Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: porcupine on November 08, 2019, 01:13:44 PM

Title: TTS - Tile Shop Holdings, Inc.
Post by: porcupine on November 08, 2019, 01:13:44 PM
Tile Shop Holdings is delisting and recently plunged from $3.35 down to where it is currently trading at $1.52. On top of the surprise delisting, the company also discontinued its dividend and buyback program (which was 66% complete).

The company has been facing some difficulties as same store sales have been declining for several quarters. Foot traffic has been a problem. They recently switched their ERP system, which led to to difficulties with their POS system. After talking to an employee today, I learned that the system would go down frequently earlier this year and they would have to write out invoices then charge the customers later when the system was back up and running. Management believes that this caused Pro customers (their pro program gives discounts to pro customers) to temporarily stop coming into the store. Additionally, they attributed same store sale declines to weather in Q1 of 2019. There is also the China concern. They have been shifting the sourcing away from China for the past two years. Less than 50% of their sourcing comes from China today. They currently have 142 stores and their goal is to have around 400 in ten years. 

They operate in a highly fragmented industry, with local and national competitors. Their main point of differentiation is the breadth of their offerings (they believe that nobody comes close to how many different products they offer).

Two board members, Peter Kamin and Peter Jacullo, have purchased 4.3mm and 2.3mm shares (respectively) in the open market since the announcement on the 22nd. I think these purchases warrant further investigation into TTS.

Still doing research on this, but it seems like forced selling from institutions and those investors concerned with liquidity has driven the price down to levels where there is simply too much pessimism priced in.

They have had some bad press recently. Wynnefield Capital is suing to stop them from delisting, stating that the board broke their fiduciary duty by purposefully plunging the share price so Rucker (the founder) can regain control of the company through Kamin and Jacullo. There were also some related party issues that occurred back in 2013.

Looks like an interesting situation.
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: Gregmal on November 08, 2019, 01:52:53 PM
Well there is also the fact that this was introduced as a SPAC and is basically a tale of everything one needs to know in terms of why to stay away.

Over the past decade, they've gone from earning about $1 per share to 1/10 of that while nearly quadrupling G&A and increasing total liabilities almost 10x despite being in a blowout housing market and having the corporate tax rate significantly slashed

Shares outstanding have nearly doubled, and theres been a huge inventory built.

There is a reason this has been a favorite of short sellers more or less since its de-SPAC-ing.

Its only productive use is as a piggybank for the chosen ones. I mean even the POS story...that doesnt/no way in hell should happen with a company of this supposed footprint. You dont even hear of that kind of stuff at K-mart. So obviously, there is more going on then just "problems with the system".

So personally, I wouldn't really want to hang around solely on the hopes of a buyout.
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: Spekulatius on November 08, 2019, 04:24:54 PM
I donít understand how they can generate 70% gross margins and then only generate subpar returns. The 70% gross margin is about twice what I would expect in such a business. Weird.
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: Foreign Tuffett on November 08, 2019, 06:40:53 PM
I donít understand how they can generate 70% gross margins and then only generate subpar returns. The 70% gross margin is about twice what I would expect in such a business. Weird.

I think their holding the line on gross margin is why SSS are declining. I'm sure they have some great looking tile, but I suspect that their competitors do too. Floor & Decor does something like ~40% gross margin.
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: BG2008 on November 08, 2019, 07:52:53 PM
Well there is also the fact that this was introduced as a SPAC and is basically a tale of everything one needs to know in terms of why to stay away.

Over the past decade, they've gone from earning about $1 per share to 1/10 of that while nearly quadrupling G&A and increasing total liabilities almost 10x despite being in a blowout housing market and having the corporate tax rate significantly slashed

Shares outstanding have nearly doubled, and theres been a huge inventory built.

There is a reason this has been a favorite of short sellers more or less since its de-SPAC-ing.

Its only productive use is as a piggybank for the chosen ones. I mean even the POS story...that doesnt/no way in hell should happen with a company of this supposed footprint. You dont even hear of that kind of stuff at K-mart. So obviously, there is more going on then just "problems with the system".

So personally, I wouldn't really want to hang around solely on the hopes of a buyout.

I second this.  This has the dual negative of it being a retail business and a SPAC.  I have never made money in retail. Remember Crumbs Bake Shop?
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: writser on November 09, 2019, 02:45:32 AM
When this was written up as a short in 2013 it had an EV of ~$1500m, operated 71 stores and insiders were selling hand over fist. Terrible. I understand the 'retail SPAC - stay the hell away' reflex. In 2013 I'd have agreed for sure. In 2018 too, probably. However, shares are down an additional 75% YTD and as of today TTS has an EV of ~$140m. The company operates 140 stores and insiders (the same insiders who were dumping shares in 2013) are buying hand over fist. There's a new CEO, they initiated a dividend, were buying back shares, insiders now own ~40% of shares outstanding and Peter Kamin has a decent track record of 'fixing' broken companies while not shafting minority holders. At some point, despite your feelings, you have to start looking at the valuation instead of discarding a name outright and I think we're getting close or closer to that point.

That said, I'm not sure I like it too much at the current valuation either. As FT said, not sure if the strategy of maintaining high-end, high-price tile shops works and whether 70% gross margins are sustainable (in fact I'd say they are not). Same store sales were increasing 2014-2018 but are now declining. High operating leverage means it is hard to forecast what will happen. You are basically betting on a turnaround / take-over. Not my favorite kind of situation. And even worse, such a situation is hard for me to put a price tag on. $140m seems cheapish but not obviously super-cheap. Still, Peter Kamin has performed similar tricks before (https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/clwy-calloway's-nursery/) and I wouldn't necessarily bet against him.
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: Deepdive on November 09, 2019, 07:19:02 AM
Very impressed with Peter Kamin's track record at Calloway.  Now Calloway was really a retail operation with free rent because they own the real estate.  Those have a tendency to suck value investors in.  But, it does form a good foundation to turn around a retail operation.  I don't recall TTS having any owned real estate.  At the same time, nurseries in a growth area is likely a better structural play.  When it comes to retail concepts, it needs to really resonate.  It needs to offer something unique.  Undifferentiated retail is where good value dollars go to die.   
Title: Re: TTS - Tile Shop Holdings, Inc.
Post by: Foreign Tuffett on November 11, 2019, 10:20:02 AM
Now trading as TTSH

https://www.otcmarkets.com/stock/TTSH/overview (https://www.otcmarkets.com/stock/TTSH/overview)

https://www.globenewswire.com/news-release/2019/11/11/1944600/0/en/Tile-Shop-Holdings-Provides-Update-Regarding-Delisting-and-Deregistration.html (https://www.globenewswire.com/news-release/2019/11/11/1944600/0/en/Tile-Shop-Holdings-Provides-Update-Regarding-Delisting-and-Deregistration.html)