Elevator Pitch
My rating for Tile Shop Holdings, Inc. (NASDAQ:TTSH) stock is a Buy. Earlier, I touched on positive corporate developments for TTSH in my previous update written on September 21, 2023.
This latest write-up reviews Tile Shop’s most recent quarterly financial results. TTSH’s Q4 2023 EBITDA surpassed expectations, and I think that the company’s 2024 financial performance will be superior to what it achieved in 2023. I retain a Buy rating for TTSH, as the company’s prospects are good, and the stock is valued by the market at a significant discount to its peer.
Tile Shop Achieved An EBITDA Beat For Q4 2023
On February 29 before trading hours, TTSH issued the company’s Q4 2023 earnings press release. The company delivered above-expectations EBITDA for the latest quarter.
Tile Shop’s actual EBITDA for the final quarter of the prior year was $6.63 million, and this turned out to be +7% higher than the sell side analysts’ consensus net income estimate of $6.18 million (source: S&P Capital IQ).
The company’s EBITDA decreased by -26% YoY and -20% QoQ in Q4 2023. TTSH attributed the operating earnings contraction for the recent quarter to “macro headwinds together with the typical seasonal slowdown in home remodel projects during the holidays” in its quarterly earnings release.
But Tile Shop managed to achieve a positive EBITDA surprise in Q4 2023 as a result of a narrowing of its same store sales decline and better than expected gross profit margin improvement.
The company’s same store sales contraction improved from -4.9% in Q3 2023 and -3.2% for Q4 2023. Separately, gross margin for TTSH expanded by +0.2 percentage points YoY to 64.7% for the fourth quarter of last year, which was above the market’s consensus gross margin forecast of 64.5% as per S&P Capital IQ data. The company explained at its Q4 2023 earnings briefing that its gross margin improved in the recent quarter because “international freight rates have decreased, and we have been able to successfully secure products offered in our assortment at lower price points.”
In the subsequent section, I analyze Tile Shop’s financial prospects for the current fiscal year.
Management Commentary Offers Favorable Read-Throughs For TTSH’s 2024 Outlook
Tile Shop didn’t provide specific quantitative guidance in tandem with its fourth quarter results announcement. However, TTSH’s management comments at its most recent quarterly earnings call suggest that the company is likely to register a reasonably good set of results for fiscal 2024.
At the company’s Q4 2023 earnings call, Tile Shop noted that it anticipates “continued success in 2024” and thinks that it is “positioned to see the continued margin expansion” this year. There are a number of factors that are expected to drive TTSH’s top line growth and profitability improvement for the current year.
Firstly, TTSH intends to place a greater emphasis on individual clients going forward, and such efforts should boost its top line for 2024. Professionals currently account for around 70% of Tile Shop’s revenue as disclosed at Tile Shop’s fourth quarter results briefing, and the company has plans in place to grow the sales contribution from individual customers who represent the other 30% of its top line. Specifically, TTSH revealed at its Q4 2023 earnings call that it targets to “regain share of retail customers seeking a DIY (Do-It-Yourself) project by introducing more products at (lower) price points.”
Secondly, Tile Shop’s e-commerce business operations have strong sales growth momentum. In specific terms, the company’s online sales jumped by more than +30% YoY (source: Q4 earnings call) in Q4 2023. TTSH has made tweaks to the process of requesting and delivering sample products in recent times, and these changes have paid off with an increase in e-commerce sales. Moving ahead, it is realistic to think that TTSH’s future revenue will be boosted by higher online sales, as the company expands its e-commerce operations and improves the product sampling process.
Thirdly, TTSH’s profitability should get better this year. The worst of inflationary pressures might be over, and the company could benefit from positive operating leverage considering a favorable revenue growth outlook. TTSH shared its view that “the increase in (the company’s) average inventory cost peaked in early 2023” at its fourth quarter earnings call. Tile Shop also mentioned at the company’s recent quarterly investor briefing that it expects to “improve our leverage on fixed SG&A (Selling, General & Administrative) expenses.”
In a nutshell, I am of the view that Tile Shop will be able to report positive top line expansion and operating profit margin improvement in FY 2024. As a comparison, TTSH’s revenue decreased by -4% in 2023 and its EBITDA margin contracted by -2.3 percentage points last year
Final Thoughts
Tile Shop trades at 11.2 times consensus next twelve months’ EV/EBITDA now, which represents a meaningful discount to its peer Floor & Decor Holdings’ (FND) current consensus next twelve months’ consensus EV/EBITDA multiple of 27.6 times. In my opinion, TTSH’s peer valuation discount is likely to narrow going forward, taking into account its Q4 EBITDA beat and its favorable FY 2024 outlook. This explains why I have maintained my Buy rating for Tile Shop.
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