deem to be a disappointment. However, Tile Shop's management commentary at the company's most recent Q2 2023 earnings briefing suggests that its actual store openings going forward might be a positive surprise for investors.

Towards the end of Q2 2023, Tile Shop had a new store open in Colorado Springs. At its second quarter results call in early August, TTSH shared that the new store in Colorado is "positioned well for traffic" and noted that the company has "high hopes" for the performance of this particular store which has done well "so far." It won't be a stretch to expect Tile Shop to be more aggressive with regards to new store openings, given that the new Colorado Springs store appears to have performed above expectations in the initial month of opening.

Tile Shop's Store Network As Of End-2022

More importantly, TTSH specifically mentioned at its most recent quarterly earnings call that it "continues to look for growth opportunities in 2024 within our existing distribution area." Tile Shop's new store in Colorado is its fifth in this state and the sole store opening for the company in this year thus far. Although TTSH doesn't seem keen on expanding into new states for now, the company appears to have the intention of growing its presence in its existing markets as per the company's management comments.

New Product

According to research published by Mordor Intelligence , worldwide sales of luxury vinyl tiles are projected to grow by +50% from $6 billion last year to $9 billion in 2028. In its report, Mordor Intelligence takes the view that luxury vinyl tiles will stay as the "most popular category of vinyl flooring solutions" for the future because they are "more durable and offers better performance" than other similar products.

Tile Shop has yet to offer specific numbers relating to its new product, luxury vinyl tiles. But it will be fair to think that TTSH's luxury vinyl tile sales are growing at a rapid pace. At the company's Q2 2023 results briefing, Tile Shop revealed that it is witnessing "more and more sales out of that (luxury vinyl tiles) segment of our (product) assortment." With respect to the outlook for future luxury vinyl tile revenue expansion, TTSH stressed that the company doesn't "see it slowing down."

The market currently expects Tile Shop's top line to contract by -1.5% for full-year FY 2023, before returning to positive revenue growth ( +2.8% ) territory in FY 2024. New store openings next year (as detailed in the preceding section) and the acceleration in sales expansion for new product luxury vinyl tiles are going to be the major drivers for the turnaround in TTSH's top line performance.

Margin Recovery

Tile Shop guided at its second quarter investor briefing that it has "confidence" that there will be "an increase" in its "margin" for "the coming quarters." TTSH's guidance is aligned with the current profitability estimates for the company. Analysts see Tile Shop's EBIT margin bottoming at 1.6% in Q4 2023, prior to recovering strongly to 5.0% and 6.3% (source: S&P Capital IQ ) for Q1 2024 and Q2 2024, respectively.

TTSH's operating margin contracted by approximately -130 basis points YoY in the second quarter of this year. The company's profitability in the most recent quarter was negatively affected by expensive inventories that it had stocked up during the period of supply chain disruptions.

But Tile Shop has subsequently managed to purchase its goods at a lower cost as supply chain headwinds eased. As such, TTSH should be able to deliver higher profit margins in the future, as it digests its expensive inventories over time.

Concluding Thoughts

I have a more favorable opinion of Tile Shop now, taking into account recent developments for the company. This has prompted me to turn bullish on TTSH and I have revised my rating for the stock to a Buy.

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