TILE SHOP HOLDINGS, INC. You should read the following discussion and analysis together with our consolidated financial statements and related notes included elsewhere in this report. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the financial data than is included in the following discussion. This report contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by 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, although some forward-looking statements are expressed differently. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this report relate to, among other things, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; our expectations regarding the potential impacts on our business of the COVID-19 pandemic, including its effect on general economic conditions and credit markets and on customer traffic to our stores, as well as the potential duration of the COVID-19 pandemic and the length and adequacy of measures we have taken to attempt to mitigate the impact of the COVID-19 pandemic on our business; our ability to successfully implement our strategic plan and the anticipated benefits of our strategic plan; the effectiveness of our marketing strategy; potential fluctuations in our comparable store sales; our expectations regarding our and our customers' financing arrangements and our ability to obtain additional capital, including potential difficulties of obtaining refinancing due to market conditions resulting from the COVID-19 pandemic; supply costs and expectations, including the continued availability of sufficient products from our suppliers and the potential impact of the COVID-19 pandemic; our expectations with respect to ongoing compliance with the terms of the credit facility, including the possibility that the impact of the COVID-19 pandemic on our business may result in our inability to maintain such compliance, as well as the potential impact of the phase out of LIBOR; our ability to provide timely delivery to our customers; the effect of regulations on us and our industry, and our suppliers' compliance with such regulations; our expectations regarding the effects of employee recruiting, training, mentoring, and retention; the potential impact of cybersecurity breaches or disruptions to our management information systems; our ability to successfully implement our information technology initiatives, including our ERP system; our ability to effectively manage our online sales; our ability to remediate material weaknesses in our internal control over financial reporting; costs and adequacy of insurance; the potential impact of natural disasters and other catastrophic events; risks inherent in operating as a holding company; fluctuations in material and energy costs; the potential outcome of any legal proceedings; and risks related to ownership of our common stock.
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These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. These risks and uncertainties, many of which have been, and may further be, exacerbated by the COVID-19 pandemic, include, but are not limited to:
?the level of demand for our products;
?our ability to grow and remain profitable in the highly competitive retail tile industry;
?our ability to access additional capital;
?our ability to attract and retain qualified personnel;
?changes in general economic, business and industry conditions, including the
current
?our ability to introduce new products that satisfy market demand; and
?legal, regulatory, and tax developments, including additional requirements
imposed by changes in domestic and foreign laws and regulations and any changes
that may result due to the change in the
There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. Such risks and uncertainties also include those set forth in Part I, Item 1A. "Risk Factors," of this report. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Our forward-looking statements speak only as of the time that they are made and do not necessarily reflect our outlook at any other point in time. Except as required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason.
Overview
We are a specialty retailer of natural stone and man-made tiles, setting and
maintenance materials, and related accessories in
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 and 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 natural stone and man-made tiles,
setting and maintenance materials, and related accessories in
The table below sets forth information about our net sales, operating income and stores opened from 2018 to 2020.
For the year ended December 31,
2020 2019 2018
(in thousands, except store data)
Net sales $ 325,057 $ 340,351 $ 357,254
Income (loss) from operations $ 6,376 $ (1,357) $ 18,138 Net cash provided by operating activities
- 4 2
Impact of the COVID-19 Pandemic
The COVID-19 pandemic had a significant impact on our operations in 2020, and is
likely to continue to have an impact on our business in the future. We
experienced a sharp decline in traffic toward the end of the first quarter of
2020 following the onset of COVID-19 in
We also took steps to conserve cash that included working with our landlords to
defer rent payments for many of our retail locations throughout the second
quarter of 2020. As of
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balance is recorded as a liability within the current portion of lease liability
and long-term lease liability, net balances. The majority of the remaining
payments are expected to occur between the first quarter of 2021 and the third
quarter of 2021. Additionally, the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") contains provisions providing for the deferral of the
employer portion of social security taxes incurred through the end of 2020. As
of
As state and local governments started lifting restrictions toward the end of the second quarter of 2020, we saw an improvement in traffic and sales trends. Throughout the remainder of 2020, we took a cautious approach to investing in activities that would increase our SG&A expenses. While many retailers elected to expand their store hours as state and local restrictions started to ease, we maintained a reduced hours schedule throughout the third quarter of 2020. During the fourth quarter of 2020, we started making limited adjustments to add hours during the week for select stores. During the first quarter of 2021, we started adding Sunday hours back to select stores. Overall, the decision to limit the number of hours that our stores were open had an adverse impact on traffic and sales; however, the SG&A savings realized help drive a substantial improvement in our net income, operating income, and Adjusted EBITDA. These actions were a key catalyst making it possible to conserve cash and fully repay our outstanding debt in 2020.
During the third and fourth quarters of 2020, we experienced an elevated level of product outages due to vendor production delays and other disruptions in our supply chain. In many instances, vendor plants were forced to close or operate at a reduced capacity pursuant to a government mandate following the onset of COVID-19. While most vendors have been able to resume normal operations, many continue to work through large backlogs. We are actively partnering with our vendors to secure delivery of backordered product.
While we are cautiously optimistic with the current business trend and the progress made distributing COVID-19 vaccinations in recent months, a resurgence of COVID-19 cases could have a negative impact on us. Specifically, we could be adversely impacted by limitations on our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring our stores to close or employees to remain at home; limitation of carriers to deliver our products to customers; product shortages; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us in a timely manner. These events could have a material, adverse effect on our results of operations, cash flows and liquidity. In addition, even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of the economic impact of the pandemic.
Other Recent Developments
As previously reported, on
Key Components of our Consolidated Statements of Operations
Comparable store sales growth is the percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable store 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. Comparable store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing our results to those of other businesses. Company management believes the comparable store sales (decline) growth metric provides useful information to both management and investors to evaluate the Company's performance, the effectiveness of its strategy and its competitive position.
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Cost of Sales - Cost of sales consists primarily of material costs, freight, custom and duty 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.
Gross Profit - Gross profit is net sales less cost of sales. Gross margin rate is the percentage determined by dividing gross profit by net sales.
Selling, General and Administrative Expenses - Selling, general and administrative expenses consist primarily of compensation costs, occupancy, utilities, maintenance costs, advertising cost, shipping and transportation expenses to move inventory from our distribution centers to our stores, and depreciation and amortization.
Pre-opening Costs - Our pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general and administrative expenses.
Income Taxes - We are subject to income tax in
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Comparison of the Year EndedDecember 31, 2020 to the Year EndedDecember 31, 2019 2020 % of sales 2019 % of sales (in thousands) Net sales$ 325,057 100.0 %$ 340,351 100.0 % Cost of sales 103,532 31.9 % 104,232 30.6 % Gross profit 221,525 68.1 % 236,119 69.4 % Selling, general and administrative expenses 215,149 66.2 % 237,476 69.8 % Income (loss) from operations 6,376 2.0 % (1,357) (0.4) % Interest expense (1,874) (0.6) % (3,792) (1.1) % Other income - - % 12 0.0 % Income (loss) before income taxes 4,502 1.4 % (5,137) (1.5) % Benefit for income taxes 1,529 0.5 % 674 0.2 % Net income (loss)$ 6,031 1.9 %$ (4,463) (1.3) %
Gross Profit - Gross profit decreased
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased
Pre-opening Costs - During 2020 and 2019, we recorded pre-opening costs of
Income from Operations - Income from operations increased
Interest Expense - Interest expense decreased
Benefit for Income Taxes - The benefit for income taxes increased
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Comparison of the Year Ended
A detailed discussion of the fiscal year 2019 performance compared to fiscal
year 2018 is set forth in Part II, Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Comparison of the Year Ended
Non-GAAP Measures
We calculate Adjusted EBITDA by taking net income calculated in accordance with GAAP and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales.
We believe that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, for budgeting and planning purposes, and for assessing the effectiveness of capital allocation over time. These measures are used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.
The reconciliation of Adjusted EBITDA to net income (loss) for the years ended
Years Ended December 31,
2020 2019 2018 2017(1) 2016(1)
(in thousands)
Net income (loss) $ 6,031 $ (4,463) $ 10,442 $ 10,819 $ 18,463
Interest expense 1,874 3,792 2,690 1,857 1,715
(Benefit) provision for income taxes (1,529) (674) 5,158 13,340 12,876
Depreciation & amortization 31,336 33,546 28,396 26,239 23,042
Stock based compensation 2,241 2,645 2,669 3,156 4,333
Adjusted EBITDA $ 39,953 $ 34,846 $ 49,355 $ 55,411 $ 60,429 (1)Prior to 2018, we also adjusted for special charges, which consisted of
equity-related transaction costs, litigation and investigation costs, and the
write-off of debt issuance costs. We have modified the Adjusted EBITDA
presentation for the years ended
Adjusted EBITDA as a percentage of net sales for the years ended
Years Ended December 31,
2020 2019(2) 2018(2) 2017(1)(2) 2016(1)
% of net sales
Net income (loss) 1.9 % (1.3) % 2.9 % 3.1 % 5.7 %
Interest expense 0.6 1.1 0.8 0.5 0.5
(Benefit) provision for income taxes (0.5) (0.2) 1.4 3.9 4.0
Depreciation & amortization 9.6 9.9 7.9 7.6 7.1
Stock based compensation 0.7 0.8 0.7 0.9 1.3
Adjusted EBITDA 12.3 % 10.2 % 13.8 % 16.1 % 18.6 %
(1)Prior to 2018, we also adjusted for special charges, which consisted of
equity-related transaction costs, litigation and investigation costs, and the
write-off of debt issuance costs. We have modified the Adjusted EBITDA
presentation for the years ended
(2)Amounts do not foot due to rounding.
We calculate pretax return on capital employed by taking income (loss) from operations divided by capital employed. Capital employed equals total assets less accounts payable, income taxes payable, other accrued liabilities, lease liability and other long-term liabilities. We believe this non-GAAP measure is useful in assessing the effectiveness of our capital allocation over time. Other
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companies may calculate pretax return on capital employed differently, which limits the usefulness of the measure for comparative purposes.
($ in thousands) December 31,
2020(1) 2019(1)
Income (loss) from operations $ 6,376 $ (1,357)
Total Assets 364,099 415,107
Less: Accounts payable (14,905) (23,362)
Less: Income tax payable (111) (49)
Less: Other accrued liabilities (38,365) (26,146)
Less: Lease liability (153,427) (162,077)
Less: Other long-term liabilities (4,137) (3,816) Capital Employed
$ 153,154 $ 199,657
Pretax Return on Capital Employed 4.2 % (0.7) %
(1)Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.
Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitations of these non-GAAP financial measures are that they exclude significant expenses and income that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financial measures in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.
Liquidity and Capital Resources
Our principal sources of liquidity include
On
The Credit Agreement is secured by virtually all of our assets, including but
not limited to, inventory, receivables, equipment and real property. The Credit
Agreement contains customary events of default, conditions to borrowings, and
restrictive covenants, including restrictions on our ability to dispose of
assets, make acquisitions, incur additional debt, incur liens, or make
investments. The Credit Agreement also includes financial and other covenants,
including covenants to maintain certain fixed charge coverage ratios and
consolidated total rent adjusted leverage ratios. We were in compliance with the
covenants as of
We did not have any borrowings outstanding on the revolving line of credit as of
During 2021, we expect to use cash to invest in opening one new store,
relocating one store, purchasing additional merchandise inventory, maintaining
our existing stores, and general corporate purposes. Additionally, as described
further in Note 8 of the Notes to the Consolidated Financial Statements, as of
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plans. As of
We currently believe that our cash and cash equivalents, cash flows from operations and access to cash under our credit facility will be adequate to meet our ongoing operating requirements over the next twelve months and our long-term liquidity requirements.
Capital Expenditures
The following table summarizes our capital expenditures during the years ended
Years Ended December 31,
2020 2019 2018
(in millions)
New store building, existing store remodels and store merchandising investments
$ 1.5 $ 20.0 $ 25.3 Information technology infrastructure - 4.9 7.2 Distribution and manufacturing facilities 0.5 2.0 2.6 General corporate - 0.1 0.2$ 2.0 $ 27.0 $ 35.3
Our future capital requirements will vary based on the number of additional
stores, distribution centers, and manufacturing facilities that we open and the
number of stores that we choose to renovate. Our decisions regarding opening,
relocating, or renovating stores, and whether to engage in strategic
acquisitions, will be based in part on macroeconomic factors and the general
state of the
Cash Flows
The following table summarizes our cash flow for the years endedDecember 31, 2020 , 2019 and 2018. For the year ended December 31, 2020 2019 2018 (in thousands) Net cash provided by operating activities$ 65,596 $ 38,563 $ 18,170 Net cash used in investing activities (1,968) (26,390) (34,143)
Net cash (used in) provided by financing activities (63,329) (8,622) 14,931
Operating Activities
Cash flows from operating activities provide us with a significant source of
liquidity. Net cash provided by operating activities was
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash (used in) provided by financing activities was
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by financing activities during 2018 included
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. Our most critical accounting policies are summarized below. For further information on our critical and other significant accounting policies, see the notes to the consolidated financial statements included in this report.
Recognition of Revenue
Revenues are recognized when control of promised goods or services is
transferred to our customers, in an amount that reflects the consideration
received in exchange for those goods or services. 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. Net sales are
reduced by an allowance for anticipated sales returns that we estimate based on
historical returns. Our process to establish a sales return reserve contains
uncertainties because it requires management to make assumptions and to apply
judgment to estimate future sales returns and exchanges. The customer may
receive a refund or exchange the original product for a replacement of equal or
similar quality for a period of three months from the time of original purchase.
Products received back under this policy are reconditioned pursuant to state
laws and resold. We believe our estimate for sales returns is an accurate
reflection of future returns. Actual return trends have not varied significantly
from estimated amounts in prior periods. However, if the nature of sales returns
changes significantly, our sales could be adversely impacted. As of
Inventory Valuation and Shrinkage
Our inventory consists of manufactured items and purchased merchandise held for
resale. Inventories are stated at the lower of cost (determined using the moving
average cost method) or net realizable value. We capitalize the cost of inbound
freight, duties, and receiving and handling costs to bring purchased materials
into our distribution network. The labor and overhead costs incurred in
connection with the production process are included in the value of manufactured
finished goods. We provide provisions for losses related to shrinkage and other
amounts that are otherwise not expected to be fully recoverable. These
provisions are calculated based on historical shrinkage, selling price, margin
and current business trends. These estimates have calculations that require
management to make assumptions based on the current rate of sales, age,
salability and profitability of inventory, historical percentages that can be
affected by changes in our merchandising mix, customer preferences, rates of
sell through and changes in actual shrinkage trends. We do not believe there is
a reasonable likelihood that there will be a material change in the assumptions
we use to calculate our inventory provisions. However, if actual results are not
consistent with our estimates and assumptions, we may be exposed to losses that
could be material. As of
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation,
which is amortized over the useful life of the assets. Leasehold improvements
are amortized over the shorter of their estimated useful lives or lease period
(including expected renewal periods). As of
Property, plant, equipment, and right of use assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets, which typically occurs at an individual store level. An impairment loss is recognized when estimated undiscounted future cash flows from the operations and/or disposition of the assets are less than the carrying amount. Significant assumptions used in developing undiscounted cash flow analyses include estimates of future sales, gross margin and operating expenses. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. Significant assumptions used in the fair value analyses include estimates of future sales, gross margin, operating expenses, comparable market rents and discount rates. If actual results are not consistent with our estimates and assumptions used in determining future cash flows and asset fair values, we may be exposed to losses that could be material.
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Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In
This standard provided a number of optional practical expedients in transition. We elected the package of three practical expedients permitted under the transition guidance within this standard, which, among other things, allowed us to carryforward the historical lease classification. We did not separate non-lease components from lease components by class of underlying assets and we did not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.
We also elected to apply the hindsight practical expedient. The election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In the application of the hindsight practical expedient, we considered recent investments in leased properties and the overall real estate strategy, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
Upon adopting this standard, we established a right of use asset of
Accounting Pronouncements Not Yet Adopted
In
In
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