Tile Shop Holdings, Inc.

Good day and thank you for standing by. Welcome to the fourth quarter 2022 Tile Shop Holdings 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 the session, you'll need to press star 1 1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Davis, Vice President of Investor Relations and Chief Accounting Officer. Please go ahead.

Thank you, Operator. Good morning to everyone and welcome to the Tile Shop's fourth quarter and full year earnings call. Joining me today are Cab Loma, our Chief Executive Officer, and Carla Lunen, 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 also been posted to our company website. With that, let me now turn the call over to Cab. Thanks, Mark.

Good morning, everyone, and thank you for joining us today. Starting with the positive, in 2022, Our company achieved our highest level of annual revenue in our 37-year history, and we're able to accomplish this milestone without opening any new stores during the year. This milestone was made possible by the steps we've taken to improve inventory levels and execution across our store base in 2022. We've made significant progress. However, in the fourth quarter, we've battled macro headwinds that contributed to lower levels of traffic in our stores and a modest decrease in comparable store sales. While the top line results for the quarter fell short of our goals, there are a number of positive developments I'm seeing in the business. First, we're able to successfully launch our expanded line of LVT products during the fourth quarter. We've seen a nice response from our associates and our customers following the launch. As you know, we have been observing LVT for the past few years as our higher end customers gradually accepted LVT as a viable option for their flooring needs. We believe this is due to advancements made in LVT product quality since it was first introduced. Our test of LVT earlier in the year went well. Since the full launch in October, we have continued to see customers choosing to purchase tile with LVT on the same order. We believe that we have an opportunity to grow ticket averages by cross-selling LVT to customers who are already in our stores to purchase tile. Additionally, we believe the addition of LVT gives us the opportunity to reach new customers We chose to shop elsewhere when LVT products were not available in our stores. As a reminder, LVT and other resilient flooring were projected to be approximately 30% of all industry-wide hard surface flooring sales in the US in 2022. While we're just getting going, I'm pleased with the initial results and believe our LVT lines will be a key catalyst for growth in 2023. Moving to new store growth. We're on track to open two new stores in 2023. We expect one to open this summer and one in the second half of the year. Our operational teams are actively working to refine our new store opening procedures to ensure our 2023 store openings are positioned to deliver strong results. The third area I'd like to address is our supply chain. Over the last 18 months, we've seen increases in prices from our suppliers in response to rising energy, labor, and other inflationary cost pressures. These pressures were compounded by elevated international freight rates. In response to these cost pressures, we took steps to implement selective pricing adjustments across our assortment, particularly during the first half of 2022. In addition, during the second half of the year, we've tried to stay ahead of this by building stock levels in our more popular SKUs ahead of announced price increases from our suppliers. Given the macro headwinds, we took a more conservative approach to raising prices during the second half of 2022. This conservative approach, combined with increasing inventory costs, contributed to the 200 basis point sequential decline in gross margin rates between the third and fourth quarters. On a positive note, international freight rates have started to come down, which should help us as we move through 2023. Additionally, we've made great progress working with our network of suppliers to identify alternative sources for a number of our products at a lower cost. In January, I had the opportunity to travel with our purchasing team to visit suppliers across Asia who are partnering with us on our resourcing effort. I was impressed by the quality of the products we inspected on our trip and encouraged to see firsthand examples of SKUs we'll be adding to our assortment at a much lower cost when compared to the price of similar items purchased in late 2022. It will take some time for the newly resourced products to make their way into the assortment. I believe the success we're having in this area will position the company to maintain a strong overall margin profile. I'd also like to take a moment and touch on our retail excellence initiative. Over the last two years, we have focused on eliminating distractions and improving core execution in our stores. We delayed initiatives such as growing stores so we could focus our efforts on developing our teams. Our focus areas including training on design, leadership, inventory best practices, and customer engagement. These efforts have translated into improvement in sales to our pros, higher conversion rates, lower discretionary discounting, and a decrease in inventory losses. While we've made great progress, our work here is never done, and we'll continue to focus on the details in providing exceptional service to every customer who walks through our doors. Before I close, I'd like to take a moment to thank the Tile Shop team. As mentioned earlier, we set an annual sales record in 2022. Our success would not be possible without the energy and passion you bring to your job every day. I look forward to continuing to build on our success in 2023. With that, I'll now hand the call over to Carla to walk us through the financial results for the fourth quarter and the full year. Carla?