Tile Shop Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q4 2021 Tile Shop Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mark Davis, Vice President, Investor Relations, and Chief Executive Officer. Please go ahead.

Thank you. Good morning to everyone, and welcome to the Tile Shop's fourth quarter earnings call. Joining me today are Kavi Loma, our Chief Executive Officer, and Carla Lunen, our newly appointed 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 and 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 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 also been posted on our company website. With that, let me now turn the call over to Cavi. Cavi?

Thanks, Mark. Good morning, everyone, and thank you for joining us today. We had a fantastic finish to 2021 and look forward to carrying this momentum into 2022. From a top-line perspective, we continue to perform at a high level. The $90.2 million of fourth quarter revenue represents the highest level of fourth quarter sales in our history. Full year revenue of $370.7 million established a new annual sales record for the company. I'm incredibly proud of what our team has been able to accomplish by focusing on execution in our stores, our supply chain, and our digital capabilities. We continue to believe that there is significant opportunity to grow both sales and profits within our existing 143-store footprint. Not surprisingly, retail execution at a store level remains a key point of focus for us as we move into 2022. We recently made several important enhancements to our IT systems and are excited to leverage additional capabilities that will be introduced throughout the next year. We expect these changes will directly translate into an even better customer experience online and in our stores. Our store and support teams are committed to attaining our retail execution goals, and I believe that this focus will help us sustain the momentum we've established in 2021. Throughout 2021, we've made it a point to limit distractions and ensure we can achieve our goals. A number of our stores took a nice step forward in 2021, and we believe that we have many stores that are positioned to take another leap ahead and deliver great results in 2022. As of today, we plan to keep our focus on our existing store base and forego opening any new stores in 2022. While it is possible we may open stores later this year, we are seeking additional financial improvements within our existing store base, particularly those stores who have fallen behind our expected sales targets as we have made system changes and discontinued promotional discounts to retail customers in recent years. Once we feel good about our existing store base being back on track with our historical economic model, we will look at store growth. Our second priority for 2022 centers on our supply chain. Over the last quarter, we have made nice progress securing delivery of inventory from our vendors and reduced our back orders to levels more in line with historical norms. As of the end of the year, our inventory balance was $97 million, demonstrating our commitment to build our inventory in response to the strong demand for our products. We continue to see cost pressure across our supply chain. While international shipping rates have started to come down from peak levels, the rates we're paying today are still much higher than they were in the past. Many of our suppliers have implemented price increases due to labor shortages, rising energy costs, and other inflationary factors. Collectively, this cost pressure has impacted our gross margin, which was 66.1% during the fourth quarter of 2021. In response to this cost pressure, we are shifting sourcing to vendors who are able to offer comparable products at more competitive prices, as well as diversifying our supplier base and the countries we source product from. We believe these changes will result in stabilizing costs over time. However, it was still necessary to implement price increases during the fourth quarter of 2021 and in the first quarter of 2022. Further, we are closely monitoring the impact of the conflict in Ukraine, which could present new challenges to our supply chain, result in higher energy costs, create further inflationary cost pressure, and heighten cybersecurity risks. In the near term, we anticipate that the pressure on our gross margin will persist and that it may be necessary to continue to take additional pricing actions. Longer term, we anticipate that the inflationary pressures will subside and that the actions we are taking will help ease some of the cost pressure we are currently experiencing. I'd like to share one other point on gross margin. As you know, we are willing to add lower gross margin products to our assortment if there is a compelling business reason and it generates incremental gross profit. For example, we have continued to make progress on initiatives to strengthen our relationships with our professional customers. One area where we've had success is in our offering of best-in-class installation products that help reduce the time a pro spends on each project and improve the quality of the installation. These products are typically sold at a lower markup than other items we carry in our assortment. Continued success winning pro-business and increasing our sales mix of pro-installation products is expected to result in incremental gross profit dollars, but may result in a lower gross margin rate. Similarly, in the past year, we have taken steps to test luxury vinyl tile products in our stores and have planned to expand this offering in 2022. While LVT sales represent a small portion of our current sales mix, the expansion of our LVT offerings, which typically carry lower gross margin rates than our existing tile assortment, could negatively impact our consolidated gross margin rate. In both of these examples, we will gladly make the trade for more gross profit dollars at a lower margin rate since it adds to store performance and supports our customer base. Improving execution in our stores, navigating supply challenges, sourcing high-quality products, and above all, providing an unmatched experience for our customers would not be possible without our team. That is why our third area of focus for 2022 surrounds our tile shop team. Over the past few years, we have taken steps to invest in training and development programs to help cultivate our next generation of leaders. We find this investment has a strong return since many of these leaders now have a direct impact on improving the performance in our stores. We continue to develop training content to enhance our team's knowledge of the latest installation techniques and design trends. We have made investments over the last year to grow our team, particularly in our stores to expand our store hours, our distribution centers given the increase in demand, and our technology team as we pursue initiatives to further leverage the investments we've made in our systems. Now, before I close, I'd like to thank the entire Tile Shop team for an incredible 2021. What you do every day is truly inspiring. We accomplished a lot, and the future is bright. I'd also like to take a moment to introduce you to one of the newest members to our Tile Shop team, Carla Lunen, our Chief Financial Officer. Carla is a seasoned financial professional with a fantastic track record of leading teams that delivered great results in previous roles at MazTec, Black & Veatch, and Ernst & Young. Carla joined us in January and has hit the ground running. I've been impressed with how quickly Carla has been able to get up to speed and integrate throughout our organization. With that, I'd now like to hand the call over to Carla.