Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Tile Shop Holdings, Inc. Third Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Mark Davis..

Thank you, operator. Good morning to everyone on the call and welcome to the Tile Shop's third quarter earnings call. Joining me on today's call are Cabby Lolmaugh, our Chief Executive Officer; and Nancy DiMattia, our Chief Financial Officer.

Certain statements made during the call today 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.

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 our earnings press release issued earlier and in our filings with the SEC.

The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update these forward-looking statements. Today's call will also include certain non-GAAP measurements.

Please see our earnings release for a reconciliation of those non-GAAP financial measures, which has been posted to our Company website. With that, let me now turn the call over to Cabby.

Cabby?.

Thanks, Mark, and good morning, everyone. At the beginning of 2020, we established three key strategic priorities for the year. Our first priority, focus retail execution. We set goals for each of our stores targeting discounting, conversion, shrink, freight collection, average ticket and sales productivity.

We provided detailed reporting and facilitated coaching conversations to help our store teams focus on improving execution in each of these areas.

While I am pleased with the progress we have been able to make, we still have opportunities for improvement and I believe we can continue to make headways through ongoing monitoring of the metrics and training. Professional customers include tile setters, general contractors, interior designers and custom homebuilders.

Our Pro loyalty program is designed to provide incentives to professional customers in the form of tier discounts, rebates on referrals, free samples and other incentives. We've paired this offering with an industry-leading assortment and a network of dedicated pro market managers responsible for pro outreach and support.

Our third priority, disciplined expense management. We set goals to cut expenses, improve profitability and reduce our debt. The actions we were able to take to reduce expenses throughout the year helped drive a $7.4 million reduction in SG&A expenses during the third quarter of 2020, compared to the third quarter last year.

During the third quarter of 2020, we generated $1.9 million of net income, $11.1 million of adjusted EBITDA, and achieved the highest adjusted EBITDA as a percentage of sales we reported in two years. Additionally, we reduced our debt by $56 million since the beginning of the year to $7 million as of the end of the third quarter.

I am proud of what we've been able to accomplish over the last three quarter despite our many challenges. Like many other retailers, the onset of COVID-19 had an adverse impact on traffic and sales towards the end of our first quarter of 2020.

We took immediate action to reduce our store hours, trim the size of our workforce, cut marketing spend and curtail other expenditures. As states started easing shelter and place restrictions, we started to see an improvement in our traffic and sales results, but we chose to take a conservative approach to adding expense back to our structure.

For example, our stores continue to operate with hours that have been scaled back from the hours we were opened in the prior year. We intentionally made the decision to limit our hours to be able to reduce payroll and other operating costs.

While the decision resulted in lower levels of traffic and sales during the third quarter of 2020, then in the third quarter last year, the expense savings were much greater than the impact of the lower sales. We continue to navigate the challenges arising from the COVID-19 pandemic. Safety has been one of my top priorities over the last six months.

We have adopted a practice to close our stores, quarantine affected staff, and complete a rigorous cleaning process before we reopen our stores when a health risk is identified. This process can take two to three days to complete. It has had an adverse impact on our sales.

However, I am committed to continuing this practice to protect the health of our employees and our customers. Over the last 12 months, we've taken steps to reduce the level of inventory we carry on our balance sheet.

Additionally, we've been working towards the goal of resourcing a number of the products we have historically purchased from vendors based in China due to increases in tariffs introduced in 2018 and 2019.

The transition to the new vendors spread across Asia, Europe and South America was well underway when the onset of COVID forced many of our suppliers to temporarily shut down their manufacturing operations. This has resulted in a delay in replenishment and challenges maintaining adequate stock levels.

We are working closely with our vendors to secure delivery of back order product. In closing, I am very pleased with the results of the last quarter and the progress we've been able to make during 2020. I'll now turn the call over to Nancy, who will take you through some of the financial details.

Nancy?.

Thanks, Cabby. Good morning, everyone. I'd like to provide a brief overview of our third quarter financial performance. Net sales of $81.5 million were down 5.2% year-over-year and comparable store sales decreased 6.5% in the quarter, driven by a decrease in traffic.

As Cabby mentioned, the decrease in traffic was largely due to our decision to reduce the hours we're open. Additionally, product shortages caused by supply chain disruptions contributed to the lower level of the sales during the third quarter of 2020 as compared to the same quarter last year.

Gross profit was $55.3 million for the third quarter of 2020, a 6.5% decrease compared to the same quarter last year. Gross margin of 67.9% was 90 basis points lower than the third quarter of 2019.

Approximately two-thirds of the decrease in the gross margin rate was driven by a higher mix of customer delivery services rendered during the third quarter of 2020.

The remaining one-third of the decrease in gross margin was due to a higher level of inventory write-downs in connection with our routine process to transition the products in our assortment. Our selling, general and administrative costs for the quarter were $52.4 million.

The $7.4 million decrease from the third quarter of last year was due to the decision to operate with reduced hours, which contributed to a $3.1 million reduction in compensation and benefits expense.

Additionally, decreases in advertising expense totaling $1.8 million reduction in advertising cost and a $1.1 million decrease in consulting, audit, legal and IT costs reduced SG&A expenses year-over-year. We concluded the quarter with 142 stores, as compared to 140 at the end of the same quarter in 2019.

Previously, we'd shared our plan to open one new store in 2020. The store opening has now been moved into 2021. Net income for the third quarter was $1.9 million and fully diluted earnings per share was $0.04. Adjusted EBITDA was a $11.1 million for the third quarter.

Adjusted EBITDA margin was 13.7% a 400 basis point improvement compared to last year during the third quarter. Turning to our balance sheet. We ended the quarter with $9 million of cash and $7 million of long-term debt. Our debt decreased $15 million from the second quarter due to improved operating cash flow.

Inventory of $73 million decreased by approximately $6.1 million from the second quarter or 7.7%. With that information, I'll now turn the call back to Mark..

Operator:.

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Thank you for listening to our earnings conference call. We anticipate filing our Form 10-Q on November 9. We look forward to providing our next update in February. Thank you for your interest in the Tile Shop and have a great day..