Tile Shop Holdings, Inc.

Good day everyone and thank you for standing by. My name is RG and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2025 Tile Shop Holdings Inc earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press star one again. Thank you. I would now like to turn the call over to Ken Cooper, Investor Relations. Please go ahead.

Thank you and good morning to everyone. Welcome to the Tile Shop's second quarter earnings call. Joining me today are Kab Woma, 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 press release for reconciliation of those non-GAAP financial measures. The press release also has been posted on our company website. With that, let me turn the call over

to Kab. Thank you Ken. Good morning everyone and thank you for joining us today for an update on our business. During the second quarter we continue to navigate a very challenging housing market. While housing turnover remains at historically low levels and present the headwind for our entire industry, we were encouraged by modest improvement in unit volume sales driven by the ongoing refinements we've been making toward assortment. Unfortunately, the unit volume increases were offset by greater use of disk toning in the quarter and greater sales of products at the low end of our recently expanded product assortment which put pressure on our average ticket. While challenging conditions persist, we believe the steps we've taken have us well positioned to appeal to a broader base of customers considering a home remodeling project. Further, we're seeing more examples where we've been able to grow tickets by picking up mudroom or basement flooring when we sell tile for a bathroom or kitchen. The refinements we've made toward assortment over the last year include the expansion of our LVT offerings such as our exclusive Arbor line which was released last fall. Additionally, we've added laminate and engineered wood flooring options over the last year which are contributing to the increase in square footage volumes that I referenced earlier. We've also expanded our assortment of large four-night tile offerings over the last year which positioned us to serve customers seeking options in this growing flooring category. On deck we have our signature line which just launched over the last quarter. The signature line includes a robust offering of over 250 different wall tile and matching products with many color options available to complement a variety of styles. Our sales team is excited to have this new offering and I'm looking forward to see how it performs in the second half of 2025 and into 2026. While we've made a number of nice additions to our assortment over the last year, we recognize the uncertainty and volatility tariffs have presented to our industry. However, it is important to remind you that we believe we are well positioned to handle their policy as it evolves. For instance, we currently source products from well over 20 countries across the world which means we're not overly reliant on a single country outside of the U.S. As we've evaluated this risk, we've noted the proposed tariffs continue to change rapidly and we continue to monitor this closely. Additionally, we carry more inventory than the typical retailer. We believe this gives us even more time to pivot if needed as tariffs take fact. Further, we have a seasoned purchasing team with deep experience working with vendors across the world to identify alternative sources of supply should cost go up in one part of the world and it becomes advantageous to source similar products from another part of the world. In short, time is on our side. Before I turn the call over to Mark, I'd like to address one more topic. Although our team has and will continue to fight valiantly, this extended difficult housing market has had an adverse effect on our profitability. Over the last nine months, we've closed two of our distribution centers, reduced our corporate workforce by about one-third and aggressively cut expense budgets across departments. We also closed one store at the end of its lease in the second quarter of 2025 and a second store in the third quarter. The actions we've taken have been the tough decisions but they have been the right decisions to help curtail spending given the traction we've seen in our business. We intend to place further emphasis near term on continued efforts to reduce expense, limit capital spending and identify efficiencies across our business while we navigate this challenging period. With that, I'll now hand the call over to Mark.

Thanks, Cap. Good morning, everyone. Second quarter sales comparable stores decreased by three and a half percent due to lower levels of store traffic. As Cap mentioned, our tiled volume sales improved during the second quarter of 2025 when compared to the same period during the prior year. While the modest improvement in unit volumes is encouraging, the volume tailwind was offset as we mixed into products carrying lower average selling prices. Our gross margin rate during the second quarter was 64.4 percent which represents a 160 basis point decrease compared to the second quarter of 2024. The decrease in gross margin was driven by an increase in discounting as well as an increase in product costs. Second quarter SG&A expense of 56.4 million dollars was 2.1 million dollars lower than the second quarter SG&A expenses in 2024. The decrease was primarily due to an 800,000 decrease in asset impairment, 700,000 dollars related to the closure of our New Jersey distribution center in the third quarter of 2024, a 700,000 decrease in marketing and a 400,000 decrease in depreciation. Together these were partially offset by a 400,000 dollar write-off of merchandising supplies. During the second quarter we closed our distribution center in Spring Valley of Wisconsin. We did not incur any material asset impairment or severance charges in connection with this DC closure and anticipate this action will reduce our annual SG&A expense by approximately one million dollars. As Cap mentioned earlier, we intend to continue to evaluate options to reduce expenses, curtail capital spending and identify efficiencies across our business while the housing backtrack remains challenged. During the first half of 2025 we generated 13.5 million dollars of operating cash flow and added 6.8 million dollars to our cash balance which grew to 27.8 million dollars at the end of the quarter. With that, Cap and I are happy to take any questions.

At this time I would like to remind everyone that in order to ask a question press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Again as a reminder if you would like to ask a question press star one on your telephone keypad. That ends our Q&A session and I will now turn the call back over to Ken Cooper, Investor Relations. Please go ahead.

Thank you for listening to our earnings conference call. We anticipate filing our Form 10Q later today. Thank you for your interest in the tile shop and have a great day.

Ladies and gentlemen that concludes today's call. Thank you all for joining. You may now disconnect.