Description

Overview

The Tile Shop (TTSH) is a cheap way to play the strength in both home building and home remodeling because the company deregistered its shares a year ago and lost its shareholder base. If TTSH was a registered security the valuation would be extremely different, which highlights the opportunity.

·        Enterprise value of $145 MM and trailing 2019 adjusted EBITDA of $34.8MM. TTSH is trading at 4.4x EBITDA during a “do it yourself” and home remodeling bonanza.

·        Long term debt December 2019 was $63MM and as of June 2020 it has been reduced to $22MM; the former dividend of $0.15 in 2019 is now focused on debt repayment.

·        Insiders own ~31% of the shares outstanding and have been “opportunistic” buyers during the deregistration

TTSH was founded in 1985 and is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials and related accessories in the United States. TTS primarily sells their products directly to homeowners and professionals.

·        Approximately 6,000 products from around the world

·        Natural stone products: marble, travertine, granite, quartz, sandstone, slate and onyx tiles

·        Man-made products: ceramic, porcelain, glass, cement, wood look and metal tiles

·        Majority of TTS’s products are sold under their proprietary Rush River and Fired Earth brand names; purchase their tile products, accessories and tools directly from a global network of suppliers

·        TTS manufactures their own setting and maintenance materials: such as thinset, grout and sealer under their “Superior” brand name

·        In 2019 TTSH operated 142 stores in 31 states and the District of Columbia with an approximate size of 20,000 square feet

·        In 2019, TTSH reported net sales and loss from operations of $340.4MM and ($1.4MM)

o   2018: net sales$357.3MM and income from operations $18.1MM

o   2017: net sales $344.6MM and income from operations $25.8MM

Event

On October 22, 2019 before the market opened TTSH announced that it would voluntarily delist from the NASDAQ and deregister from the SEC’s reporting requirements suspend its quarterly dividend and TTSH’s share repurchase program.  The prior day, October 21, 2019, TTSH closed at $3.35 and upon the unexpected announcement the next day it closed at $1.13 on 11.3MM shares of volume. Subsequent to this news, Peter Jacullo, a TTSH board member of 8 years, purchased 2.3MM shares and Peter Kamin purchased 4.2MM shares on the open market from shareholders. Insiders now own a very significant amount of the shares outstanding. The delisting has created an opportunistic event for buyers that are able to purchase and own unregistered shares.

The rationale for “going dark” was due to TTSH incurring “significant expenses and indirect costs associated with being a public company.” In addition, delisting would allow management to focus more on managing the business and strengthening store operations with a “focus on long-term growth without undue distraction by short-term financial results and stock price movement.”

The “going dark” decision was pivotal for the company and shareholders; however it now presents an opportunity with TTSH uniquely aligned with current and new shareholders. Eventually, TTSH will be correctly valued by the market or via a private equity transaction.

TTSH believes “our long term-vendor relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources and believe that we are a leading retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States.”

 ·        2019 revenue of $340.4MM and loss from operations ($1.4MM)

Competitive Strengths

Broad Product Assortment at Attractive Prices: offer ~6,000 natural stone and man-made tile products, setting and maintenance materials, accessories and tools; able to maintain competitive prices by purchasing tile and accessories directly from producers and manufacturing their own Superior brand setting an maintenance materials, such as thinset, grout and sealer.

Customer Service and Satisfaction: highly trained sales personnel are knowledgeable about the technical and design aspects of TTSH’s products; provide one-on-one installation training as required to meet customer needs.

Inspiring Customer Experience: stores are spacious, well-lit, and organized by product type to simplify the customers’ shopping experience

Global Sourcing Capabilities: TTSH has long-standing relationships with suppliers throughout the world and work with them to design products exclusively for TTSH; these direct relationships differentiate them from competitors

Proprietary Branding: TTSH sells a majority of their products under proprietary brand names, which is differentiating from competitors; offer products across a range of price points, quality levels which allow TTSH to target discrete market segments and to appeal to diverse groups of customers

o   Proprietary Brands: Superior Adhesives & Chemicals, Superior Tools & Supplies, Rush River and Fired Earth

Centralized Distribution System: TTSH services their store locations from five distribution centers located in Michigan, Oklahoma, New Jersey, Virginia and Wisconsin to cost effective service existing stores

Strategic Plan

Over the last two years TTSH has made a number of different investments to position the Company for long-term growth; focused on internal execution and generating profitable ROI on these investments

Focused Retail Execution: implemented a number of enhancements to the ERP system and now have reporting that provides visibility to key business trends giving store, regional and corporate management teams the tools needed to pinpoint inefficiencies and take corrective action.

Growing Professional Sales: TTSH has a seasoned team of pro-market managers in place with the experience to cultivate relationships with professional customers; TTSH’s loyalty program continues to gain access to gain traction with professional customers; adding several new products for professional customers in 2020 to help augment existing pro product offerings.

Disciplined Expense Management: over the last six months, TTSH has identified and implemented a number of initiatives to reduce the level of brand advertising=, IT, consulting, staffing and public company costs; TTSH is committed to these initiatives and will explore other expense savings opportunities in pursuit of a return to profitability

 Sales Model

TTSH principally sells products directly to homeowners and professionals.

·        Homeowners: due to the average cost and relative infrequency of a tile purchase, these customers conduct extensive research using multiple channels before making a purchase decision.  TTSH’s strategy is to provide comprehensive and convenient educational tools on their website and in stores for customers to learn about the products and the tile installation process

·        Store format: TTSH’s stores are designed to emphasize products in a visually appealing format; average store is ~20,000 square feet, with a majority of the square footage devoted to the show room and several thousand square feet is used for warehouse space.

o   Unlike many TTSH competitors, they devote a substantial portion of store space to showrooms, including ~6,000 products and up to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, and other distinct spaces that showcase products; many stores are also equipped with a training center designed to teach customers how to properly install tile.

·        Staffing: a staffing model for a typical store consists of a manager, an assistant manager, sales associates and a warehouse leader; store managers are responsible for store operations and for overseeing the customers shopping experience.

o   TTSH offers financing to customers through a branded credit card provided by a third-party consumer finance company

Products

Natural stone: marble, travertine, granite, quartz, sandstone, slate and onyx

Man-made: ceramic, porcelain, glass, cement, wood look and metal tiles

Accessories: trim pieces, mosaics, pencils, listellos,

Selling and maintenance materials: thinset, grout, sealers and accessories; including installation tools, shower and bath shelves, drains and similar products

Suppliers

TTSH has long-standing relationships with suppliers throughout the world and work with them to design and manufacture exclusive products for TTSH. The direct relationship with suppliers differentiates TTSH from competitors.

·        TTSH purchases tile products from ~approximately 200 different suppliers; top ten suppliers accounted for 49% of their tile purchases in 2019; largest supplier accounted for ~12% of total purchases in 2019

·        In 2018 TTSH made the decision to diversify their source of supply and shift certain products manufactured in China to other parts of the world; successfully completed this work in 2019

Distribution and Order Fulfillment

TTSH takes possession of products in the country of origin and arrange for transportation to a distribution center. TTSH manufactures many of their setting and maintenance materials in Michigan, Oklahoma, Virginia and Wisconsin.

·        Customer orders are fulfilled by shipping products to the stores, where customers can either pick up their orders or arrange for home delivery.

·        TTSH believes the existing distribution centers will continue to play an integral role in their growth strategy and expect to establish one or more additional distribution centers to support geographic expansion of the store base and support store growth plans.

·        TTSH entered into a credit facility; as of December 2019, borrowed $63MM on the revolving line of credit, leaving $35.7MM available for future borrowings

·        TTSH directors and executive officers, together with their affiliates hold ~31% of the shares outstanding

Catalyst

Revenue Recovery due to homebuilding and home remodeling boom