Adam Hauser – Director of Investor Relations Bob Rucker – Chief Executive Officer and President Chris Homeister – Chief Operating Officer Kirk Geadelmann – Chief Financial Officer..

Peter Keith – Piper Jaffray Peter Benedict – Robert Baird Kate McShane – Citi Research Daniel Moore – CJS Securities John Baugh – Stifel Nicolaus Anthony Lebiedzinski – Sidoti & Co Cristina Fernandez – Telsey Advisory Group.

Good day, ladies and gentlemen and welcome to The Tile Shop Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session and instructions follow at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the conference over to your host, Adam Hauser, Director of Investor Relations. Please go ahead..

Thank you, operator. Good morning to everyone on the call and welcome to the Tile Shop's third quarter earnings call. Joining us on the call today are Bob Rucker, CEO and Founder of The Tile Shop, Chris Homeister, Chief Operating Officer and Kirk Geadelmann, our Chief Financial Officer.

Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and we would appreciate that participants would limit themselves to one question, with one follow-up.

As a reminder, certain statements made during the call today may 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.

Words such as, but not limited to, plan, expect, anticipate, believe, estimate, target and any other similar words to identify forward-looking statements may be made. 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 the earnings press release issued today and in Tile Shop's latest filings with the Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call and the company does not undertake any obligation to update these forward-looking statements.

Today's presentations may also include certain non-GAAP measurements. Please see the company's earnings release issued for a reconciliation of those non-GAAP financial measures. With that, let me now the turn the call over to Chief Executive Officer, Mr. Bob Rucker.

Bob?.

Good morning. Today we announced our third quarter financial results which Chris and Kirk will discuss in greater detail during the course over the call.

As you read our press release this morning, I've elected to retire from The Tile Shop and Chris Homeister has been unanimously approved by the Board of Directors to become the CEO of company beginning on January 1, 2015. Chris is also been elected as the member of the Board of Directors with this term begin early next year.

I will remain in a full-time capacity at The Tile Shop through August 1, 2015, where I will be advising Chris and working with the other members of the management team and building out our programs and initiatives for the coming year.

I will remain active, an active board member at the company and will always be available to Chris and his team on any topic, where they feel like and have my expertise and counsel. When I started the company in 1985 in Rochester, Minnesota. I felt, that we could bring a different and unique experience to purchasing tile and natural stone products.

Over the course of the last 29 years, we have continued to modify and enhance our business model to provide the best products from around the world at a fair price to introduce design ideas to consumers with their investments in vignette and always provide great customer service by having knowledgeable and highly trained sales associate interact with our residential and professional customers, so that they would always be treated right.

I take great pride in standing behind the products that I've selected over the years and ensuring that we always exceeded our customers' expectations. This is the heart of the what The Tile Shop has always been and what sets up apart from our competitors.

I'm very proud of the business that I've built, where we now have 105 stores in 30 states and feel that we are just getting started.

I continue to get highly energized by visiting our stores across the country and speaking to all of our sales men and women, about how we can better serve our customers by offering them the best experience that is available in our industry.

I feel that our management team has never been stronger during my time and leading with a company, we've individuals on the management team, who are experts in their field. Who love retail and who have a laser focus on exceeding the needs of our customer base? I'm absolutely confident that Chris is more than ready to lead the company going forward.

I work very closely with Chris over the past year and have been very impressed with his ability to learn our industry while drawing on, his extensive past experiences to improve our operations on a variety of fronts.

Chris brings a broad array of great operational experiences, in depth retail knowledge, global sourcing and merchandising experiences, strong business in financial acumen and the ability to connect on an individual basis with our key vendors across the world.

I've also enjoyed seeing Chris connect firsthand with our store managers and associates as we continue to expand our retail store footprint across the country. Chris and I've travelled all over the world over the past year.

We have visited all of our key vendors and I'm confident that under Chris's leadership the team that we have put in place in country as well as here at our corporate offices is well positioned to grow and ultimately expand our sourcing activities.

We can expand with existing vendors and also by sourcing products from new countries such as Mexico in a more significant way going forward. The time is right for me to write the next chapter of my life, as I've good health and a wonderful family and I'm looking forward to spending more and more time with them as we travel the world.

I will always remain an active member of The Tile Shop and Chris knows that he can call on me at any time. As I love the Company and what it represents to people.

I'm immensely proud of how we have positively changed the lives of thousands of people, who have worked for The Tile Shop both past and present and will always be humbled by the dedication and loyalty, they have shown to the company and to me over the years.

The Tile Shop is poised for great success and I'm looking forward to watching the Company to grow and prosper in the coming years ahead. Thank you to our investors who have believed in me and the company as we went public a couple years ago. I firmly believe that the best years of the Company are directly ahead.

Now let me turn the call over to our future CEO, Chris Homeister..

Thank you, Bob. I'd like to begin by thanking Bob and the entire Board of Directors for selecting me for this incredible opportunity to lead The Title Shop.

I'm very proud to lead the organization as Bob has built over the course of the past three decades and fee that the future is very bright for the organization, as we continue to prove upon our business model.

Bob is been a tremendous mentor to me, during my time at The Tile Shop and I sincerely appreciate his counsel and teaching me about the industry and also discussing with him, how we can better serve our customers, while improving our financial performance and return on capital.

During the course of my 20 plus year career, I've had the opportunity to lead organizations that were in high growth dynamic and in ever changing environments. I feel my background in global sourcing; marketing financing, retail operations, supply chain and finance will be highly beneficial to the organization as we continue to grow our store base.

I love retail, sourcing [indiscernible] to present the customers and how we are able to inspire customers, as they invest in their homes. Now let's begin with, the current quarter's disappointing results, which we will discuss in shortly.

I remained fully convinced in the long-term opportunity presented by The Tile Shop superior and dynamic business model. This is what originally factored me to the Company and this is when I'm more enthusiastic than ever about our prospects as we move into my new role.

The Tile Shop is a tremendous business and has historically driven superior financial results to its investors. The specific reason and few one of The Tile Shop is and will continue to be a great business by the following.

We are consistently out pierced the industry in a highly fragmented market, building and leading position in a category clues for sustained growth. A very strong relative to almost any other retailer EBITDA margins.

Best-in-class customer benefits in the form of the six month return policy, never restocking fee and 100% guarantee on our manufacture products and setting materials. The largest and most diverse part in serving [ph] the industry.

We have the best-in-class store experience, with over 50 beautiful store and yes, [indiscernible] hundreds of tile and stone selections inspiring our customers to think about to how they personalize their project.

Highly and knowledgeable store associates that are able to advise our customers on every phase of the purchase and lastly a strong leadership team, is in place to drive the next phase of growth for the company. We have accomplished a great deal over the past year, but we have underperformed relative to our own and external expectations during 2014.

My observations for this underperformance are outlined as follows. First, while we have done an excellent job of adding to and strengthening the corporate staff role to our aggressive storage expansion. The company has not been able to keep that same pace at the retail store level. They've doubled our store base over the past three years.

During this period of dramatic growth, we have not consistently maintained the sufficient supply of tenured and well trained store manager and sale staff that meet that road, as successfully as we've been accustomed.

In our journey [ph] of stores with year-to-date comp sales declines, you can trace it back to management limit incurred due to our significant store growth that has always been a case with The Tile Shop, that the number one factor for store success is a strong store manager and sale staff.

Secondly, approximately half of our stores were opened in 2012 or later, that account about 30% of 2014 sales. These store investments have yet to evolve far enough along maturity curve, where, they're able to contribute for well EBITDA margin approaching a mature store-base.

About 35% of new stores since 2012 were in new markets which further challenges their movement of maturity curve]. This significant expansions in new markets superior of the challenges and staffing the stores with historical manager profile has amplified our EBITDA margins deleverage.

Third, we've invested in infrastructure capable of supporting an aggressive long-term store expansion. We've invested in assets that have our actual expansion such as our performance distribution center, e-commerce upgrades and handful of additional corporate positions including a new sourcing and merchandising computer [ph].

This hurts operating margins in the short-term, but we believe will provide long-term benefits. Based upon the challenges that I've just outlined. Let me now focus on what we're doing to address them and turn the company to higher levels of growth and profitability. The first topic I'd like to discuss is about our plans for new store openings.

We are reducing our planned store openings for the next year to range of low to mid-teens. Five of these stores are expected to be in new markets to The Tile Shop, with a remainder opening in existing markets.

A combination of fewer store opening and a significantly higher percentage of stores opening in the existing markets will make it easier to get ahead of hiring and training challenges that we've encountered recently. In addition, we will continue to optimize the store layout, merchandising selection and overall look and feel of the store.

This will include selecting and operating future sites that are below our historical square footage, which will allow the company to lower our capital outlay in per store and increase our sales productivity on a store foot basis. Second area of focus is centered around retail talent identification and training.

We are modifying the retail field organization to include a new position called market managers. This position will be accountable for driving the overall market growth strategy for a specific DMA and will be also accountable for talent identification and development of assistant managers and ultimately new store managers.

This position will be financially incentive to select, train and ultimately have their managers placed within our network of stores. In order to maintain high customer service levels and come up connection plans with our customers.

We are hiring an additional 18 full-time assistant managers that we have identified as confidential individuals that will leading, into a manager and training program. A full classroom and on the job training program has been developed that we will follow when placing these leaders in the new stores or locations that have an actual turnover.

We expect the cause associated with these programs will fully cover by the incremental sales within the store, that they're assigned few as well as significantly diminishing disruption in the stores. The third items, is that we're expanding our focus on the professional customer.

While the professional customer has always been an important client for The Tile Shop, we feel we have a significant opportunity to expand our penetration over this customer segment going forward. We've hired, a seasoned and tenured leader, direct our efforts in developing in best-in-class professional program.

We believe that this additional focus will pay dividends in the coming quarters and we will provide updates for our progress on this front, in the future.

In addition, we continue to improve and refine our website improving our organic search and by continuing to add to this tiles functionality including the recently launched ship to store for free option that is available to all of our customers.

We'll also be announcing soon a new product sampling program that will offer many of our more popular mosaics will reduce cost that will be shipped directly to our customer's home.

Lastly, working capital management will continue to remain a key area focus, as we look to optimize our inventory levels at the store, distribution centers and [indiscernible] inventory with vendors. As previously stated, we have no plans for a new distribution center through at least 2015.

In summary, I'm very confident in the business performance, a very high level and my ability to positively impact this performance. The team and I will look forward to provide a future updates to all of you in the coming quarters and with that, let me now turn the call over to Kirk to further discuss the quarter..

Thanks, Chris and good morning, everyone. I'll begin by taking you through greater detail on our third quarter before discussing our outlook for the remainder of the year.

Today, we reported net sales of $62.8 million for the third quarter, 2014 which represents an increase of $6 million or nearly 11% over sales of $56.8 million in the same quarter of last year. The macro backdrop remained challenging for the specialty flooring industry in the third quarter.

Given the challenging environment, we were encouraged by the 0.6% comparable store sales growth in the quarter. This marks our second consecutive quarter of sequential improvement and represented a two-year stacked growth rate of 15.4%, our highest quarterly total this year.

The third quarter represented the second straight quarter of approximately 15%, two-year stacked growth at comp stores. Importantly, our four largest and most well established markets of the twin cities Chicago, DC, Baltimore and Detroit in aggregate delivered approximately 4% comp growth in the quarter.

These markets accounted for over 40% of our comparable store sales in the quarter and they each approximately met or exceeded Q2 comp performance. The health of these mature markets as well as 7% to 8% implied annual growth of our two-year stacked comp the past two quarters is a strong indicator of the continued strength of our model, with customers.

Our comparable store sales fell modestly short of our expectations for the quarter. However, a much larger portion of our revenue shortfall versus our own goals occurred within our new stores. In aggregate, new stores opened in 2013 and 2014 will fall short of our historical first year expectations.

The 36 stores opened from January 1, 2013 through the end Q3, 2014 have phased three distinct challenges as Chris discussed, we have not been able to staff these stores with the same level of management tenure and Tile Shop experience as we were able to throughout most of our history.

Which now only a handful of opening per year? Second 24 of these 36 openings, were in new markets with very little marketing investment. Compounding this dynamic was the fact, that during the third quarter we experienced some natural weakness related to search engine optimization, after transitioning our website in June.

This has much more impact on new stores, where we've yet to establish our brand. Third, these companies' specific challenges were paired with a sharp slowdown in existing home sales that has persistent throughout 2014. When assessing these 36 stores, about one-fifth are overcoming these challenges.

In our achieving or exceeding early revenue targets based on historical norms. About one-fifth are falling modestly short of early revenue targets, which we classify as a short fall of up to approximately 15%. About one-third of these stores are falling meaningfully short, which we classify as a shortfall in excess of 15%.

The remainder of the 36 stores are too early since opening to categorize. Starting new stores coming slowly up to maturity curve is not, a new challenge at The Tile Shop. It is happened numerous times throughout our history, when going into new markets and with no brand recognition and minimal marketing investment.

The great news is what these stores have done after a slow start, between 2009 and 2012 we opened 26 stores. Nine of these locations fell more than 10% below our first year sales expectation. In aggregate, these nine stores had a year two, growth rate of approximately 30% far above our targeted year two growth.

These previous proof points, thermally reinforce our belief that stores opened in 2013 and 2014 will achieve success despite a sluggish first year. From a real estate and site selection perspective, we believe these stores are positioned for success. Finally, since 2012 was our first year of rapid store expansion with 15 openings.

It's worth pointing out, that these stores deliver an average first year revenue of approximately $1.8 million right on track with our targeted goal. The challenges, I've just discussed started to impact new store revenue for opening in 2013 and beyond.

The initiatives Chris outlined earlier, are intended to provide very specific help to our new stores, having market managers to mentor new store managers. Investing in a deeper bench of well-trained assistant managers.

Focusing on how to help our stores in growing their professional business accounts and driving marketing effectiveness are all efforts we expect to feel the performance of our new stores. Gross profit increased $3.6 million in the quarter or 9.2% over last year.

We experienced a slight decline to 69.2% gross margin rate, after five straight quarters of approximately 70%. The 60 basis point decline versus our first half rate of 69.8% was driven by corporate promotions to compete aggressively during two key holidays in the fourth quarter; 4th, July and Labor Day.

We had five-day promotional window surrounding these holidays at see more pronounced customer traffic and orders in other weeks during the quarter. Our selling, general and administrative cost for the quarter were $39.8 million as compared to $32.2 million for the third quarter of last year.

The SG&A cost in 2014 included approximately $0.2 million of non-recurring cost primarily related to litigation expenses. We concluded the third quarter with 104 stores, a 30% increase versus the conclusion of last year's third quarter, when our store count was eight.

Consequently, when looking at the $7.6 million year-over-year increase SG&A approximately $7 million or 90% of the increase is attributable to new store growth. Nearly, $4 million of the $7 million is depreciation and amortization, rents, property taxes, utilities and other occupancy costs.

The remainder of growth attributable to new stores is primarily for compensation, benefits and shipping and transportations. Pre-opening expenses were approximately $365,000 in the quarter.

The remainder of total SG&A growth not attributable to new stores included, a modest increase in advertising, a $160,000 increase in stock-based compensation an incremental corporate leadership cost.

As we discussed on previous call, as new stores are opened the store related SG&A cost are disproportionately higher as a percentage of sales then our mature stores. After the past three years, as we doubled our store count, this has dramatically distorted our SG&A cost, as a percent of sales.

At the end of the third quarter, 36 of our 104 stores have been opened in 2013 or later. I just discussed, how I higher than normal portion of these new stores were performing below targeted expectations and this has created an even more pronounced impact than originally expected on our SG&A ratio and EBITDA margins, this year and particularly in Q3.

We are still expecting an improvement to SG&A ratio and EBITDA margins, beginning in Q4 in meaningful improvement in 2015. Adjusted EBITDA was $10 million in the third quarter or 15.9% of sales.

The non-GAAP presentation in the press release adjust our GAAP quarterly results by eliminating non-cash expenses related to unusual or non-recurring cost and then applies the tax rate to the results.

This presentation, results in non-GAAP net income for the quarter of approximately $1.6 million, which translates into a basic and fully diluted earnings per share of $0.03.

Turning to our balance sheet as of September 30, we ended the quarter $5.7 million of cash and $90 million of long-term debt, at quarter-end we had approximately $20 million of borrowings available under our long-term credit facility.

As we indicated in our last call, the second half of the year typically experiences a modest build in inventory from first half levels. Our $67.3 million ending inventory was a dramatic improvement from last year's third quarter total of $77.1 million. Down nearly $10 million or 13% despite sales growth of 11%.

We still plan to end 2014 with lower ending inventory than 2013, despite opening 19 additional stores by year-end and growing sales greater than 10%. Capital expenditures were approximately $9 million in the quarter.

Primarily related to new store build out, store remodeling, improvements at the existing distribution centers and corporate IT investment. With respect to cash flow, the company generated approximately $7 million of free cash flow in the quarter. Importantly, we expect the year to conclude with positive free cash flow for 2014.

Regarding our outlook for the year, with the continuation of mid single-digit declines in existing home sales and approximately flat year-to-date comparable store sales growth.

We are taking a more cautious view of the fourth quarter and have modified our guidance for 2014 to reflect our year-to-date results and to recognize a more conservative estimate for the fourth quarter.

The company now expects the following for the full year of 2014; revenues were ranged between $257 million and $261 million comparable store sales growth will be down 1% to plus 1%. New store revenue will be lower than our traditional first year levels.

Earnings per share will range between $0.23 and $0.25 per share assuming approximately a 69.5% gross margin rate, an effective tax rate of 40% and $51 million fully diluted shares outstanding. We now expect to open 19 new stores in 2014. One last than our previous outlook, driven by the timing of a new store opening.

Of the 19 stores, 13 will be in new markets and six in existing markets. CapEx is expected to range between $38 million to $40 million. Our expectation for depreciation and amortization is approximately $20 million and stock-based compensation is now expected to be approximately $5.5 million.

With that operator, we can now turn the call over for questions..

Thank you, ladies and gentlemen. (Operator Instructions) our first question comes from Peter Keith with Piper Jaffray. Your line is open..

Chris, congratulations to you. I guess, I want to talk to you about the new store productivity because it feels like, we've been on this adventurous path for two years of very rapid store growth and I think you guys have been fairly consistent to say that the, the store growth productivity is good, it's in line with historical measures.

Now there seems to be a concession that it's not, the management turnover of the store would be an issue, but I guess how can you give us comfort that there is not a broader issue in terms of real estate site selection and maybe you've signed some bad leases over this aggressive growth period..

Good morning, Peter. This is Chris. Thank you for the note and looking at the site selection and the stores that we bought into the company over the last two years. We feel confident that, do not have a real estate selection issues, with any of the stores that we have a chain that's currently went under thought.

What I was say it from our stand point about how looking at store performance as we go forward, as looking at couple different things. One is, what is the plan for a marketing promotion standpoint for what we build, that store against the community especially for new stores and new markets.

I feel that, historically we've not invested as much as we need to or should, during that timeframe and we've had a number of different outliers both positive and negative on that front, Peter. So I don't feel that, I do feel that the historical guidance that's been given has been accurate across the board.

I would then also couple with the fact that, as we've talked about at length during the call about the plans that we have around continuity of people within the store, it's an incredibly important item for store performance and when you look at the continuity of store leader which then constantly goes into the continuity of the store staff and given a fact that, we have a very high touch transaction that has multiple touch points coming in.

Where they're coming and looking at sample, they're coming at looking at vignette, they're coming into bring another individual into the discussion as well, having the continuity people is incredibly important for the company and historically been one of the core differentiators for us, as we know the new markets.

With performance on the store, not necessarily being as high as we like, it has led to turn over had lead over from the turnover institute the stores have, which we feel has impacted the performance significant during the last several quarters in particular..

Okay and so looking out to next year, you're slowing the store growth, but I guess on a low to mid-teens percentage growth rate, I mean this back me up, I'm calculating that to be 12 to 16 new units, why open many stores at all.

I mean, it seems like, you could maybe put a pause in here delay some leases and put less stress on your management and employee training process?.

Well, we feel that we can, by going to the low-to-mid-teens, it gives a range of where we feel that we have opportunities across the board, Peter.

We feel that, we do have opportunities within existing market certainly and when you look at the ratio, we don't know what the top end is going to be at this point in time, we want flexibility about the stores that we select and the regions that we go into, but we do feel there is opportunities and I don't want the point to be missed either.

Is that, we know as many stores that are performing excellent and we have many stores have been existing and new market center achieving our plans across the board.

We feel the items, that we've identified and we feel being very frank and open with the investment community, about what are doing to change their trajectory and we look at via the common thread about of how, it's fixed and how and what's fixable and we look at via the people in the store and also reallocating some of the marketing dollars, what we have as well to new stores and new markets as well.

So we feel this opportunities, we don't feel it's a high risk for energy by moving forward with these far number of stores and we expect them to perform as well as we go into next year, Peter..

Peter, let me add one thing. This is Bob Rucker, with the new stores. We've significantly stepped up our training, all store managers, assistant managers. I think we've developed a much better apparatus to get people in the store as a key, as a good confident and knowledgeable store manager and I think we have answers there, we are getting that.

I think we over expanded ourself there, one reason we don't want to go back to zero is because we don't need to, also we need to maintain the apparatus to keep opening stores. We need our construction to keep going, the entire apparatus to keep this going. If we go back to a store a month or so, I think we will be fine.

We've got a system that can handle that..

Okay, thank you very much for the feedback..

Our next question comes from Peter Benedict with Robert Baird. Your line is open..

I guess, I wanted to start quickly with gross margin and it likes in the fourth quarter it's implied to be up a bit here, just with the Pro initiative as well.

Help me understand, what do you think is going to be driving that and how does this effort to go after to go after the Pro little more aggressively, how does that play into the P&L going forward?.

Good morning, this is Kirk. We are really excited about the Pro initiatives, I think it's little early to start talking about any meaningful impact over the next 90 days, but the early results in a couple of the markets, where we really done some good work and help some initiatives are great.

What we'll, as we get further on here over the next 30 days, 60 days, 90 days next six months. We'll be talking more about that, but most of the progress is really been over the last 30 days. So probably not a huge Q4 impact for us.

As we're thinking about the Q4 gross profit rate, we feel pretty good about the guidance and it gives us a little bit of room to do some moderate promotions, if we think it would helpful for a business..

When we look at pro businesses, the stores that the do the best for us, the highest volume, the most profitable stores also have the highest percentage of Pro business.

Now, is that because they have that or they're just a well-developed store, it all runs together, but the pro-business would be the tile contractor, the designer and then the middle and higher end home builder. We see that you get more referrals from these people and you develop the market much more deeply with them..

That's helpful.

I mean, I know that you guys spoke about a field position to help with this, are there any store staffing changes that need to happen to push this along?.

It's an additional thing, we've tapped a long time employee, a long time store manager to head up the contractor Pro business and we've tapped another one to head up the design business working together will morph the stores into a better position, once again those stores that do the best are well developed on the contract side, the home builder and tile contractor side and they're also well developed on the design side.

So we are actually better right now on the construction, but we are also putting a lot of emphasis on the design side. As you know, when this works, we are selling fashion. So the closer we can get and the more we can hone our skills there, the more business, we are going to do..

That's helpful and then for my follow-up. Maybe, Chris. Share a little bit more about the marketing plans going forward. I just want to make sure, we are clear. Do you think, reallocating dollars to some of the new markets or is the aggregate spend going to be up overall. I think last year, your advertising ratio was like 2.7% of sales.

How do we think about going forward, what are your plans are either in dollars or as a percentage of sales, what you're going to do on marketing? Thank you..

Thanks, Peter. You should continue to look at the advertising spending flat of which, I actually believe is a little lower than 2.7%, I believe it's around 2.2%. The number that, the approach that we want to have on advertising is two-fold. One we want to increase the penetration that we have in new markets and new source.

We feel that we need to give them an understanding of what The Tile Shop is, what we represent, what the value proposition is, and that we do have a different experience for a consumer, as well as content that come into the store.

The second thing, is that we are going to continue in the rest of our market approach is to continue the approach of having a dynamic and digital approach, the things that we think are really working well for us, on both digital as well as reallocating some of the things, that we've done internally around some of the things that, when we look at the materials, that we placed out therefore, design books and other materials such as that.

You'll see a different size of look and feel, you'll see a, it's a little bit more focused around some of the exclusive collections we've had and you will also see, some of the things that we think are going to be very important for us as we, on the look and feel the website, as well as some of the things, that you're going to see from the marketing materials that we place in front of the customer as well as the employee..

Okay, perfect. Thanks, very much guys..

Our next question comes from Kate McShane with Citi Research. Your line is open..

My question is on the competitive environment and just with the macro environment continuing to be challenging.

Can you talk at all about some of competitive response from just some more challenging macro, but also if there is a big difference between what you're seeing and you're more developed to existing markets versus the new markets, where you're opening new stores?.

Hi, Kate, this is Chris. We're happy to talk about this topic, still. When we go into a new market, certainly we're going into trenched market that has a variety to competitors, certainly we compete with the big bucks, there is out there.

Regional players and then, just as important for our business, we are competing against well in entrenched local distributor or local shop, that's been in the market for many, many years.

So we haven't seen dramatic changes within those markets, what I will say as we go forward is that, we feel that we're going to be doing more events looking at you know attracting that contractor crowd, the professional crowd to bring them into the first time, to really understand what The Tile Shop is, I think we have a tremendous opportunity for awareness about what we are and the buyer composition that we have, as a company and talk about some of the things, that we know have high value to both the consumers as well as Professional customer around our return policy, no restocking fee and stand behind.

What we feel is the best in the industry, any of the products that we sell, with manufacturers as well as private label [indiscernible] in Tile products on that standpoint. From a promotional standpoint, that certainly we feel that the promotional environment has certainly ticked up, certainly in the Q3 timeframe.

I think you've seen that with other, with probably other companies that you follow, as demand has been soft really across the board on both traffic, on professional side as well as consumer, as you're looking at a multitude of different things, influencing that certainly existing home sales as well as home values continue to be a bit stagnant and the general retail environment has been sluggish as well, but from a competitive standpoint, getting back to your question.

We really look at, at being three-fold of who we compete against in the marketplace and we do feel that, we're well positioned when we enter into market both in new stores, in newer markets as well as new stores in our existing market as well..

Okay, that's helpful. Thank you and I just wondered, if I could follow-up with a question about the transition of management and congratulations to everybody, but I know Bob you've been very involved and it's been your point of differentiation of how you source your product, then where you source your product and tile from.

I just wondered, how that strategy might change over the transition period or once this transition is fully made?.

Goal is not to have a change at all, I leave very much and I think our team is very aligned.

I think, we're probably more aligned on the go forward proposition than we've been since we've gone public, but our whole system is, our supply chain system is predicated on creating product at relatively low cost, romancing it, bringing it forward as a fashion item and basically by low so high.

And the fashion industry does that, we intent to keep doing that. The people that we've added in sourcing, are very good, I'm very happy with Lindsay and we've added a few more people there, the other thing is I'm not going away. My strength has always been a product guy, I'm a tile peddler, I'm in good health.

I've committed fully to help wherever I can and I intend to do that over the years. So I don't think anything will change in product and that hasn't been one of the things that we've overgrown, we are good on product, I think we are in a position now to actually pick up the pace on development and factor right in the middle of that.

So I don't see anything changing there at all, other than for the better..

Thank you..

Our next question comes from Daniel Moore with CJS Securities. Your line is open..

And thank you for the candor, certainly.

I'm trying to understand, just want to go back to historically you promoted from within, if the issues with the newer stores are really a management bandwidth issue, help us understand how going out and hiring 15 or 20 new individuals and training them from the outside, is going to turn this around, give us your, help us understand your confidence around that and maybe so sense of timing, how long you think that will take to really gain traction?.

Hi, Dan. It's Chris. So let me just clarify one point on the 18 additional that we're promoting and going to the manager and training program. These are largely internal candidates, so you should look at the ratio as 90 to 10 or 95 to 5. We feel that we have, a deep bench of existing assistant manager across the chain.

We feel that they are more than capable, what we didn't have and quite frankly we've developed and spend a lot of time during the quarter and increasing inquiry as well, is really developing that training program that plan having a clear understanding of where people are going from store-to-store making sure that there is continuity and handles on professionals as well as our consumer, customers, understanding best practices happening across the chain.

So look at it from a standpoint of, we feel that given the fact that we have 105 stores and we have multiple assistant managers within a store, we feel that the bench is deep.

What we want to do is, having a much more regimented approach around how they're trained, how they go into a store and making sure, that when they transition out of the store that we have a ready and able back fill in that store, so that there is no, there is no issues or drop off in the existing store that they're in and that they're also more prepared to leave the new stores as they transition out of that store into, either a new store, a new market or potentially a store that had some natural turnover over the market place as well..

That's helpful. I obviously misheard, so thank you very much for that clarification. Just as you've opened, obviously a significant portion of the new stores and newer markets.

Any thoughts or plans at this stage to potentially close any of those stores that might be orphaned, if you're not adding as many newer stores in some of those newer markets going forward..

We don't have any plans to close any stores now or into the future.

we actually feel that, all the stores that we've identified 36, will now have positive contribution to the company, what we've been open about is that, they haven't had the type of success, in some cases it's higher than we wanted, but I also want to be very clear that, every store that we have within the chain, is a positive contributor to the organization from a profitability standpoint and we're not anywhere near from a store closure standpoint.

So just looking at the magnitude of what we have here, the chain from [indiscernible] standpoint is incredibly strong and I want to make sure, that we deliver when in the call and our investors that, the stores that, that are underperforming still are a positive contributor to the company as a whole..

Been great clarification, appreciated. Lastly, just based on the guidance. Obviously, EBITDA will be a down a little year over year.

Remind us, what covenants if any there are to your current credit facility either at your end or out into 2015?.

Sure, Dan. Good morning, this is Kirk. There is two primary covenants, one is the fixed charge ratio and the other is a leverage ratio and as we, when we amended the agreement several weeks ago, it was really the leverage ratio that we were focused on.

As you're adding new stores and incurring all the incremental occupancy cost and primarily rent, that impacts that leverage ratio, pretty materially and particularly in a softer environment from a macro perspective.

And then, when you have some newer stores that aren't getting up the revenue curve, quite as quickly as they originally have in the past, that just put the little extra leverage, little extra pressure on that leverage ratio, but with the amendment, we feel very comfortable that we'll be good going forward..

Can you share, what that it is for 2015?.

I don't have the numbers right here in front of me, but it's in the 8-K that we filed, three weeks or four weeks ago..

Okay, thank you once and best of luck, transition..

Our next question comes from John Baugh with Stifel. Your line is open..

I guess, first question is on the lower, smaller store planned openings, could you put a dollar amount on what you expect the new store to be in terms of you know all in, inventory etc.?.

I'm sorry, John, could you repeat that question?.

Curious as to, with the total capital outlay will be for a new store going forward.

You mentioned it will be smaller sized store?.

Okay, yes sorry John. This is Kirk, good morning.

We're -- at this point, we're hoping to so traditionally, we've invested about $1.4 million in a new store and as we reduced the square footage of our stores going forward and look to downsize just a little bit, we are still refining what the opportunity is from an investment perspective, is we don't have any specific numbers to share, but we do think there is some opportunity there..

Okay and then, do you have any thoughts around free cash flow in 2015 at this point, what is sort of the plan on absolute levels of debt going forward, if there is a financial goal or plan?.

We'll talk about 2015 in 90 days and going to give some guidance on the next call..

Okay and then just on the Pro business, these people tend to have a better idea of this material cost and the casual consumer, so following up on an earlier question, does it stand a reason.

Obviously volume increases can result in higher gross profit dollars, but I'm just assuming that business if you pursued earnestly will have a lower margin attached with it..

John, this is Chris. We don't necessarily feel that way. We feel that they, the contractor professional customer already receives a significant discount for purchasing at The Tile Shop.

It is material for them and we feel that, when you factoring those discounts that's already baked into our models across the board that, we don't view any deleverage on our gross margin ratio, percent of gross margin, percentage at all.

We feel that, there is an opportunity to grow that business, to share with the professional customer about the benefits of purchasing at The Tile Shop both on the front end, on product selection and quality, pricing. We think is a benefit not a charge, then certainly on the flipside of servicing that customer.

We feel that, all those things are already built into the operating business model of the company and we feel that is being, it continues to be warmly received and then certainly the new folks, if you go talk to across the country.

I think are surprised with, all three of those elements of, how we can service them in a very different and meaningful way for our competitors..

Especially, the designer led business in the higher and home builder business is higher margin, that's a high category..

Great, thanks for the color and then my last question. I think, it was asked earlier, but I'm not sure what the answer was, so maybe I'll ask a little differently. I'm curious in new stores, particularly in new market.

Are the geographic challenges, I know you've been strong in the North East, I think you've opened some stores and areas where there is just more tile players.

Are there any themes of competition like a floor and décor, store or some competition, where you're seeing some issues relative to what historically been more robust areas?.

This is Chris. I'm sorry, if I wasn't more clear in answering the question. There are clear themes from a competitive standpoint or geographic standpoints. What is clear, what we identified from a leadership team and what we've spoken about here this morning.

Is around the common theme can be really traced back to having that continuity of leader from within The Tile Shop. So we're having excellent performance across large geographies of the country and we're also having underperformance across the same choices. So but when you actually go down, it's not a competitive issue.

Certainly there is macro slowdown across the board, but when we look at it internally.

The biggest opportunity that we feel to improve the performance of these stores is to increasing our training to be mortgage around our account identification and placement process and to really built up that continuity of sale staff and sales leader within a store.

And we feel that, use the recipe and the formula that has been successful for us in the past and certainly we feel that, it will continue to be successful for us going forward..

Where there is more competitors, there is more market. We've always had success going right into the middle of the tile area in any community that we go into, would create success..

Great. Thank you for that color and thanks for taking my questions..

Our next question comes from Anthony Lebiedzinski with Sidoti. Your line is open..

So I may have missed this, but did you guys give out a breakdown for traffic and tickets for same-store sales and also, if you could talk about same-store sales by region?.

Good morning, Anthony this is Kirk. No we didn't talk about it specifically earlier. As we, the method we usually look at in terms of traffic is the number of tickets and as we look at the number of tickets over the last 90 days, it's been there's been, it's been relatively stable.

We haven't had any changes in average any material changes in average ticket and obviously, we are seeing some sequential improvement in comps, but it's not a significant change at this point. There's a little bit of uptick, but nothing more than that..

And as far as, comp sales by region or any comments you can give us?.

It's really, as we talked about a little bit earlier. The strength is with our four most mature markets Minneapolis – Saint Paul, Detroit, DC, Baltimore and Chicago. It's collectively those markets are doing about four comp in the quarter, which we are very pleased with..

Okay, that's helpful color and also, what is your longer term outlook for gross margins. I mean looking back historically, the company was close to 74% in 2011, the prior guidance used to be 70% to 72%. We know your guidance for this year, but if just take a step back and look at the business next couple of years.

How should we think about gross margins?.

Yes, feel pretty good that this is approximately, 70% margin business we don't see any reason of why we can't achieve that going forward..

Okay and as far as new store openings, you gave us some color for next year low to mid-teens, so is that a sustainable annual rate, that you think will happen 2016 and beyond or if you could just share some color on new store growth, that will be helpful..

Hi, Anthony this is Chris. And we certainly, we look at the opportunity for us to increase stores across the country remain strong. There is nothing that, dampened our market, about what we can do across the country and ultimately expand, and be a national retailer.

So I feel that, that team number is that your number is a good approximate gage for you and your modeling purposes and we feel very strongly that, once these items are rectified, we continue to be aggressive in our store penetration across both new markets as well as existing..

okay, so your store growth, if you look at the growth in the store base, it's coming down to, you'll be adding some more people obviously, so with that in my mind, I mean what kind of same-store sales increase will you need to leverage SG&A expenses next year?.

Yes, Anthony one thing to clarify, on the investments we are making in terms of training and talent pipeline. There won't be any significant incremental dollar investment there. It's a time investment, we are not adding incremental positions.

For example, the market manager positions we talked about each of those people is already a store manager and in addition to their responsibilities as a store manager in a particular market, will also be broadening their responsibility to help the other store managers in that market, as a market leader.

In terms of the assistant managers, really what we are doing there. We are not adding incremental positions.

We are just identifying the most talented people that are ready to start to leading and managing people earlier on in the process and training them and being clear on, who the next group of people will be to lead our stores and the benefit there is really, the development prior to them taking on a new store.

The other benefit obviously is, they know they're going to be moving at some point to another location within the market or in some cases outside of the market. So that, if they have for example, a lot of relationships with our pro-business customers.

They can make sure, that there is time to transition those relationships to a new person, a new sales person that steps into that assistant manager role, but we don't expect just to be clear. We don't expect any significant incremental expense from the initiatives that Chris talked about..

Oaky, that's helpful color.

So with that in mind, what kind of same-store sales increase will you need to leverage next year?.

We'd like to, again with no significant incremental investment in expense, any increase in same-store sales we get, well, we'll flow through and we'll talk about 2015 same-store sales on the next call,.

Okay, thank you very much..

Our final question comes from Joseph Feldman with Telsey Advisory. Your line is open..

This is Cristina Fernandez for Joe. I wanted to ask about, the 12 stores opened in existing markets.

I mean, do we assume that all those are performing in line with expectations or are some of those, as well, falling short?.

Good morning, Cristina. This is Kirk.

As we talked about, many of the comp stores are doing great, collectively the four largest markets are doing a four comp, as we look at so of course, as we reported, we were close to getting to a one comp, but you can do the math that means, many of the others stores that are comp, are doing a negative comp or not quite as good of a comp as the ones in mature markets.

As we study those stores, its' interesting on a year-to-date basis, the ones that are doing a more material negative comp often and I think it's really over two-third of those stores that are doing a negative year-to-date comp have a new store manager.

So we can trace back some of the things we talked about early on the call and making sure we have a talent pipeline, that when we do have a change in store leader, we are ready for that change and we can mitigate, any top line risk that we might have.

And then, as we look at, the other third of the stores that are doing a negative year-to-date comp, it's interesting for those stores have the same manager as they had last year. All of those stores, last year had a positive year-to-date comp and many of those stores. I think it's at least five of them had comps that were 20% plus.

The compare is really difficult, they're comping on an incredible year from last year and it's noteworthy that a lot of these stores are pretty mature stores as well. So it's just a tough compare, so there is a number of things going on within our comp base and hopefully, that provides a little more clarity..

Thank you..

And that concludes the Q&A session. I will now turn the call back over to Bob Rucker for closing remarks..

Thank you folks for joining us this morning on our call. Wish all you guys a good day. Thank you..

Thank you, ladies and gentlemen, that does concludes today's conference. You may all disconnect and everyone have a great day..