Good day, ladies and gentlemen, and thank you for standing by. Welcome to The Tile Shop Holdings Incorporated First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Mark Davis..

Thank you. Good morning to everyone and welcome to The Tile Shop’s first quarter earnings call. Joining me today are; Cabby Lolmaugh, our Chief Executive Officer; and Karla Lunan, 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 1995, as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause the 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.

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 or a reconciliation of those non-GAAP financial measures, which has also been posted on our company website. With that, let me now turn the call over to Cabby.

Cabby?.

Thanks, Mark. Good morning, everyone and thank you for joining us today for an update on our business and a review of our first quarter financial results. Earlier this morning, we reported revenues that eclipsed $100 million in a quarter for the first time in our history. We also set our fourth consecutive quarterly sales record.

While home improvement tailwinds have continued and our recent pricing actions have contributed to our results, these results would not have been possible without the strong execution by the entire Tile Shop team. There are three specific areas I’d like to touch on this morning. First, our in-store execution continues to improve.

Over the last year, we’ve made in a point to focus on our people, cultivate talent and reinforce our brand promise to provide best-in-class service. Recall, that it was just a little over a year ago when we started rebuilding our team by adding staff in our stores and expanding our store hours.

We also increased the number of regional managers overseeing our 143 store portfolio from six to nine, which increased the level of interaction between sales leadership in each of our stores.

We’ve been successful in strengthening our talent bench at the same time, we’ve raised the bar and has been able to make a number of strategic moves to replace managers who are struggling to meet our expectations. Today, we’re in a much better position with our staffing levels, and the caliber of the talent managing our stores.

Second, we continue to see strengthen our professional customer channel which exceeded 60% of our overall sales mix during the quarter. Our Pro Market Managers have done a great job cultivating relationships with our best pros.

Our loyalty program provides great benefits to our professional customers that include tiered discounts, referral rebates and no-fee job site delivery for the pros who do the most business with us. Our assortment includes products, specifically sourced for our pros that include reputable brands in the industry, such as Wedi and Ardex.

This has proven to be a winning formula that has helped us sustain growth and sales to this key customer segment. Third, the investments we’ve made in our digital commerce capabilities are also contributing to the improvement in our top line results.

For instance, we launched our Visualizer last year, which gives our customers access to a virtual design studio. Additionally, we’ve enhanced the way we merchandise our inventory online, and further merge the digital and in-store shopping experiences. Our constant work on our digital commerce is paying off.

Online orders increased by over 30% between the first quarter of 2021 and the first quarter of 2022. While, online orders still represent less than 5% of our overall orders. We are pleased with our progress and believe we have an opportunity for continued growth in digital sales. Training to our supply chain.

In fact, levels have continued to get closer to pre-COVID levels, despite all the recent disruptions in the worldwide supply chain. We’ve successfully worked with a number of our suppliers to secure delivery of inventory that have been backordered and we’re now in a much better position from an inventory availability standpoint.

While product availability continues to improve, inflationary cost pressure remains a challenge across the industry. We continue to see elevated rates for international container freight. And many of our vendors across the world are raising prices in response to increases in the cost of energy, labor, and other inflationary cost pressures.

Currently, this is most pronounced in Europe, where natural gas prices have increased in recent months following Russia’s invasion of Ukraine. Natural gas is a key resource used by our vendors to fire the killings that are used to make ceramic, porcelain and other manmade tiles.

Further, increases in oil prices contribute to higher costs to extract stone from quarries around the world, it’s been transported for fabrication. In the near-term, we anticipate that the cost pressures will persist. In response to these challenges, we’re executing several actions.

We’re pulling forward some purchases on items to secure shipment before price increases go into effect. We’re raising our prices. We completed a price increase in January of 2022. We also completed a similar price increase in April 2022. While we continue to evaluate and adjust pricing in future periods as it makes sense.

And as always, we’re evaluating alternative sources of supply across the globe, most recently targeting South America and the United States. We’re always searching for the best vendors to deliver the best products and the best prices. The current inflationary backdrop is volatile.

But I’m confident we have the right team in place to help navigate the current challenges. I’ll now hand the call over to Karla to touch on our financial results.

Karla?.

Thanks, Cabby. Good morning, everyone. It’s exciting to see the strength in our top line. The 10.7% comparable store sales increased during the first quarter was largely due to an increase in average ticket driven by our recent pricing actions. However, we did see some modest volume uptake as well.

As pleased as we were with our top line performance, we continue to see the cost pressure affect our gross margin, which was 65.2% during the first quarter. It was encouraging to see that the price increases implemented during the first quarter helped to slow the pace of sequential decline in gross margin.

The current environment remains incredibly volatile, and we expect further pressure on our gross margin in the near-term. SG&A expenses increased by $4.8 million during the first quarter of 2022 when compared to the first quarter of 2021.

The majority of the increase was due to a $3.9 million increase in pay and benefits related to getting staffing levels back to pre-COVID levels, and $700,000 of increased marketing spend to take advantage of the current home improvement environment. Transportation expenses also increased by $500,000 due to increases in fuel prices.

These factors were partially offset by an $800,000 decrease in depreciation expense. Our SG&A expense rate was 60.6% during the first quarter of 2022, which represents 160 basis point improvement when compared to the first quarter of 2021.

We’ve made a number of important expense investments, rebuilding our store teams, expanding our regional support, growing our corporate teams and investing in other areas of the business to help drive growth.

It is critical that we’re able to continue to leverage our SG&A expenses both at the store and corporate levels, especially given the impact that inflationary cost pressure has had on our gross margin. Net income was $3.5 million during the first quarter of 2022 and adjusted EBITDA was $11.7 million.

Our adjusted EBITDA margin rate was 11.4% in the first quarter of 2022, which was 460 basis points lower than our adjusted EBITDA margin rate during the first quarter of 2021. The decrease was largely due to the decrease in gross margin rate I spoke about earlier. Moving to the balance sheet.

We’ve made headway rebuilding our inventory levels and reducing back orders. As of the end of the quarter, our inventory balance was $104.7 million. As Cab mentioned, we are actively pulling forward some inventory purchases in advanced of announced vendor price increases. We also expect the inflationary cost pressure to persist in the near-term.

The combination of our decision to accelerate certain purchases, and ongoing inflationary cost pressure is expected to result in an increase in inventory balances over the next several quarters. As of the end of the first quarter, we had $13.5 million of cash and $5 million of debt outstanding.

In closing, we’re pleased with our top line results and the strong execution by our team. While margin pressures persist, we have and will continue to manage these challenges and we remain confident in our future. With that, Cabbie and I are happy to take any questions..

[Operator Instructions] Our first question or comment comes from the line of David Kanen from Kanen Wealth. Your line is open..

Good morning, guys. First question is in regards to the inflationary pressures.

Could you break down for me how much of it is coming from direct cost of goods versus transportation costs?.

Hey, thanks, David. This is Cabby. Yeah, well it’s funny because it’s a balance of our assortment, because we ship from 155 suppliers in 23 different countries so we have different shipping costs increases across the world. And then you know they’re also dealing with their own issues with increase of you know their product costs.

So I would you know like to say, it’s more on the product side and the transportation side right now. And it’s volatile you know we’re seeing it go up and down in different areas, but it’s definitely more product than shipping at this point..

Okay.

Is it like 80% product, 20% transportation? Could you quantify that you know as best you can?.

Yeah, it’s really tough to quantify, because of you know the segments that we sell in the different you know velocity. So, all I can say is, it’s more on product than shipping, David..

Okay. And then in terms of e-commerce or online sales, that was a nice number of 30%.

Where do you see that getting to in terms of your mix of overall sales over the next couple of years? And then, is Visualizer available to the consumer, the online buying experience? Or is that in-store when you meet with you know representative salesperson?.

Sure, let me tackle the first part. We see you know this growing nicely for us. Our investments are paying off in technology and our e-commerce area. I would love to eclipse to 5% and keep growing it from there, and our trajectory is strong. So I’m very excited with our IT team and merchandising and marketing team and getting this going.

When it comes to the Visualizer, yes, a consumer can use it at home, they can use it in the store. We’re making updates to it monthly. And it’s a great tool. We’re really proud of it..

Okay, great. And then just last question before I jump back into queue.

Could you give us some more detail on pro what percent it was? And also for your consumer, I’m pretty sure you guys have loyalty? Could you give us an update on loyalty adds and so forth?.

Sure. I mean, we’re pretty excited with our initiatives in Pro. Our new Pro Market Manager team has done a great job and getting our Pro sales at 60%, plus 60%, which we’re excited. I mean these are loyal customers that continue to send their customers to us, and they buy more often.

So we’re continuing to invest into that area of our business with added enhanced assortment for those customers. And with our Pro Market Managers in our Pro loyalty program, getting them more engaged in what the benefits are. And we’re seeing a nice buy in there from our Pro customers.

With our regular customers and loyalty, we see the same customers probably every five to seven years. You know, if they’re doing it themselves, that’s typically the turnaround on a project that they’re doing on their own. And we continue to see a lot of the same old faces. So it’s been good for us..

Okay. Could you just, as a reference point, tell me percentagewise what Pro was. I know you said it was just north of 60%.

But what was that a year ago and last quarter?.

Last quarter it was just below 60%, and a year ago, we were in the 50s. And three years ago, we were in the 40s. So it continues to climb.

Well, you’re going see that in during in – you know it’s going to be with the macro environment we’re looking at you know, Pros are brought so there’s not a – you know there’s always going to be a stress on getting that labor into your house. And so we’re going to see strong Pro business continuing.

But then you’re also going to see, I think a resurgence of the DIY customer, because of you know with the Fed increasing you know interest rates and things like that, we’re going to see people want to turn around and start doing it themselves again. So it’s a nice balance that The Tile Shop offers.

I mean, we have videos and tools for the Do-It-Yourself for customers, and we have those enhanced assortments for the Pro customer. But we’re going to continue to see Pro increase. That’s been a focus of ours for quite some time and it’s paying off. And then we’re going to continue to invest in the DIY customer as well..

Okay. Thank you guys. Good luck..

Thanks, David..

Thank you. Our next question or comment comes from the line of Mark Smith from Lake Street Capital. Your line is open..

Hi, guys. First question from me. Just want to look at our traffic versus ticket, you’ve done a good job you know taking price increases.

But what the store traffic look like?.

Hey, Mark. Thanks for the questions, it’s Cab. The traffic has been declining. We’ve seen that in in the first quarter and continuing in the second quarter. Our ticket has been increasing. Now some of this is due to unit increase and some of it’s been due to pricing increase. I’d say more pricing than unit, but they’re both positive.

So we’re executing wellness stores, our conversion rate has gone up, our, you know ticket continues to go up. And as long as I see units going up, I’m pretty happy with the results..

What kind of pricing power do you think you have? You know, is there a limit at some point where you know consumers may be pulled back?.

It’s something we monitor really close, Mark. It’s you know since our assortment is so vast, it’s – we have opportunities to pull levers in different segments of the assortment. You know when you’re dealing with back shelf and pro, when you’re dealing with high end waterjet mosaics or just the commodity subway tiles.

These are areas where we can continue to make adjustments as needed. I think we still have room to go, if we need to..

Okay.

And then as we look at kind of you know use of capital here, where are you seeing the most attractive places to put capital to work? Is it your remodels on stores? You know any update on kind of new store growth? You know how are you guys looking at putting some of this capital to work?.

Sure. Right now you know we’re really focused on the execution of stores with enhancing merchandising you know investments into technology and then inventory, Mark.

I mean, inventory right now is a great cash asset for me, because inventory is cash, and we’re going to grab it as soon as – as fast as we can you know we want to get ahead of some of these pricing increases. I’d rather have it needed than needed not have it.

And right now with supply chain loosening up a little bit, we’re able to get a lot more inventory, we’re in a better spot now that we’ve been in quite some time. So we’re making a lot of capital investments into our inventory and into our stores.

But when it comes to new store growth, again, I’m focused on the existing footprint, really getting the stores back to where I want them to be. I don’t see anything you know new opening in 2022, maybe a store or two in the fourth quarter, but I’m not going to commit to that right now.

I think that 2023 would probably be the time you know looking at the macro environment we’re in right now. Let’s focus on our existing footprint, get the growth where we can in our investments we’ve already made and then start going again..

Okay.

And as you focus on the existing footprint, you know DCA needs on remodels is a big investments that need to be made in the existing stores?.

You know not big investments, Mark. I mean, what we want to do is, we do a lot of freshen ups, right we refresh them. So we’ll go in, we’ll spend a couple of hundred thousand and get some vignette and some of the stores that deserve them. But honestly, if you’re not a Tile Shop employee, you can walk into any of our stores and they look good.

I’m pretty happy with the look and feel of our chain right now. You know tile doesn’t expire. So you look in at The Tile Shop that’s 10 years old or a vignette that’s 10 years old, it still looks pretty good today. So I’m pretty happy with how the stores look. Now, we are investing in remodels. We have remodels going today.

But they have increased the cost you know as labor and material goes up, that’s impacting our budget for remodels. So we’re being real careful and selective on where we’re going and how we’re investing in these stores in these refreshes..

Okay, great. Thank you..

You bet..

Thank you. [Operator Instructions] I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Mark Davis for any closing remarks..

Thank you for listening to our earnings conference call. We anticipate filing our Form 10-Q later today. Thank you for your interest in The Tile Shop and have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..