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Elevator pitch
Tile Shop Holdings, Inc (Nasdaq: TTSH) The stock is rated as Buy.
My previous article published on March 6, 2024 analyzed Tile Shop’s financial results for the fourth quarter of last year. Current update Focuses on TTSH’s key growth drivers.
I’m sticking with a Buy rating for Tile Shop, as I have a positive outlook on the growth outlook for the company’s e-commerce channel and its new product offerings.
The online sales channel has the potential to expand
My opinion is that Tile Shop’s e-commerce business has good growth potential.
The company operated 142 stores in the US as of March 31, 2024 according to its Q1 2024 earnings release. In its previous fiscal 2023 earnings call at the end of February this year, TTSH revealed that “we do not intend to open any new bank.” Stores through 2024. “I think it’s a wise move to pause capital-intensive store network expansion in uncertain economic times like these. Instead, it makes a lot of sense for Tile Shop to grow an asset-light, high-margin sales channel like e-commerce.
The Tile Shop does not segment its revenue by distribution channel. But TTSH revealed in its latest Q1 2024 earnings summary that its online sales now roughly equal the revenue contribution from “one of our larger stores”. Given that TTSH currently operates more than 100 stores of varying sizes, it is reasonable to assume that Tile Shop’s current online sales will not exceed a low single-digit percentage of its top line.
In terms of positive growth momentum, it is worth noting that TTSH’s online sales rose by a significant +25% year-on-year in the first quarter of this year. At the company’s Q1 results conference call, Tile Shop highlighted that “we continue to invest in our e-commerce capabilities” and this puts the company in a good position to capitalize on strong e-commerce demand.
As such, there is still plenty of room for further expansion of TTSH’s e-commerce business.
Target price-conscious customers with new products
In its fiscal 2023 10-K filing, Tile Shop describes itself as a company that sells “high-quality products to our customers, who are primarily homeowners and professionals.” As economic conditions become more challenging and customers tighten their wallets, it is essential for businesses to adapt and meet the needs of price-conscious customers. This is exactly what TTSH did.
Regarding the company’s homeowner clients, TTSH recently launched “competitively priced tile products to attract customers seeking to complete a smaller remodeling project on a limited budget,” according to its comments in its first-quarter results summary. The Tile Shop referred to the new customer segment it aims to serve with the new offerings as the “middle market customer.” Assuming the economy remains weak, it is likely that an increasing number of Tile Shop’s current and potential customers will fall into the “middle market customer” category.
In this regard, Tile Shop has taken the right step to improve the company’s product range to meet the needs of some homeowners who intend to allocate less money to renovation projects.
Regarding Tile Shop’s professional customers, TTSH has also taken measures to remain relevant in the eyes of those customers who are also more price-focused. On its Q1 2024 earnings conference call, Tile Shop announced it was “excited to relaunch our line of brands” with quality on par with “the best brands” and “exceptional price points” with its professional customers in mind.
TTSH already has an existing loyalty program that caters to its professional clients and offers discounted products. Furthermore, Tile Shop’s new private label offerings will also play a key role in helping the company retain its budget-conscious professional clientele.
The downside is protected by strong financial position and cost discipline
In the previous sections, I wrote about the upside of Tile Shop in terms of its product and channel growth drivers. It is also important to worry about the downside of the company.
I think the downside for TTSH is limited to the company’s financial strength and expense management.
Tile Shop is debt-free with its cash position as of the end of Q1 2024 representing approximately 8% of its market capitalization. The company also generated positive operating cash flow and free cash flow of $18.6 million and $15.9 million, respectively, in the first quarter of this year.
When it comes to cost optimization, TTSH emphasized in its most recent quarterly earnings call that “we continue to pursue a number of expense management initiatives focused on reducing manageable expenses.” For reference, Tile Shop was able to reduce its SG&A (selling, general and administrative) costs by -6% year over year for 1Q24.
Key risks to consider
There are two main risk factors that investors should watch.
The main risk is that Tile Shop’s new product offerings will fail to attract customers due to competition or a change in customer preferences.
Another major risk is that TTSH becomes too aggressive in its e-commerce investments, hurting the company’s profitability.
Concluding thoughts
The market is currently valuing TTSH at a trailing twelve-month EV/EBITDA multiple of 12x (Source: Standard & Poor’s Capital IQ). In contrast, Tile Shop’s all-time midpoint (average of historical peak and historical trough) EV/EBITDA ratio and Floor & Decor Holdings’ (FND) current EV/EBITDA measure are relatively higher at 18x and 28x, respectively. for every Standard & Poor’s Capital IQ Data.
I see Tile Shop deserving of more demanding valuations, as the company’s product and channel growth initiatives are delivering results
