Tile Shop Holdings Inc

NASDAQ:TTSH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Max, and I will be your conference operator for today.

At this time, I would like to welcome everyone to the Second Quarter 2024 Tile Shop Holdings, Inc. Earnings Conference Call. [Operator Instructions] Thank you.

Well, I would like to turn the call over to Ken Cooper, Investor Relations. Please go ahead.

[Ken Cooper, executive]

Thank you, and good morning to everyone. Welcome to the Tile Shop's second quarter earnings call. Joining me today are Cab Lolmaugh, our Chief Executive Officer; and Mark Davis, our Chief Financial Officer.

Certain statements made during the call today constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. 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 our earnings press release issued earlier and in our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements.

Today's call will also include certain non-GAAP measurements. Please see our earnings release for a reconciliation of those non-GAAP financial measures, which has been also posted on our company website.

With that, let me turn the call over to Cab.

[Cabell Lolmaugh, executive]

Thank you, Ken. Good morning, everyone, and thank you for joining us today for an update on our business. I'm proud of our team's execution during the second quarter, which resulted in a sequential improvement in comparable store sales. We did this despite continued softness in existing home sales trends, which has created challenges for many across the home improvement industry and contributed to lower levels of traffic in our stores.

While external headwinds persist, I'm encouraged by the progress we have made on several key initiatives. First, we rolled out our enhanced line of private label installation products sold under the Superior brand name during the second quarter. This line includes products such as thinsets and levelers that are used by both Pro and retail customers and virtually every type of tile project.

Over the past 12 months, we have made significant strides advancing the performance of the Superior line. After completing these steps to improve the product quality, we invested time training our sales teams and holding events for our Pros to give everyone the opportunity to work with our new formulas.

It's important to note that our Superior initiative is also part of our strategy to deepen our relationships with our professional customers. As I noted earlier, Pros use installation products in virtually every tile project they complete. We're looking to get a bigger piece of this business.

We believe steps we have taken to improve product quality, combined with our ability to offer this line at a competitive price point has us in a position to expand our penetration into this important customer segment, as it relates to tile installation products. Over time, we believe this will create additional cross-selling opportunities from our tile assortment and further strengthen our relationships with our Pro customers.

We've also made significant headway building our assortment of entry-level competitively priced products. We believe the expansion of entry-level priced products will attract more middle-market customers seeking to complete smaller projects on a budget.

Additionally, we believe our expanded assortment strengthens our competitive position with Pros, seeking to complete cost-effective projects for their end customers. So far, sales of entry-level products are tracking in line with our goals, and we anticipate building on our success in the second half of the year.

Turning our attention to our website. The investments made to date in our e-commerce capabilities have helped us grow online orders by over 25% during the second quarter of 2024 when compared to the same period in 2023. We've continued to see an increase in both traffic and conversion rates on our sites and believe we have a long runway for continued growth.

With that, I'll now hand the call over to Mark.

[Mark Davis, executive]

Thanks, Cab. Good morning, everyone. Second quarter sales in comparable stores decreased by 6.9% compared to the second quarter of 2023 due to lower levels of store traffic. That said, comparable store sales when compared to last quarter saw a 330 basis point improvement. While we had an easier compare and benefited from the timing shift of Easter, this result would not have been possible without the strong execution of our sales teams, given the headwinds facing in our industry.

Our gross margin rate during the second quarter increased to 66%, which represents a 20 basis point improvement from the first quarter, and a 180 basis point increase when compared to the second quarter of 2023.

As we've outlined in recent quarters, international freight rates have fallen, and we have been able to successfully secure products offered in our assortment at lower price points, which helped reduce our inventory costs.

Second quarter SG&A expenses of $58.5 million were $2.9 million higher than our second quarter SG&A expenses in 2023. The increase in SG&A expense was partially due to a $1.3 million increase in bonus expense that was primarily attributable to a release of certain bonus and long-term incentive accruals during the second quarter of 2023 that was not repeated in the second quarter of 2024.

Additionally, occupancy costs increased by $700,000 due to an increase in rent expense associated with leases that were extended over the last year. IT-related expenses increased by $700,000 due to an increase in software and licensing costs, and marketing expenses increased by $400,000 due to increase in digital advertising expenses.

These increases were partially offset by a $900,000 decrease in depreciation expense and a $700,000 decrease in variable compensation expenses. During the quarter, we recorded $900,000 of asset impairment charges related to the write-down of certain store assets.

Turning our attention to the balance sheet and cash flow information. We ended the quarter with $25.3 million of cash and no bank debt. We generated $23.5 million of operating cash flow as of June 30, 2024, we believe we're well positioned to navigate the challenges of the current environment with a great team, strong balance sheet and the enhancements we're making to serve our customers.

With that, Cab and I are happy to take any questions.

[Operator]

[Operator Instructions] There are no questions. I will now turn the conference back over to Ken Cooper for closing remarks.

[Ken Cooper, executive]

Thank you for listening to our earnings conference call. We anticipate filing our Form 10-Q later today. Thank you for your interest in Tile Shop, and have a great day.

[Operator]

This concludes today's conference call. You may now disconnect.