Tile Shop Holdings Inc (TTSH) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Tile Shop first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Adam Hauser, Director of Investor Relations. Sir, you may begin.

Thank you, operator. Good morning to everyone and welcome to the Tile Shop's first-quarter earnings call.

Following our prepared remarks the call will be open for analyst questions. Questions will be limited to analysts and we would appreciate if participants would limit themselves to one question with one follow-up.

As a reminder, certain statements made during the call today may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 as amended. Words such as but not limited to plan, expect, anticipate, believe, estimate, target, and any other similar words to identify forward-looking statements may be made.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the earnings press release issued today and in the Tile Shop's filings with the Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call and the Company does not undertake any obligation to update these forward-looking statements.

Today's presentations may also include certain non-GAAP measurements. Please see the Company's earnings release for a reconciliation of those non-GAAP financial measures also available on the Investor Relations section of our website at investors.tileshop.com.

With that let me now turn the call over to our Chief Executive Officer, Mr. Chris Homeister.

Thanks, Adam. Good morning everyone and thank you for joining us today. I'm here with Kirk Geadelmann, our CFO, and we appreciate you joining us this morning as we report our results from the first quarter.

Let me begin by saying that we were very pleased with our start to 2015. As discussed in previous calls, we've been working on a variety of initiatives with the intention of delivering improved financial results while serving all of our customers at a very high level.

Many of our efforts are still in the early stages and impacts will continue to evolve over time. But we are very pleased with the progress made thus far and how that progress manifested itself into our first-quarter results. The next up is building off of that success and delivering strong results throughout all of 2015 and beyond.

Sales for the quarter were $73 million exceeding our largest quarterly revenue previously achieved by $6.3 million. The $73 million of revenue represented growth of 13.3% versus last year including comparable store sales growth of 4.5%.

Comparable store sales growth occurred throughout the entire quarter and our efforts to improve sales at our stores that were opened in 2013 and 2014 led to strong results for these stores which Kirk will explain in greater detail shortly. Our adjusted earnings per share in the quarter was $0.08, adjusted EBITDA grew 6.2% and adjusted EBITDA margin was 20.1% during the quarter.

Now let me walk you through the highlights of Q1 in relation to our key initiatives for 2015. Let me begin by discussing our retail talent identification and training initiatives.

Our stores led by market managers outperformed the balance of the chain with respect to comparable store sales growth, sales performance to plan and sales associate turnover reductions. Additionally they continued to develop strong store manager candidates that will serve us well as we open new stores in the coming quarters.

We are happy with a leadership role that the market managers are playing and the results they are driving. With this success we are planning to have the entire chain covered by market managers by the end of 2015.

We had meaningful declines in sales associates and store manager turnover from Q4 and prior-year Q1 levels. Average store manager tenure had another meaningful increase in the first quarter with average tenure at its highest level since 2012.

As we have discussed in the past, manager tenure is an important driver in successfully deploying our in-store strategies. Finally, our bench of manager candidates continues to strengthen as a result of our training and development efforts.

Our next key initiative is expanding our focus on the professional customer. During the quarter we executed numerous efforts to build our pro business including direct marketing, new product offerings, in-store events and enhancements to the pro section of our website.

In the first quarter our pro sales growth outpaced the balance of business by a meaningful factor ultimately leading to an increase in our total pro sales mix of over 100 basis points from Q1 last year. This trend occurred across most markets including very mature markets. The opportunity for greater penetration with this customer segment is still very significant especially in our less mature markets.

In addition to our marketing efforts with the professional customer general improvements in our marketing effectiveness also was a key component in achieving our 2015 goals. One area that we specifically allocated dollars toward in the first quarter were a subset of our 2013 and 2014 new store markets in an effort to build awareness and traffic. Sales results in these markets have improved by a factor that clearly indicates they saw a return on this localized advertising spend and our plan is to continue these marketing efforts in new store markets for the balance of the year.

We have also made enhancements to our search engine optimization and other vehicles to drive traffic to our website. These efforts paid off with mid-double-digit sales growth in our online channel in Q1.

In addition there were several other accomplishments from the quarter that I'd like to take a moment to highlight. Gross margin was 69.9% for the first quarter, 10 basis points higher than Q1 of 2014 and represented our highest rate in the last six quarters. This was driven by disciplined promotions and strong inventory control measures.

Free cash flow generated was $21.5 million and we paid down over $18 million of debt in the quarter. Inventory management continued to improve as we reduced our quarter-ending inventory by 4% versus the first quarter of 2014 despite 17% store unit growth. It is also important to note that while total inventory has declined from prior-year levels over the past five quarters our in-stock availability across all major product lines remains very high.

During the first quarter we opened two new stores, one in the Orlando, Florida market and our second store in Tampa, Florida. Our new store opening plans for 2015 remain unchanged as we expect to open 6 to 8 additional stores for a total of 8 to 10 new stores this year.

One opening is planned for Q2 and that will be late in the quarter. Of the remaining store openings for the year it is likely that they will all occur in existing markets.

From a product category perspective, marble, subway tile and faux wood were key drivers of growth in the quarter. In Q1 we brought in over 200 new SKUs from across the world that bring more color, the latest design trends and large-format tiles into the assortment with additional new products supplementing these additions during the early part of Q2.

As we discussed in February we believe the assets and the specific plans are in place to begin delivering strong growth and earnings in 2015 while still being in the early stages of our journey to becoming the leading national specialty tile retailer. The first quarter was a strong result for the year and we are focused on making additional progress as we move forward.

Without let me now turn the call over to Kirk for a further discussion on the quarter and our outlook for 2015.

Thanks, Chris. Today we reported net sales of $73 million for the first quarter of 2015 which represents an increase of $8.6 million or 13.3% sales of $64.4 million in the same quarter of last year. Comparable store sales growth was 4.5% in the quarter.

Progress made on sales productivity within our stores opened during 2013 and 2014 was significant during the quarter. Our 2013 vintage stores opened in average 1.7 years at quarter-end had mid-teens comparable store sales growth. These stores had a sequential increase in sales from Q4 to Q1 of more than 20% signaling strength beyond seasonality as our more mature stores opened in 2012 or earlier had a sequential increase in sales of 12%.

Our 2014 vintage stores excluding those opened during Q4 had a sequential increase in sales of 36% in Q1 versus Q4 with every single store outpacing the mature store sequential increase of 12%, indicating very solid progress up the maturity curve. Many of the underperforming 2014 stores are still not yet at the desired revenue levels for their current age but they made significant progress during the first quarter. Our more mature stores opened in 2012 or earlier had low-single-digit comparable store sales growth during the quarter.

Gross profit increased $6 million in the first quarter, or 13.4% over last year. Gross margin of 69.9% increased 10 basis points from last year and was our strongest rate since the third quarter of 2013. The strength in rate was driven primarily by disciplined discounting and focused efforts on inventory control-related costs.

Our selling, general and administrative expenses for the quarter were $43.8 million as compared to $38 million in the first quarter of last year. First-quarter 2015 SG&A included approximately $0.5 million of non-recurring costs related to litigation expenses.

We concluded the first quarter with 109 stores, a 17% increase versus the conclusion of last year's first quarter when our store count was 93. Therefore, when looking at the $5.8 million year-over-year increase to SG&A most of it is attributable to new store growth.

Depreciation and amortization, rent, property taxes, utilities and other occupancy costs represented $3.4 million of SG&A growth versus the prior year during the quarter. Advertising costs were up versus the prior year by approximately $1 million driven mostly by very low advertising spending in the prior-year period in response to the weak customer traffic and demand from the harsh winter weather conditions. Despite the year-over-year growth, advertising expenses were less than 3% of sales in the quarter.

The remainder of SG&A growth during the quarter was mostly attributable to variable compensation growth from sales and store growth. Preopening expenses were approximately $116,000 in the quarter.

Adjusted EBITDA was $14.7 million in the first quarter representing growth of 6% versus the prior-year period. Adjusted EBITDA margin was 20.1%. We expect to increase our full-year adjusted EBITDA margin by 100 to 200 basis points in 2015.

The non-GAAP net income presentation in the earnings release adjusts our GAAP quarterly results by eliminating unusual or non-recurring costs and then applies the tax rate to the result. The presentation results in non-GAAP net income for the quarter of approximately $4 million which translates into a basic and fully diluted earnings per share of $0.08.

The first quarter had an abnormally high effective tax rate of 43%. The higher rate was attributable to adjustments for discrete items during the quarter.

Turning to our balance sheet as of March 31, we ended the quarter with $9 million of cash and $73.7 million of long-term debt. Our significant free cash flow of $21.5 million during the quarter allowed us to pay down over $18 million of debt in Q1.

Both of these amounts exceeded our expectations for the quarter based on strong sales performance, successful inventory management and tax refunds related to the prior year. We expect full-year free cash flow generation to be approximately $30 million in 2015.

At quarter-end we had over $35 million of borrowings available under our long-term credit facilities. We are pleased with our $63.5 million quarter-ending inventory which represented a 4% decrease from last year during a quarter with 13% sales growth and significant growth in store count. Capital expenditures were approximately $4.6 million in the quarter primarily related to new store investments, store remodel activity and merchandising.

As detailed in our earnings release this morning we are reaffirming our full-year outlook that was provided in February. Although we were very encouraged by our first-quarter results, as well as macro factors that continue to trend positively such as year-over-year existing home sales growth, we are only through one quarter of the year with three quarters remaining at of us.

Our guidance range for sales, comparable store sales growth, gross margin and EPS continue to cover a logical range of potential outcomes for the year. We are making good progress in our key initiatives but significant work remains. Our second quarter is historically the largest revenue quarter of the year so we will know a lot more about our progress and the associated financial results in a few months.

From a modeling perspective a key component worth highlighting is that year-over-year SG&A growth should begin moderating to high single digits in the second quarter and mid- to high single digits for the remainder of the year. This is primarily due to the slowdown in store count growth as we progress through the year. Also, as Chris alluded to earlier, only one store opening is expected during the latter part of Q2.

With that, operator, we can now turn the call over for questions.

(Operator Instructions) Peter Benedict, Robert Baird.

Hey guys, thanks for taking the question. I guess the first question would be on the comp improvement, can you talk about traffic versus ticket?

It sounds like obviously the pro was a big driver here, just are you just getting more pros through the door? Are they significantly higher ticket than your DIY? Just help us tease that out a little bit.

Sure, Peter. Good morning, this is Kirk. Yes, it was mostly traffic driven.

Our transactions were up. We did see a good uptick in ticket as well but it's mostly a transaction story at this point. I would think that as we continue to grow our pro business we would expect to continue to grow ticket as well but right now we feel good about the traffic trends and we hope those will continue on into the rest of the year.

Yes, certainly so 1Q was a good start for sure. My follow-up would be on the new store performance. As you noted it is getting better, starting to work its way back.

I know in the past you guys had spoken to a year-one volume of around $1.8 million. I know you are not running that right now but as you think about some of the initiatives to repair that new store performance, is there a level we should be thinking about as we model it out next couple of years where you think those new stores should be performing on a one-year basis?

Is $1.8 million still achievable or should we be moderating that expectation? Thank you.

Yes, that's a great question. I think it it's fair to say we still feel pretty good in a normal environment where we're doing what we need to do and we have a normalized macro that we can generate $1.8 million in an existing market in the first 12 months and maybe $1.7 million of revenue in a newer market.

So we're not ready to come off that yet. We think that when everything is normalized those are still pretty good numbers. Historically they have been proven out and I think as you go back to as early as 2012 and those stores on average performed at that level.

So we do still have a lot of work to do yet on the stores that were opened in 2014. I'd say the 2013 opened stores as a group are getting a lot closer to where we want them to be but we did make good improvement in both groups of stores between Q4 and Q1 and it's still very, very early. We want to string together a couple of quarters of continued improvement but we are seeing good things so far.

That make sense. Thank you very much.

Peter Keith, Piper Jaffray.

Great, thanks. This is actually Jon Berg on for Peter. Thanks for taking our questions.

Just first I was just curious since your Q4 call I think in mid-February I think you guys were pretty encouraged about trends through mid-February. In the second part of the quarter did trends hold in there or accelerate? And I'm also just curious how you're looking at the first three weeks of April here.

Hi, Jon, this is Chris. I can answer that question for you.

So the trends throughout the entire quarter were positive. We're pleased certainly since the time that we talked in mid-February on our Q4 announcement but they certainly continued all the way through the quarter and we certainly are very pleased of where things are at midway through April as well.

Great. And then I guess on the inventory side as you alluded to you've seen down inventory now for five straight quarters. Just curious if you guys have a longer-term goal on where you think inventory per store could trend and could it continue to be down for several quarters yet?

Well I think certainly inventory management and working capital management is certainly a big initiative for the Company. We continue to look at inventory, inventory availability on a customer availability standpoint for each individual product.

Feel great about the in-stocks that we have on really every product line across the Company within the assortment especially on new items and high selling items. Again I think the better metric would be not necessarily looking at it as inventory per store but total inventory given the fact that most of our inventory is not actually in the store, it's actually at our distribution centers.

So I know that's typically a manner which other retailers have measured. I think for us the total aggregate number is really what we'd like to really focus on. I think we've made great strides over the last five quarters.

And again I think it's moving through product that we feel that we can be aggressive on while still making a significant margin on and then also making room for new product that's coming in which I feel that our assortment has never been better on having high trend items and high velocity items in the assortment. I think that will certainly continue to improve as we go into Q2 and beyond.

Great, thanks a lot guys, good luck on the rest of the year.

Kate McShane, Citi Research.

Hi guys, this is Geoff Small on behalf of Kate. I just want to say congratulations on a strong start to the year.

It looks like you or your sales, same-store sales comps will remain fairly modest throughout 2015 and you've talked about your finished goods having a more pronounced effect in the second half of this year. We were just hoping you could talk about why guidance remains unchanged low-single-digit same-store sales guidance and also if you could please talk about the cadence of same-store sales trends through the remainder of the year?

Geoff, good morning, this is Kirk. Thanks for the question. Yes, I think the biggest driver of why our guidance would remain unchanged is as many of you on the phone have called out Q1 is our easiest compare.

So last year we did a negative 2-ish comp and while we're excited about what we've been able to accomplish in this year Q1 we still have a long ways to go and the next three quarters will be more difficult comparisons. In terms of any ramp up as we move through the year we do expect more of an uptick in Q4 and so if you take all that together it's still very early on.

We have more difficult compares headed our way and Q4 is still a ways out. And we'd like to see an ongoing trend to develop before we start thinking about any changes at this point.

Great, thank you. That's very helpful.

John Baugh, Stifel.

Thank you. Good morning and terrific progress on the debt reduction inventory.

My questions were around the new stores. Could you talk a little about size, the capital per store, maybe the cost of vignettes and what if anything changing there?

Sure, absolutely John. Good morning, this is Kirk. While we're definitely interested in reducing the size as we move forward and I think we said before we really like that 16,000 to 18,000 square-foot range we're still some of the locations that we've opened recently are still slightly larger.

Summer are slightly smaller so we're still at a point where we have a mix of different sized stores. We have seen some initial success with a few stores where we've been able to meaningfully reduce our CapEx. On average as you know it's usually around on average $1.4 million in that range and we have a few stores that are actually performing very well that we've opened in the last year that are significantly lower than that.

But we're still at a point where we have a mix of different size and also different CapEx investments. And while we're headed to hopefully more consistently do a smaller box and hopefully we'll be able to also demonstrate that we can do a smaller CapEx level we're not quite there yet where we're comfortable that we can do that with each and every store. But we are focused on continuing to improve in that area.

Okay, and you mentioned I think maybe Chris mentioned 200 new SKUs that were coming in. How do we think about that in the context of the entire SKU base?

And I guess the question is really centered around the strategy in the past has been to build up vignettes and have those vignettes last as long as seven years. Are these SKUs specific to the pro side and that part of the story hasn't changed at all or any color there?

Yes, John, this is Chris. No change in strategy, so vignettes in our stores are still a very important part of our differentiation to the consumer retail customer as well as to pros and giving them confidence to come into our store with their customer and make their selections and have that visual.

So when you think about 200 new SKUs coming into the store many of them will go into a vignette. We're looking at having more variety of different vignettes in the stores so the two stores that I mentioned in Orlando and Tampa have a wide variety of different vignettes. And it's an important element for us to have what I will call rich media and photography into our library of content that we can share across the Company.

So one of the things that we've done within the stores is having a QR code on the price tag where if their vignette is not actually in their store we likely have a photograph of our own that's our library, that we own it that's somewhere else within the chain where instead of having 50 vignettes in your store now you can have 1,000 different vignettes or 1,500 different vignettes of either a video or of a photo that actually visualizes what the vignette looks like with that particular tile in it. So the time frame we're still looking at the time frame as being just as long. Some will be more of a fashion SKU and those will turn quicker but the average is still measured in years and not months.

Great, thank you. My last question quickly, you gave color around advertising spend.

What is it for the year roughly either in dollars or percentages of revenue year over year? Thank you.

Hey John. We don't anticipate it being as a percent of sales we don't anticipate it being significantly different than we've done in the past. It's been less than 3% of sales in the past.

We don't see it ticking up higher than that this year. But I think we feel good that we've made progress on maximizing that investment and we've had some good learnings over the last 90-plus days in terms of what may work better than an alternative media investment.

We've done some testing in some of our new store markets and had some good success there. And we'll continue to learn and refine our media strategy threat the year so that we can continue to enhance the media effectiveness and the return on investment.

Great, thanks for that. Good luck.

Daniel Moore, CJS Securities.

Good morning, thanks for taking the question. And I appreciate the color on the trajectory of SG&A growth for the rest of the year. I wanted to look out a little bit further.

As we look into 2016 given the slower rate of new store growth and if these stores opened in 2014 and 2013 continue to trend back towards normal or historic performance levels in that scenario would you likely see margin or EBITDA margins expansion accelerate in 2016 or would you in that scenario would you consider accelerating new store growth again and ramping up investment? Just trying to think how you're thinking about the trade-off beyond this year of letting more drop to the bottom line versus more aggressively reinvesting in the business.

Good question, Dan. This is Kirk. So at this point 2016 is a little ways out, we are not ready to start talking about number of stores at this point and related topics.

I do think it's fair to say that we fully expect to continue to see EBITDA margin improvement as we go but we're not ready to quantify it specifically at this point. We have had I think we had said it in our opening remarks but we feel comfortable with 2015 EBITDA margin improvement of 100 to 200 basis points. And on into 2016 and beyond we want to definitely continue that improvement but just not ready to quantify it at this point.

And just as a follow-up you alluded to it in the last question but maybe a little bit more color about some of those initiatives, those advertising-related initiatives that are gaining more traction how you've changed the mix and what we would expect to see going forward.

Thanks, Dan. There is a wide variety. I think the marketing team has done a great job of conducting marketing tests of a challenger and a champion methodology similar to what you would do online.

But utilizing that in every mechanism we do going from direct mail to the online channel of dynamic display ads to what we're doing with email and what's our open rate to in-store events that we're doing for pros, it's a new event for us but having very tangible measurements for us to look at the return on spend. Then ultimately leading into sales. I think one of the things on the pro side for sure we look at the number of accounts that we set up when a contractor goes through, submits their license, submits their contractor number if they are state licensed, if that particular state requires a licensed professional and those continue to grow at a very significant rate for the Company.

Certainly I think we had our largest percentage growth in new accounts set up for professionals ever for the Company. So there's a variety of different initiatives.

I like the fact that we're pretty analytical about it but also having a great credit feel for what we're doing with the consumer as well as with the pro. And both efforts both on the pro and consumer we feel good about where we're at today and I think we'll continue to tailor and refine our messaging as well as the approaches as we go into 2015.

Appreciate it. Thank you again for the color.

Joe Feldman, Telsey Advisory Group.

Hey guys, congratulations on a good quarter. I wanted to ask you -- you mentioned the market managers rolling that out to all be markets.

I was curious to get a little more color on that, like how many more guys or gals do you need and where do you find those people? Is it generally promoting from within or is it pulling from regional managers of other quality retailers out there?

Hi, Joe, this is Chris. So the market manager that we're looking at for the balance of the chain I'll put it between a 5 and an 8 number, certainly no higher than 8.

I think we might refine a little bit of how we look at the markets and how many stores and market manager can handle and still have the performance that we want to look for in aggregate on all the different measures that I mentioned in the opening commentary. I think so, and just as a reminder for yourself as well as others on the call, so a market manager is someone that leads their market but also just as important leads a store.

So primarily we've taken our best performing store managers and promoted them to having a larger scope of business within the market that they lead and then if they have an outlying area as well it may make sense to include that into the market as well as a satellite store that they oversee in their day-to-day operation and what they review with them on a week-to-week basis as well as monthly performance. So right now we have primarily looked at internal candidates. We have hired external, an external regional manager to the chain that has responsibility for the southeast part of the country, has a wide variety of sales experiences both on commission sales as well as leading teams and feel that has been a great addition outside of the chain and we'll continue to do more of that as we go forward.

Thank you. And just wanted to get an update on obviously strong quarter from a sales perspective and was just curious have you seen that trend continue so far this quarter?

Well I think I mentioned already that we're pleased where we're at certainly from through the first 20 days of the month. We haven't seen anything that we would be concerned about and quite to the contrary I really look at us really continuing this for as we go forward.

Got it. Thanks guys. I appreciate it.

I'm showing no further questions at this time. I would like to hand the conference back over to management for closing remarks.

Thank you for joining us today on the call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.