Tile Shop(TTSH) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's financial statements, management's discussion, market risk disclosures, and internal controls Financial Statements The company's unaudited consolidated financial statements for H1 2023 show decreased assets and net income, but significantly improved operating cash flow Consolidated Balance Sheets Total assets decreased to $325.4 million by June 30, 2023, driven by reduced inventories and debt, while equity increased to $116.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (unaudited) | December 31, 2022 (audited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $14,592 | $5,948 | | Inventories | $106,862 | $120,952 | | Total Current Assets | $135,862 | $146,403 | | Total Assets | $325,439 | $345,822 | | Liabilities & Equity | | | | Total Current Liabilities | $85,526 | $83,291 | | Long-term debt | $20,000 | $45,400 | | Total Liabilities | $208,850 | $237,053 | | Total Stockholders' Equity | $116,589 | $108,769 | Consolidated Statements of Income Net sales and net income declined in Q2 and H1 2023 compared to the prior year, with Q2 net income at $5.1 million Income Statement Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $98,557 | $107,604 | $200,576 | $210,075 | | Gross profit | $63,302 | $71,018 | $128,840 | $137,863 | | Income from operations | $7,734 | $9,778 | $11,859 | $14,514 | | Net income | $5,079 | $6,914 | $7,591 | $10,427 | | Diluted EPS | $0.12 | $0.13 | $0.17 | $0.20 | Consolidated Statements of Comprehensive Income Comprehensive income for Q2 and H1 2023 decreased to $5.0 million and $7.6 million respectively, mirroring net income trends Comprehensive Income (in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | | | | Net income | $5,079 | $6,914 | | Comprehensive income | $5,043 | $6,871 | | Six Months Ended June 30 | | | | Net income | $7,591 | $10,427 | | Comprehensive income | $7,560 | $10,386 | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $116.6 million by June 30, 2023, primarily due to net income and stock-based compensation - Total stockholders' equity rose to $116,589 thousand at June 30, 2023, up from $108,769 thousand at December 31, 2022[21] - The increase in equity during the first six months of 2023 was mainly due to $7,591 thousand in net income and $706 thousand in stock-based compensation[21] Consolidated Statements of Cash Flows Operating cash flow significantly increased to $41.4 million in H1 2023, primarily due to improved inventory management, supporting debt repayment Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $41,438 | $9,223 | | Net cash used in investing activities | ($8,076) | ($7,361) | | Net cash used in financing activities | ($25,846) | ($676) | | Net change in cash | $7,488 | $1,148 | - The significant increase in operating cash flow was largely driven by a $14.1 million decrease in inventory, compared to a $12.9 million increase in the prior year period[24] Notes to Consolidated Financial Statements These notes detail accounting policies, revenue by product (man-made tiles 52%), inventory levels, and the $75.0 million revolving credit facility - The company is a specialty retailer with 143 stores in 31 states and D.C. as of June 30, 2023, primarily serving consumers, contractors, designers, and home builders[28] Revenue by Product Category (Six Months Ended June 30) | Product Category | 2023 | 2022 | | :--- | :--- | :--- | | Man-made tiles | 52% | 50% | | Natural stone tiles | 23% | 25% | | Setting and maintenance materials | 15% | 16% | | Accessories | 8% | 7% | | Delivery service | 2% | 2% | - The company has a $75.0 million revolving line of credit, with $20.0 million outstanding and $53.3 million available for borrowing as of June 30, 2023[44][48] The SOFR-based interest rate was 6.67%[48] - During Q2 2023, the company recorded $0.5 million of impairment charges related to property, plant and equipment and right of use assets[59] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 sales decline due to macroeconomic factors, reduced gross margin, lower SG&A, and strong operating cash flow Results of Operations Q2 2023 net sales fell 8.4% with comparable store sales down 8.0%, while gross margin contracted to 64.2% and SG&A decreased 9.3% - Comparable store sales decreased by 8.0% in Q2 2023 and 4.0% in the first six months of 2023, primarily due to lower store traffic, partially offset by higher average ticket value[82][93][98] - The gross margin rate decreased to 64.2% in Q2 2023 from 66.0% in Q2 2022, mainly due to inflationary cost pressures on products, which were partially offset by increased selling prices[94][99] - Q2 2023 SG&A expenses decreased by $5.7 million (9.3%) due to a $3.0 million drop in variable selling expenses, a $1.1 million decrease in transportation costs, and a $0.9 million reduction in depreciation[95] - Interest expense increased to $0.7 million in Q2 2023 from $0.2 million in Q2 2022, due to higher average borrowings and rising interest rates[96] Non-GAAP Measures Adjusted EBITDA for Q2 2023 was $13.6 million, and the trailing twelve-month pretax return on capital employed was 13.8% Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $5,079 | $6,914 | $7,591 | $10,427 | | Interest expense | 668 | 201 | 1,466 | 467 | | Provision for income taxes | 1,987 | 2,663 | 2,802 | 3,620 | | Depreciation and amortization | 5,549 | 6,415 | 11,332 | 12,854 | | Stock based compensation | 301 | 562 | 706 | 1,054 | | Adjusted EBITDA | $13,584 | $16,755 | $23,897 | $28,422 | - Pretax return on capital employed for the trailing twelve months ended June 30, 2023 was 13.8%, down from 15.0% for the period ended June 30, 2022[107] Liquidity and Capital Resources The company maintains strong liquidity with $14.6 million cash and $53.3 million available credit, sufficient for future operations - As of June 30, 2023, the company had $14.6 million in cash and cash equivalents and $53.3 million available for borrowing under its credit facility[108][111] - Capital expenditures totaled $8.1 million for the first six months of 2023, primarily for investments in a new store in Colorado, store remodels, and technology assets[113] - Net cash from operating activities increased to $41.4 million in H1 2023 from $9.2 million in H1 2022, mainly due to better inventory management[116] Quantitative and Qualitative Disclosures About Market Risk No material changes have occurred in the company's market risk exposures or management since the 2022 Annual Report on Form 10-K - There have been no material changes in primary risk exposures or management of market risks from those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[120] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[121] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[122] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity transactions, and other disclosures, including beneficial ownership Legal Proceedings The company is involved in routine lawsuits, but management anticipates no material adverse effect on its financial condition - The company is party to routine lawsuits and claims, but management believes the outcomes will not have a material adverse effect on its financial condition[123][124] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have occurred from the risk factors disclosed in the 2022 Form 10-K[125] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company withheld shares for tax obligations on vested restricted stock and did not conduct public share repurchases - The company withheld shares to satisfy tax withholding obligations on vested restricted stock grants and did not repurchase shares as part of a publicly announced plan or program[129] Defaults Upon Senior Securities Not Applicable - Not Applicable[127] Mine Safety Disclosures Not Applicable - Not Applicable[128] Other Information No Rule 10b5-1 trading plan changes occurred, and the report lists beneficial ownership for major stockholders - No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading plan during the quarter ended June 30, 2023[130] 5% Stockholders as of August 1, 2023 | Name of Beneficial Owner | Percent | | :--- | :--- | | Peter J. Jacullo III, Director | 18.9% | | Peter H. Kamin, Chairman of the Board | 15.6% | | Fund 1 Investments, LLC | 7.6% | | Savitr Capital LLC | 6.2% | | Monomoy | 5.7% | | Cannell Capital LLC | 5.5% | Exhibits This section lists required exhibits, including CEO/CFO certifications and iXBRL financial statements - Key exhibits filed include CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and financial statements formatted in iXBRL[138]