UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)



For the quarterly period ended September 30, 2017March 31, 2018



OR





 For the transition period from – to –

Commission file number: 001-35629

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TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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(763) 852-2950 

(Registrant’s telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes    ☐ No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes    ☐ No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes    ☒ No



As of OctoberApril 23, 2017,2018, there were 52,158,06552,504,143  shares of the registrant’s common stock, par value $0.0001 per share, outstanding.







TILE SHOP HOLDINGS, INC.

Table of Contents



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)



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Note 1: Background



The Tile Shop, LLC was formed on December 30, 2002, as a Delaware limited liability company and began operations on January 1, 2003. Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly owned subsidiaries, the “Company”) was incorporated under the laws of the state ofin Delaware in June 2012 to become the parent company of The Tile Shop, LLC.2012.



The Company is a specialty retailer of manufacturednatural stone and natural stoneman-made tiles, setting and maintenance materials, and related accessories in the United States.  The Company manufactures its own setting and maintenance materials, such as thinset, grout, and sealers. The Company’s primary market is retail sales to consumers, contractors, designers and home builders. As of September 30, 2017,March 31, 2018, the Company had 134140 stores in 31 states and the District of Columbia, as well aswith an on-line retail operation.average size of approximately 20,200 square feet. The Company also sells products on its website. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company has a sourcing operation located in China.



The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions. Operating results for the three and nine months ended September 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2018.



These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 1 to the Consolidated Financial Statements in such Form 10-K.



Recently Adopted Accounting Pronouncements



In July 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued a standard that simplifies the subsequent measurement of inventory. Previously, an entity was required to measure inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes required that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The standard was effective for the Company at the beginning of fiscal 2017.  The adoption of this new standard did not have a material effect on the Company’s financial statements.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts either proportionally in earnings as redemptions occur or when redemption is remote.  Upon adoption of the standard, the Company expects to present the gross sales returns reserve as a component of other accrued liabilities and establish a return asset that will be classified as a component of other current assets, net in the Consolidated Balance Sheet.  Currently, the Company presents its sales returns reserve net of the value of the return assets as a component of other accrued liabilities in the Consolidated Balance Sheet.standard.  The Company continues to assess the impactadopted this standard as of other aspects of this standard.  As the Company finalizes its assessment, the Company will take steps to finalize its accounting policies, establish new processes and controls when warranted, and ensure information is captured to conform with the disclosure requirements outlined under the new standard.  The standard is effective for the Company in fiscalJanuary 1, 2018 and provides for either full retrospective adoption or modified retrospective adoption by which the cumulative effect of the change is recognized in retained earnings at the date of initial application.  The Company has elected to adopt this standard using the modified retrospective approach. transition method.  See Note 2 for further details.



In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the Consolidated Balance Sheet.  The standard is effective in 2019, with early adoption permitted. The Company is currently assessing the effect the new standard will have on its consolidated financial statements.

In August 2016, the FASB issued an accounting standards update with new guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in the standards update provide guidance on eight specific cash flow issues. The standards update is effective for the Company in fiscal 2018 and shall be applied to the Company’s financial statements retrospectively. The Company is currently assessing the effect the new standard will have on its consolidated financial statements.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown onin the statement of cash flows. The Company adopted the new standard is effective foras of March 31, 2018 using the Company in fiscal 2018, with early adoption permitted. The guidance should be applied retrospectively after adoption.retrospective transition method. The Company’s restricted cash balance was $0.9$0.8 million as of September 30, 2017.March 31, 2018. Upon adopting the new standard, the Company anticipates that it will no longer presentpresents the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will beare included in the beginning and ending cash, cash equivalents and restricted cash balances in the statementConsolidated Statement of Cash Flows. In connection with the adoption of this standard, $1.3 million received from restricted cash flows.accounts during the three months ended March 31, 2017 that was previously presented as a financing cash inflow was reclassified to the beginning cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet.  The standard is effective in fiscal year 2019, with early adoption permitted. The Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of minimum commitments under non-cancelable operating leases on the consolidated balance sheets resulting in the recording of right of use assets and lease obligations.  The Company’s minimum commitments under non-cancelable operating leases are disclosed in Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  The Company has identified its lease management system and is in the process of identifying and evaluating the applicable leases.  The Company is currently assessing the effect the new standard will have on its consolidated financial statements.





Note 2: Revenues

On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.  The adoption of Topic 606 had a cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and did not have an impact on revenues recognized for the quarter ended March 31, 2018.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration received in exchange for those goods or services.  Sales taxes are excluded from revenues. 

The following table presents revenues disaggregated by product category:

The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store locations and website.  The timing of revenue recognition coincides with the transfer of control of goods and services ordered by the customer which falls into one of three categories described below:

The Company determines the transaction price of its contracts based on the pricing established at the time a customer places an order.  The transaction price does not include sales tax as the Company is a pass-through conduit for collecting and remitting sales tax.  Any discounts applied to an order are allocated proportionately to the base price of the goods and services ordered.  Deposits made by customers are recorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transfers control of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was $9.8 million and $8.1 million as of March 31, 2018 and December 31, 2017, respectively.  Revenues recognized during the three-month period ended March 31, 2018 that were included in the customer deposit balance as of the beginning of the period were $7.4 million.

The Company extends financing to qualified professional customers who apply for credit.  The accounts receivable balance was $2.9 million and $2.4 million as of March 31, 2018 and December 31, 2017, respectively.  Customers who qualify for an account receive 30-day payment terms.  The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed.  Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promised amount of consideration for the effects of the financing component. 

Customers may return purchased items for an exchange or refund.  The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance.  Historically, the sales returns reserve was presented net of cost of sales in other current liabilities.  Upon adoption of Topic 606, the Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet.  The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017 are as follows:

(1) As of December 31, 2017, the returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.

Note 3: Inventories



Inventories are stated at the lower of cost (determined on the weighted-average cost method) or market.net realizable value. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following as of September 30, 2017March 31, 2018 and December 31, 2016:2017:





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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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Notes to Consolidated Financial Statements

(unaudited)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20162017 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, unexpected delays or expenses related to opening new stores and maintaining or renovating existing stores, changes to economic or market conditions and customer preferences, disruptions in our supply chain, or inventory management, competitive factors, increases to interest rates or other impacts on our ability to obtain or maintain financing, unanticipated expenses related to operating as a public company including but not limited to litigation-related expenses, and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2016,2017, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview and Recent Trends



We are a specialty retailer of manufacturednatural stone and natural stoneman-made tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of September 30, 2017,March 31, 2018, we operated 134140 stores in 31 states and the District of Columbia, with an average size of 20,50020,200 square feet. We also sell our products on our website.



We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, and we believe that we are a leading retailer of manufacturednatural stone and natural stoneman-made tiles, accessories, and related materials in the United States.



We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 112 new stores in the first ninethree months of 2018, and opened 15 new stores during 2017. Between April 1, 2017 and opened 9 new stores in the United States during 2016. Between October 1, 2016 and September 30, 2017,March 31, 2018, we opened 14 new store locations. We plan to open approximately 15 storesone additional store in 2017.2018. We believe that there will continue to be additional expansion opportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill transactions at these new locations.



For the three and nine months ended September 30,March 31, 2018 and 2017, we reported net sales of $84.4$91.1 million and $266.0 million, respectively. For the three and nine months ended September 30, 2016, we reported net sales of $78.6 million and $247.5$92.1 million, respectively. The increasedecrease in sales for the three and nine months ended September 30,March 31, 2018 compared to the three months ended March 31, 2017 was primarily due to a decline in comparable stores sales generatedof 6.8%, or $6.3 million, offset by net sales of $5.3 million from stores opened since September 30, 2016, as well asnot included in the comparable store sales increases of 1.1% and 2.2%, respectively.base.  



During the three and nine months ended September 30, 2017, we experienced aThe decrease in the growth rate of comparable store sales compared to 2016.  Comparable store sales increased 7.6% during the year ended December 31, 2016. The deceleration in sales at comparable stores for the three and nine months ended September 30, 2017March 31, 2018 was primarily the result of weaker store traffic due to an increase in competitive activity, increased consumer demand for opening price point offerings, and a significant product transition which caused disruptionpart to our product availabilityshift in our stores during the period.  In addition, inconsistent execution across certain markets also contributed to a lower conversion rate and lower sales.promotional strategy.

The table below sets forth information about our samecomparable store sales growth for the three and nine months ended September 30, 2017March 31, 2018 and 2016.2017.  







For the three and nine months ended September 30,March 31, 2018 and 2017, we reported gross profit of $56.7$64.0 million and $183.8 million, respectively.  For the three and nine months ended September 30, 2016, we reported gross profit of $55.2 million and $173.6$64.7 million, respectively. The gross margin rate for both the three and nine months ended September 30,March 31, 2018 and 2017 was 67.1% and 69.1%, respectively.70.3%. The gross margin rate for the three and nine months ended September 30, 2016 was 70.2% and 70.1%, respectively.  The decreaseimproved sequentially from 66.8% in the gross margin rate wasfourth quarter of 2017 primarily due to decreased promotional pricing and increased demand for opening price point product. Additionally, sales growth of installation and setting materials, which carry a lower gross margin rate, outpaced the sales performance of other product categories.activity.



For the three and nine months ended September 30,March 31, 2018 and 2017, we reported income from operations of $4.4$6.1 million and $29.5$13.5 million, respectively.  For the three and nine months ended September 30, 2016, we reported income from operations of $7.8 million and $31.3 million.  The decrease in income from operations during the period was primarily driven by a deceleration in comparable store sales growth, a decrease in our gross margin rateoverall sales and an increase in occupancy costs due to the opening offrom new stores that have opened since OctoberApril 1, 2016.2017. 



Net cash provided by operating activities was $49.4$9.9 million and $50.7$20.1 million for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively, which was used to fund operations, new store construction activities, store remodels, dividends and debt repayments. We expect to continue to fund our capital expenditures and daily operations from our operating cash flows. As of September 30, 2017,March 31, 2018, we had cash of $12.4$7.2 million and working capital of $33.7$45.2 million compared with cash of $9.8$6.6 million and working capital of $37.7$43.5 million at September 30, 2016.

Year to date free cash flow in 2017 of $21.3 million enabled an additional $5.0 million reduction to long-term debt during the third quarter, bringing our net debt position to $1.5 million at quarter end. See the “Non-GAAP Measures” section below for a reconciliation of these Non-GAAP measures to the comparable GAAP measures.December 31, 2017.

Key Components of our Consolidated Statements of OperationsIncome



Net Sales Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes possessioncontrol of the merchandise or final delivery of the product has occurred. We recognize service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.



SameComparable store sales amounts include total charges to customers less any actual returns, and thegrowth is a percentage change in the returns provision related tosales of comparable stores. In general, we consider a new or relocatedstores period-over-period. A store in theis considered comparable store sales calculation on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable stores sales growth calculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation.



Cost of Sales Cost of sales consists primarily of material costs, freight, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.



Selling, General, and Administrative Expenses Selling, general, and administrative expenses consists primarily of payroll and benefitcompensation costs, occupancy, utilities, and maintenance costs, advertising cost, freightcosts, shipping and transportation expenses to move inventory from the Company’sour distribution centers to the Company’sour stores, depreciation and amortization.



Pre-opening Costs Our pre-opening costs are those typically associated with the opening of a new storesstore and generally include rent expense, payrollcompensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general, and administrative expenses.



Provision for Income Taxes We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business.



Non-GAAP MeasuresMeasure



We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense, and special charges, which consist of litigation costs.expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. Free cash flows is calculated by taking net cash provided by operating activities and subtracting net cash used for the purchase of property, plant and equipment. Non-GAAP net income excludes the special charges, which consist of litigation costs, and is net of tax. Net debt equals long-term debt, net, plus the current portion of long-term debt, minus cash and cash equivalents.



We believe that thesethis non-GAAP measuresmeasure of financial results provideprovides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses thesethis non-GAAP measuresmeasure to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures areThis measure is used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of thesethis non-GAAP financial measuresmeasure provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measuresperformance with other specialty

retailers, many of which present  a similar non-GAAP financial measuresmeasure to investors.



The reconciliation of Adjusted EBITDA to net income for the three and nine months ended September 30, 2017March 31, 2018 and 2016 is as follows: