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Tile Shop(TTSH) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's analysis for Q1 2023 Item 1. Financial Statements This section presents the unaudited consolidated financial statements and detailed notes for the period ended March 31, 2023 Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time Key Balance Sheet Metrics | Metric | March 31, 2023 (unaudited) | December 31, 2022 (audited) | Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | | Total Assets | $334,703 | $345,822 | (3.2%) | | Total Liabilities | $223,439 | $237,053 | (5.7%) | | Total Stockholders' Equity | $111,264 | $108,769 | 2.3% | | Cash and cash equivalents | $8,624 | $5,948 | 45.0% | | Inventories | $115,480 | $120,952 | (4.5%) | | Long-term debt | $25,000 | $45,400 | (44.9%)| Consolidated Statements of Operations This section details the company's revenues, expenses, and net income over a specific period Key Operations Metrics | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net sales | $102,019 | $102,471 | (0.4%) | | Gross profit | $65,538 | $66,845 | (2.0%) | | Income from operations | $4,125 | $4,736 | (13.0%)| | Interest expense | $(798) | $(266) | 200.0% | | Net income | $2,512 | $3,513 | (28.5%)| | Basic EPS | $0.06 | $0.07 | (14.3%)| | Diluted EPS | $0.06 | $0.07 | (14.3%)| Consolidated Statements of Comprehensive Income This section presents net income and other comprehensive income items, reflecting total non-owner changes in equity Key Comprehensive Income Metrics | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net income | $2,512 | $3,513 | (28.5%)| | Currency translation adjustment | $5 | $3 | 66.7% | | Comprehensive income | $2,517 | $3,516 | (28.4%)| Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity accounts, including net income and stock-based compensation impacts Key Stockholders' Equity Changes | Metric | Balance at March 31, 2023 | Balance at December 31, 2022 | Change | | :-------------------------- | :------------------------ | :------------------------ | :----- | | Total Stockholders' Equity | $111,264 | $108,769 | 2.3% | | Accumulated deficit | $(16,668) | $(19,180) | (13.0%)| | Net income (Q1 2023) | $2,512 | N/A | N/A | - Stockholders' equity increased by $2.5 million, driven by net income and foreign currency translation adjustments, partially offset by tax withholdings related to stock-based compensation18 Consolidated Statements of Cash Flows This section reports the cash generated and used by operating, investing, and financing activities Key Cash Flow Activities | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by operating activities | $25,822 | $7,634 | 238.2% | | Net cash used in investing activities | $(3,367) | $(2,933) | 14.8% | | Net cash used in financing activities | $(20,827) | $(607) | 3330.0%| | Net change in cash, cash equivalents and restricted cash | $1,631 | $4,097 | (60.2%)| - The significant increase in operating cash flow was primarily due to decreased inventory purchases and an income tax refund105 Notes to Consolidated Financial Statements This section details accounting policies and significant financial disclosures supporting the consolidated financial statements - The notes clarify accounting policies and provide disaggregated financial data, including revenue by product category, inventory composition, and details on debt and lease obligations232728 Note 1: Background This note provides background information on the company's business and the basis of financial statement preparation - Tile Shop Holdings, Inc. is a specialty retailer of natural stone and man-made tiles and related materials in the U.S., operating 142 stores across 31 states and the District of Columbia as of March 31, 202325 - The accompanying Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information and Form 10-Q rules26 Note 2: Revenues This note details the company's revenue recognition policies and disaggregated revenue by product category Revenue Share by Product Category | Product Category | Q1 2023 Revenue Share | Q1 2022 Revenue Share | | :------------------------ | :-------------------- | :-------------------- | | Man-made tiles | 52 % | 49 % | | Natural stone tiles | 23 % | 25 % | | Setting and maintenance materials | 15 % | 16 % | | Accessories | 8 % | 8 % | | Delivery service | 2 % | 2 % | - Revenue is recognized when control of goods or services is transferred to customers, which can be at order placement, pickup, or delivery2829 - Customer deposits increased to $14.1 million as of March 31, 2023, from $11.3 million at December 31, 2022, with $8.6 million recognized as revenue during Q1 202331 Note 3: Inventories This note describes the company's inventory valuation methods and composition Inventory Composition | Inventory Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :------------- | :---------------------------- | :------------------------------- | :----- | | Finished goods | $114,002 | $119,517 | (4.6%) | | Raw materials | $1,478 | $1,435 | 3.0% | | Total | $115,480 | $120,952 | (4.5%) | - Inventories are stated at the lower of cost (moving average) or net realizable value, primarily consisting of merchandise held for sale34 - The provision for losses related to shrinkage and other amounts increased from $0.7 million at December 31, 2022, to $0.8 million at March 31, 202334 Note 4: Income Taxes This note explains the provision for income taxes and the effective tax rate for the reporting period Income Tax Provision and Rate | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change | | :---------------------- | :--------------------- | :--------------------- | :----- | | Provision for income taxes | $815 | $957 | (14.8%)| | Effective tax rate | 24.5% | 21.4% | 3.1 pp | - The decrease in the provision for income taxes was due to a decrease in pretax income, while the increase in the effective tax rate was largely due to a decrease in the tax benefit associated with employee equity award vestings35 Note 5: Earnings Per Share This note outlines the calculation of basic and diluted earnings per share Earnings Per Share Details | Metric | Q1 2023 | Q1 2022 | Change | | :-------------------------------- | :------ | :------ | :----- | | Basic EPS | $0.06 | $0.07 | (14.3%)| | Diluted EPS | $0.06 | $0.07 | (14.3%)| | Weighted average shares outstanding - basic | 43,237,856 | 50,713,809 | (14.7%)| - Basic and diluted EPS are calculated by dividing net income by the weighted-average number of common shares outstanding, with diluted EPS considering dilutive potential shares38 Note 6: Other Accrued Liabilities This note details the composition and changes in other accrued liabilities Other Accrued Liabilities Breakdown | Liability Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :------------------------ | :---------------------------- | :------------------------------- | :----- | | Customer deposits | $14,078 | $11,315 | 24.4% | | Sales returns reserve | $5,418 | $4,993 | 8.5% | | Accrued wages and salaries | $7,145 | $6,040 | 18.3% | | Payroll and sales taxes | $3,154 | $2,286 | 37.9% | | Total other accrued liabilities | $37,511 | $31,916 | 17.5% | - The increase in total other accrued liabilities was primarily driven by increases in customer deposits, sales returns reserve, accrued wages and salaries, and payroll and sales taxes39 Note 7: Long-term Debt This note provides information on the company's revolving line of credit and compliance with debt covenants - The company has a $75.0 million revolving line of credit through September 30, 2027, with $25.0 million outstanding and $48.2 million available for borrowing as of March 31, 20234042 - The SOFR-based interest rate on outstanding borrowings was 6.37% on March 31, 202340 - The company was in compliance with all financial and other covenants of the Credit Agreement as of March 31, 202341 Note 8: Leases This note details the company's lease arrangements, including right-of-use assets and lease liabilities Lease Metrics | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change | | :-------------------- | :------------- | :---------------- | :----- | | Right of use asset | $118,038 | $118,501 | (0.4%) | | Total lease liabilities | $130,142 | $131,219 | (0.8%) | Lease Metrics | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net lease cost | $12,528 | $12,206 | 2.6% | | Operating cash flows from operating leases | $9,472 | $9,350 | 1.3% | - The company leases retail stores, distribution space, and office space, with leases generally having initial terms of ten to fifteen years45 Note 9: Fair Value of Financial Instruments This note describes the fair value measurement of financial instruments and related impairment charges - Cash, cash equivalents, and restricted cash are measured at fair value using Level 1 inputs (unadjusted quoted prices in active markets)5357 - A $0.1 million impairment charge was recorded in Q1 2023 for property, plant, and equipment, with fair value measured using Level 3 inputs (projected cash flows)54 Note 10: Equity Incentive Plans This note outlines the company's equity incentive plans and stock-based compensation expenses - The 2021 Omnibus Equity Compensation Plan has a maximum of 3,500,000 shares available for awards55 Stock-Based Compensation | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | | Stock based compensation (restricted stock) | $405 | $492 | | Stock based compensation (stock options) | < $100 | < $100 | - As of March 31, 2023, there were 471,067 outstanding stock options and 1,245,607 outstanding restricted common shares5961 Note 11: New Markets Tax Credit This note explains the company's involvement in a New Markets Tax Credit financing transaction - The company is involved in a 2016 New Markets Tax Credit (NMTC) financing transaction related to a $9.2 million expansion of its facility in Durant, Oklahoma62 - The company expects U.S. Bank to exercise a put option in December 2023, at the end of the seven-year recapture period64 - The balance of the contribution liability for this arrangement was $0.3 million as of March 31, 202367 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations for Q1 2023, focusing on macro impacts, sales, and liquidity - The company's business is impacted by macro-economic factors including rising interest rates and slowing existing home turnover, contributing to a slowdown in demand for home improvement products76 - Despite macro challenges, Q1 2023 revenues were in line with Q1 2022, with comparable store sales increasing by 0.1% due to higher average ticket, partially offset by decreased traffic7686 - The company generated $25.8 million of operating cash flow in Q1 2023, which was used to fund capital expenditures and reduce debt by $20.4 million79 Overview and Recent Trends This section provides an overview of the company's business and recent operational and financial trends - Tile Shop Holdings is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories, operating 142 stores in 31 states and D.C74 - Comparable store sales increased by 0.1% in Q1 2023, driven by an increase in average ticket that was partially offset by a decrease in traffic76 - The rate of gross margin decline tapered from a 200 basis point decrease between Q3 and Q4 2022 to a 30 basis point decline between Q4 2022 and Q1 202377 - Selling, general and administrative expenses decreased by $0.7 million in Q1 2023, primarily due to lower variable selling and transportation expenses78 Key Components of our Consolidated Statements of Operations This section defines key components of the consolidated statements of operations, including net sales and cost of sales - Net sales represent total charges to customers, net of returns, recognized when the customer takes control of merchandise or final delivery occurs, excluding sales taxes80 - Comparable store sales growth is the percentage change in sales for stores operating for at least 13 full months, excluding relocated stores82 - Cost of sales primarily includes material costs, freight, customs and duties fees, storage and delivery of product, and costs associated with manufacturing setting and maintenance materials83 Results of Operations This section presents a detailed comparison of the company's operational results for Q1 2023 versus Q1 2022 Operations Results Summary | Metric | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | Change | | :-------------------------- | :----------------------- | :----------------------- | :----- | | Net sales | $102,019 | $102,471 | (0.4%) | | Gross profit | $65,538 | $66,845 | (2.0%) | | Gross margin rate | 64.2% | 65.2% | (1.0 pp)| | Selling, general and administrative expenses | $61,413 | $62,109 | (1.1%) | | Interest expense | $798 | $266 | 200.0% | | Net income | $2,512 | $3,513 | (28.5%)| - The decrease in gross margin rate was primarily due to inflationary cost pressure, partially offset by an increase in selling prices87 - Interest expense increased significantly due to higher average borrowings outstanding on the line of credit and an increase in interest rates89 Non-GAAP Measures This section defines and presents the company's non-GAAP financial measures, including Adjusted EBITDA and Pretax Return on Capital Employed - Adjusted EBITDA is calculated by adjusting net income for interest expense, income taxes, depreciation and amortization, and stock-based compensation expense91 Adjusted Non-GAAP Metrics | Metric | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | Change | | :-------------------------- | :----------------------- | :----------------------- | :----- | | Adjusted EBITDA | $10,313 | $11,667 | (11.6%)| | Adjusted EBITDA margin | 10.1% | 11.4% | (1.3 pp)| | Pretax Return on Capital Employed (trailing twelve months) | 15.2% | 13.1% | 2.1 pp | - Management uses these non-GAAP measures for trend analyses, incentive compensation, budgeting, planning, and assessing capital allocation effectiveness92 Liquidity and Capital Resources This section discusses the company's sources of liquidity and its ability to fund operations and capital expenditures - Principal liquidity sources include $8.6 million of cash and cash equivalents at March 31, 2023, cash flow from operations, and a $75.0 million revolving line of credit9798 - As of March 31, 2023, $48.2 million was available for borrowing on the revolving line of credit100 - The company believes its cash flow from operations, existing cash, and available borrowings will be sufficient to fund operations and anticipated capital expenditures for at least the next twelve months101 Capital Expenditures This section details the company's capital expenditures and their primary uses during the reporting period Capital Expenditures Summary | Metric | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | Change | | :-------------------------- | :----------------------- | :----------------------- | :----- | | Capital expenditures | $3,367 | $2,933 | 14.8% | - Capital expenditures in Q1 2023 were primarily due to investments in store remodels, merchandising, distribution, and information technology assets102 Cash flows This section analyzes the company's cash flows from operating, investing, and financing activities Cash Flow Summary | Metric | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | Change | | :-------------------------------- | :----------------------- | :----------------------- | :----- | | Net cash provided by operating activities | $25,822 | $7,634 | 238.2% | | Net cash used in investing activities | $(3,367) | $(2,933) | 14.8% | | Net cash used in financing activities | $(20,827) | $(607) | 3330.0%| - The increase in net cash provided by operating activities was primarily attributable to a decrease in inventory purchases and the collection of an income tax refund in 2023105 - The significant increase in cash outflows from financing activities was primarily due to payments made to reduce the outstanding balance on the line of credit107 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states no material changes in market risk exposures from the prior Annual Report on Form 10-K - No material changes in primary market risk exposures or management of market risks from the Annual Report on Form 10-K for the fiscal year ended December 31, 2022109 Item 4. Controls and Procedures This section confirms effective disclosure controls and reports no material changes in internal control over financial reporting Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures - The Chief Executive Officer and Chief Financial Officer evaluated and concluded that the company's disclosure controls and procedures were effective as of March 31, 2023110 Changes in Internal Control Over Financial Reporting This section reports on any material changes in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting111 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other disclosures for the reporting period Item 1. Legal Proceedings This section indicates routine legal proceedings and claims, with no anticipated material adverse effect on financial results - The company is, from time to time, party to lawsuits, threatened lawsuits, disputes, and other claims arising in the normal course of business112 - Management believes that the ultimate liability in connection with these matters is not expected to have a material adverse effect on the company's results of operations, financial position, or cash flows113 Item 1A. Risk Factors This section states no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022114 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered equity sales and share repurchases for tax obligations in Q1 2023 Share Repurchase Details | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | January 1, 2023 - March 31, 2023 | 263,864 | $1.61 | - The shares purchased were primarily due to the cancellation of forfeited restricted shares and shares withheld to satisfy tax withholding obligations related to stock-based compensation awards119 - These repurchases were not part of a publicly announced plan or program119 Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not Applicable116 Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not Applicable117 Item 5. Other Information This section provides information on beneficial ownership of the company's common stock, listing entities owning over 5% Beneficial Ownership | Name of Beneficial Owner | Number of Shares Beneficially Owned (as of May 1, 2023) | Percent | | :----------------------- | :------------------------------------------------------ | :------ | | Peter J. Jacullo III, Director | 8,392,568 | 18.8 % | | Peter H. Kamin, Chairman of the Board | 6,918,096 | 15.5 % | | Fund 1 Investments, LLC | 3,387,190 | 7.6 % | | Savitr Capital LLC | 2,770,535 | 6.2 % | | Monomoy | 2,531,462 | 5.7 % | | Cannell Capital LLC | 2,453,327 | 5.5 % | - Beneficial ownership is determined by SEC rules, generally meaning possession of sole or shared voting or investment power119 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance, certifications, and iXBRL financials - Exhibits include the Certificate of Incorporation, By-Laws, various stock restriction agreements, CEO/CFO certifications (pursuant to Sarbanes Oxley Act), and financial statements formatted in iXBRL126 Signatures This section confirms the official signing and submission of the report by authorized executives - The report was duly signed on May 4, 2023, by Cabell H. Lolmaugh, Chief Executive Officer, and Karla Lunan, Chief Financial Officer131