The Tile Shop (TTS) is trading sharply lower this morning (-28%) after reporting disappointing Q4 (Dec) results. Before getting into the numbers, a little background would help. The Tile Shop is a specialty retailer of manufactured and natural stone tiles. It also sells setting and maintenance materials (thinset, grout, sealers) as well as related accessories (installation tools, shower and bath shelves etc.).
TTS offers a complete assortment of tile products, sourced directly from vendors, including natural stone, ceramic, porcelain, glass, cement, wood look, and metal tiles. Natural stone products include marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. Its wide assortment of trim pieces, mosaics, pencils, listellos and other unique products encourage customers to make a fashion statement with their tile project.
Unlike many of its competitors, TTS devotes a substantial portion of its retail store space to showrooms, including samples of its 4,000+ products and up to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, outdoor living, and other distinct spaces that showcase its products. These are full-room tiled displays which are enhanced by the complimentary Design Studio, a collaborative platform to create customized 3-D design renderings to scale, allowing customers to bring their design ideas to life.
Its showrooms are designed to provide customers with a better understanding of how to integrate various types of tile. Many stores are also equipped with a training center designed to teach customers how to properly install tile. Its stores are spacious, well-lit, and organized by product type to simplify the shopping experience. The Tile Shop currently operates 140 stores in 31 states, with an average size of 20,300 sq feet.
TTS customers tend to be mostly homeowners and professionals. An important strategy TTS has been employing is to focus more on driving sales to professionals. The professional customer includes tile contractors, custom home builders and designers. Key elements of this strategy have included joining trade organizations, developing marketing strategies, hosting in-store events, enhancing its product assortment of tools and refining its credit policies. Also, store associates have been tasked to develop relationships with professionals in their trade area.
Turning to the Q4 results, TTS reported a non-GAAP loss of $(0.05) per share. This was seen as a disappointment because the market as expecting a profit in Q4. Revenue rose a modest 2.6% year/year to $78.58 mln, which also was a good bit below market expectations. Same store comps declined -4.9% in Q4 following a +3.1% increase in 4Q16 and a +1.1% result in 3Q17. The comps are also being seen as a disappointment.
Keep in mind that Q4 is typically The Tile Shop's weakest quarter which makes sense as most people are not wanting to do tile projects around the holidays. Sales tend to pick up during the spring/summer remodeling season. However, these Q4 results were still quite a bit weaker than expected.
A big reason for the shortfall was a drop in customer traffic in Q4. Part of this was likely due to TTS' decision to de-emphasize price promotions. Instead, TTS said it was more focused on improving its product assortment and identifying opportunities to better serve its professional customers. This is a key strategy for TTS as discussed earlier.
In sum, investors appear to be quite disappointed in how TTS closed out 2017. And management seems to know it needs to do better. The company said its performance in 2H17 was not reflective of its position within the flooring industry as the preeminent place to romance the home with unique and premium tile. However, TTS believes it's taking the right steps to deliver better financial results and to best position the company for long-term success. Let's hope so because consumers tend to like price promotions and de-emphasizing them in Q4 hurt results.