Tile Shop Holdings, Inc.

Q2 2021 Earnings Conference Call

8/5/2021

spk06: that it is in that back order. Our margins vary, you know, depending on whether it's stone or it's material, so it's a little difficult to say, and that changes on a daily basis, given on the orders that are in process and currently, you know, waiting for fulfillment.
spk01: Yeah, on top of that, Jeff, you know, retail customers put 100% down, where pro customers, depending, have a small deposit or no deposit. based on their tiers. So it does impact a different level according to the customer type. So it's obviously going to be a little bit more than the deposit itself.
spk04: So in terms of the mix of that deposit on your balance sheet, how much of that would be pro-customers and how much of that would be just a regular home remodeler that's buying it for their own house?
spk01: Yeah, it's a mix. I mean, right now, if you listen to our prepared remarks, I mean, we've eclipsed 60% as pro-business. So we have 40% of retail. And so you think that they have to put 100% down. You can do the math. So it is higher than that, but it's not substantially higher.
spk04: Okay. Also, last conference call, I asked you about your borrowed facility and whatnot. And I know it's got a long date of maturity and everything. There's nothing drawn on it. But I was curious if you guys have looked into other borrowing facilities that have lower interest rates or more attractive terms or any things like that and what updates you could provide on that.
spk06: We continue to have a great relationship with our existing bank, and we're always evaluating our options and what's going to produce the best performance for us. and for our shareholders. But at this time, there's nothing new to update or share.
spk04: Okay. And then what about investigation of return capital to shareholders?
spk06: That's something that's come up a lot. You know, we continue to be really pleased about the cash flow that we're generating. And frankly, I think having a cash cushion during these unusual times that we're in today is really a good thing. Keep in mind that we've only been debt-free really for two full quarters. This isn't something that we feel a need to rush on, but we do continue to evaluate our options and certainly we'll keep our shareholders in mind as we do so.
spk04: Okay. And then one last question. In terms of evaluations for floor covering companies and whatnot, I'm sure you guys have your finger on the pulse of M&A. What kind of multiples and valuations are you seeing for other companies as they kind of get folded up into larger entities?
spk06: We're really not looking to discuss M&A or other companies at this time.
spk04: Any particular reasons?
spk06: It's just not part of a strategy that we're prepared to discuss for competitive reasons. And again, it really varies.
spk00: Okay.
spk04: Thanks for your time. Thanks, Jeff.
spk00: Thank you. Our next question comes from John Hollander of CAG. Your line is open.
spk02: Good morning, guys, and great quarter. Just a few quick questions. One is I wanted to chat about the store remodeling process? How many stores have been remodeled, and how many do you expect to be remodeled over the next 12 months?
spk01: Well, thanks for the question. Yeah, we want to remodel. We came out with a certain list of stores at the beginning of the year to remodel and enhance. Now, we do analysis based on the tenure of the store, the segments of the customer, the dates of the vignettes, and how much we want to spend on these remodels. And we've remodeled around a half dozen so far this year. We've scaled back a little bit just due to some of the inventory and shipping constraints that we're experiencing, but we're going to continue remodeling some stores throughout the remainder of the year, over 10, if not a few more, depending on how things shake out here in the next few months.
spk02: I'm sorry, Tom, was that 10 additional or going from 6 to 10?
spk01: Hopefully 10 additional, but we're going to say 10 right now. But, you know, we'll see as product continues to come in through the multiple ports. Thank you.
spk02: And what type of returns or lift do you see on the store remodel?
spk01: You know, we've done the analysis on this, and depending on how much we invest, it can be anywhere from two to four years. depending if we're investing a smaller amount to a larger amount or a full store remodel. If we're doing just a scrape on some vignettes, we can see the return quite quickly. But if we're investing a substantial amount in the remodel, it could take two years.
spk02: And what is the impact on the employees and the manager of the local store after you do the remodel?
spk01: Well, from beginning to end, it's exciting. It raises morale. I was a manager for 15 years and a salesman. And when you have remodels going on in stores, the customers get excited. They actually go around and watch this being done. The staff's excited to get new product in the stores. We try to do any demo or anything that's disruptive to the business during the evening hours and setting and grouting of tile and applying fixtures during the day. So it's It's not disruptive at all, and it creates a lot of excitement.
spk02: Well, I will put in a shameless plug for the Glen Burnie Maryland store. If you could do a remodel there, it would be very nice.
spk01: I appreciate it. I'm sure they're happy to hear that, too. So thank you.
spk02: And a follow-up question. In your press release, you track a return on capital employed metric. And I was hoping to understand better why this is the metric that the company tracks.
spk03: Hey, good morning. This is Mark. You know, we feel that the return on capital employed metric is a very good metric to assess the health of the business as well as the quality of the earnings that we're able to produce on our capital over time. We do feel that seeing continued improvement in this metric is helpful, but that's the primary return on capital metric that we think is most important to us as we evaluate the health of our business.
spk02: Are management bonuses at all tied to this metric? No. Okay. This metric has dramatically increased, so congratulations for that. You know, last quarter it was 7.2. This quarter is 13.9. And when doing any modeling, it's obvious why, because we're taking out poor quarters from 2020 and adding in these dramatically powerful quarters from 2021. How does management feel about the different levels? Right now you're at nearly 14%. you know, what happens if this number goes higher? Does this change any management's behavior?
spk03: I think the easiest way to answer that question is we feel really good about the progress we've made over the course of the last year, but we think that we can do better. That doesn't necessarily change our behaviors, but we're continually striving to get a better return as we move forward. Okay.
spk02: And finally, just about inventory and shipping delays, could you comment a little bit about the current delays of your orders from your international suppliers? Have these delays shortened at all? Have they lengthened? Has there been any impact of the Delta variant with what's going on in Asia right now? Just any qualitative commentary would be helpful.
spk01: Thanks, John. Yeah, it's been a struggle for us. Almost a year, over a year now. So what we're seeing, though, are our vendor partners are able to produce the product. People are back at work all over the world. And they're getting the product made. We find a container shortage is continuing to be a struggle. But once we get the containers on the ships, the ships are sitting at ports. And you have longshoremen strikes at the ports of Montreal. We've got fires in the northeast that are closing rail lines. But, I mean, there's always going to be challenges in logistics. But the good news is we're still continuing to receive a lot of product, more so today than in the past nine months. So things are slightly opening up. We're able to get a lot of our back orders in our DCs. But we're also opening a lot of businesses as well. So as we receive back orders, we're continually creating some new ones. You know, when you have 6,000 SKUs, you know, it's a balancing act. You know, who can ship what and when is it going to arrive at what port and what challenges are we going to incur not only at the ports but in rail, trucking, and everything else. But the good news is it's getting better.
spk02: Thank you. And do you lose any deposits because of these delays, or are customers not able to cancel? I just want to understand how that rolls through.
spk01: Yeah, customers can cancel whenever they want. We're very lenient with our customers. And I think what I'm seeing, I'm a customer myself, and I'm waiting on furniture, I'm waiting on certain things for my own home. Our customers are seeing this. They're remodeling, they're not just buying tile, they're buying cabinets, they're buying windows, they're buying siding, and everyone is experiencing the same thing. So what I've seen and heard from our leadership in the field and when I talk to customers is their understanding of the current challenges that everyone's facing. So we're not seeing any elevated cancellation rates. So I don't think that's a concern. If they wanted to, they could, but I'm not seeing that right now.
spk02: Thank you. And then in terms of deposits, where is the best place to track that in the financials?
spk06: The deposits are included in the cash that you'll see on our balance sheet. Right now we've got $16.5 million for part of the cash that is from deposits.
spk02: And is that broken out like in the queue? Because obviously on the press release I'm only seeing the $44.75 in the restricted cash amount.
spk03: Good morning. This is Mark. It is broken out in the queue. The actual deferred revenue that we have associated with customer deposits is in other accrued liability, and we have a breakdown of other accrued liabilities as part of our queue.
spk02: Okay. Thank you very much. Those are all my questions. Great quarter, guys. I'm looking forward to the remodeling of the Grimbeardy store.
spk01: All right, John. I made a note of it.
spk00: Thank you. Our next question comes from Jeff Moore. of Borough Capital, your line is open.
spk04: Thanks for taking a follow-up. I was curious about the B. Reilly Summer Summit that you guys are going to be attending on August 18th and 19th. Are you all going to be doing some sort of presentation that will be made public?
spk03: Hey, Jeff. This is Mark. We're not necessarily going to be making a presentation there that will be made public. but certainly happy to meet with folks that have questions as our investor relations line is always open.
spk04: Okay, and what colored the decision to attend that? It seems kind of like a large directional change that the company's made in kind of the communications or attendance of these conferences. Just a little bit out of the ordinary, right? I personally think it's a great thing that you all are attending, but I was kind of curious what prompted that and kind of what some of the thinking was for that.
spk01: Hey, Jeff. This is Kev. I'm really excited to attend the conference and meet a bunch of people and talk about the tile shop. We want to increase transparency to our shareholders. As we've relisted on the NASDAQ, I think it's important that we We come back and do the Q&As and hit some conferences and just share the excitement that I have about our company and where we're going to be going. So that's pretty much it.
spk04: Okay. What are some of the other conferences you guys have kind of looked at and we might expect to see you all, you know, doing presentations or doing Q&As at in the future?
spk01: We'll let you know when we book them. There's a few out there that we're analyzing, but, you know, we'll let you know, Jeff. None at this time. Okay, thanks.
spk00: Thank you. Our next question comes from David Cannon of Cannon Wealth Management. Your line is open.
spk05: Good morning, guys. Congratulations. Appreciate you taking my questions. First, I'm traveling. I don't even have Wi-Fi, so some of my questions may be in the press release or they may have been covered. But in terms of the deposits, customer deposits, Nancy, could you call out sequentially, if any, the change from Q4, Q1 to Q2? That would be helpful to me.
spk06: I don't know off the top of my head exactly what it was for Q4. It was $17.8 million in Q1, and we're at $16.5 million in Q2. So, David, I believe we're going to keep... I beg your pardon?
spk05: So, it's basically flat. So, basically, it was flat with Q1.
spk06: There's a slight decrease. It is fluctuating and has been over the last three quarters, and it goes back to some of what Cappy had mentioned earlier. It depends on what product is coming in, given the availability for transportation internationally. And as we fulfill some orders, other products will then go on back order. So it does fluctuate somewhat.
spk05: I see. Okay, so as the lead times compress, as you can ship product quicker to the customer, that number should work its way down and then ultimately move over to revenue, correct?
spk06: Yes. Yep, that's correct.
spk05: Okay. So in general, are you seeing that trend where you're able to get product to customers? Some of the supply chain issues are improving. I don't know about resolving, but are they improving?
spk06: They are improving. Well, they're definitely not resolved yet, but it looks like we're starting to trend in the right direction.
spk05: Okay. Okay. And then in terms of the growth, Cavi, and I know that you guys spoke about this, but I missed it, unfortunately. How much of the growth is attributable to pro versus retail customer? And then if you could just comment in general on the levers that you see or that were effective in driving business during the quarter for growth.
spk01: Yeah, we – We anchor back, David, to our strategies this year, which was retail execution, enhance our customers' online experience, and really work on our supply chain. All those things impacted our growth. I mean, we're pulling levers in all avenues when it comes to impacting our business. So, yeah, our pro business has grown. It eclipsed 60%, as in my prepared remarks. And when you can grow your pro business, hopefully you can grow your retail. That comes with it. So, I don't want to get into specific numbers, but I think we're doing the right things today, and we're going to continue to do the things that we've started and that will continue to impact the business in a positive manner. But growth is all we talk about here, so it's a good question.
spk05: Okay. Well, guys, congratulations. You've done a very good job. I'm very pleased as a shareholder. I guess I'll just leave you with the comment that obviously having all that cash sitting on the balance sheet returning almost zero, you know, probably is not a good strategy for the long haul. And I know a previous caller asked about it or made a comment. You know, I would just like to share my view that, and I'm sure you guys are working on this. I have no doubt you guys, you have a very good board and smart management and I'd like to see that cash returned to shareholders rather than just sit on the balance sheet. Unless you have a high ROI activity for it, it seems like that would be wise. So just keep up the great work and hope to chat next quarter. Thanks, David.
spk00: Thank you. Again, if you'd like to ask a question, please press star then one on your touchtone telephone. One moment, please. Again, to ask a question, please press star then 1. I'm showing no further questions at this time. I'll have to turn the call back over to Mark Davis for any closing remarks.
spk03: Thank you for listening to our earnings conference call. We anticipate filing our Form 10Q later today. We look forward to providing our next update in November. Thank you for your interest in the tile shop, and have a great day.
spk00: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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