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Tile Shop Holdings Announces Independent Investigation Results, Provides Preliminary 2013 Results and 2014 Outlook
Company Release - 01/27/2014 17:26
– Investigation Concludes Historical Financial Statements
Properly Stated –
MINNEAPOLIS--(BUSINESS WIRE)-- Tile Shop Holdings, Inc. (NASDAQ:TTS) (the “Company”), a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories, today announced the findings of the Audit Committee investigation into the nature and extent of its relationship with Beijing Pingxiu (“BP”), a licensed Chinese export trading company formerly utilized by the Company and certain of its Chinese vendors. The investigation was conducted by Dorsey & Whitney LLP, independent counsel to the Audit Committee, and an internationally recognized “Big 4” independent public accounting firm. The findings of the investigation concluded that while certain previously undisclosed related party relationships existed, there is no evidence that the Company’s historical financial results have been misstated or that the Company applied any improper accounting treatment with respect to its historical financial statements.
The investigation provided the following information:
Mr. Rucker, CEO, stated “I am naturally extremely disappointed to learn of the nature and extent of the previously undisclosed relationships that Mr. Nishi maintained with our vendors. Our senior management team has had direct and pointed conversations with our vendors about this situation. We believe that by working together we will implement better practices to safeguard against any of these situations recurring in the future.”
Mr. Rucker continued, “The investigation took longer than we anticipated, but because of the diligence of the process, our Company will be stronger in the future. We have reexamined our business practices and have initiated the implementation of new procedures to better manage and control our vendor relationships. With that said, our entire organization can now re-focus its efforts on growing this Company as we continue to build out our national network of stores in a profitable manner.”
The detailed investigation included:
The Company is taking the following actions as a result of the investigation findings:
The Company will file an amended Annual Report on Form 10-K for fiscal 2012, which will include disclosure of Mr. Nishi’s previously unknown ownership interests in BP and Nanyang, and the salary paid to Mr. Nishi as a Company employee.
2013 Preliminary Results
The Company is providing select preliminary financial information for the year ended December 31, 2013.
Revenues for the fourth quarter 2013 were $57.8 million and for the full year were $229.6 million, representing an annual increase of 26%. Comparable store sales for the fourth quarter of 2013 were 10.1% and for the full year 2013 were 12.4%.
While the annual result is within the guidance range previously communicated of $227 to $237 million, the fourth quarter sales were lower than anticipated. The Company noted that revenues trailed off from earlier 2013 trends starting in mid-November due to a reduction in traffic, limited benefit of promotional activities and inclement weather in several of the Company’s key Upper Midwest and East Coast markets.
Gross margins will be below 70% for the quarter but will approximate 70% for the year. Cost increases, discounts and promotional activity all impacted gross margins in the quarter.
Adjusted EBITDA is expected to range between $8 million and $10 million in the fourth quarter and $53 to $55 million for full year 2013. The Company had provided guidance that Adjusted EBITDA would approximate $60 million for the year.
The lower than anticipated revenues, coupled with the lower gross margins, were the primary reasons that Adjusted EBITDA will be below expectations. Also contributing to the Adjusted EBITDA shortfall was:
Adjusted EBITDA excludes any costs associated with the independent investigation and other non-recurring items, as further described in “Non-GAAP Financial Measures” below. The costs for the investigation are anticipated to be in the $1.0 to $1.5 million range, which will be recognized as incurred in the fourth quarter 2013 and first quarter 2014.
The Company opened eight new stores in the fourth quarter, bringing the total for 2013 to 20 new stores. Two additional stores were opened in early January 2014.
“Late in the fourth quarter, there was a noticeable drop in customer traffic and our sales in the quarter ended below expectations. Harsh winter weather conditions in important markets had a meaningful effect on our daily orders and order deliveries in the quarter. In addition, planned promotional activities that were executed in the quarter did not yield the return we expected, which impacted our gross margins”, commented Chief Operating Officer Chris Homeister. Our team is carefully examining the cost/benefit relationship of our current promotional practices so as to consistently return to 70% gross margins. We are modifying our advertising approach to employ more dynamic messaging and personalized media capabilities as we enter into 2014. We will continue to invest in new stores and targeted promotional activities to drive sales growth in the most profitable manner.”
Mr. Rucker concluded, “While we are disappointed with our performance in the fourth quarter, we are still energized and excited about our long-term growth strategy. The opportunity for growth in our market niche is significant and our new store performance continues to demonstrate that the fundamental business model is sound. Our business is extremely well positioned to take advantage of the existing market conditions and we will strive to improve all operating metrics as we move forward. We are at the very early stages of a long term expansion opportunity and we remain committed to substantially growing shareholder value every year.”
Initial 2014 Guidance
The Company is providing initial expectations for 2014, based on past performance, anticipated new store openings and current economic conditions. Guidance includes the anticipated impact from challenging weather in key markets in January 2014 and resulted in the temporary loss of selling days at select locations in three important markets.
For the full year ended December 31, 2014 the Company expects:
The Company anticipates that it will report 2013 full year results on February 20, 2013.
About Tile Shop Holdings and The Tile Shop
The Company is a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company offers a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. The Company operates 90 stores in 28 states, with an average size of 23,000 square feet. The Company also sells its products on its website, www.tileshop.com.
Non-GAAP Financial Measures
We calculate Adjusted EBITDA by taking net income calculated in accordance with GAAP, and adding back interest expense, income taxes, depreciation and amortization, non-cash change in warrant liability, non-recurring equity related transaction costs, unusual items, the cost of the special investigation, deferred compensation expense, and stock-based compensation expense. The exact amount of these items is not yet determinable for the fourth quarter and full-year 2013, as expected results remain subject to completion of the Company’s year-end accounting processes and may be affected by subsequent events in accordance with GAAP. Accordingly, the Company is unable to provide fourth quarter and full-year GAAP net earnings estimates and reconciliation at this time.
We believe that measuring Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure 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. This measure is used in monthly financial reports prepared for management and our board of directors. We believe that the use of Adjusted EBITDA 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.
Our management does not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitations of non-GAAP financial measures are that they exclude significant expenses and income that are required by GAAP to be recorded 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 Adjusted EBITDA. 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.
FORWARD LOOKING STATEMENTS
This press release includes “forward looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “anticipate”, “believe”, “expect”, “estimate”, “plan”, “outlook”, and “project” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward looking statements include any statements regarding the Company’s intended actions following completion of the independent investigation, the anticipated benefits to be achieved as a result of information gathered during the independent investigation, expected financial performance, activities relating to pricing and advertising initiatives and the benefits of the Company’s operating model. Forward looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward looking statements, including but not limited to the Company’s ability to recover funds from Mr. Nishi, the Company’s ability to establish controls and take other actions that will ensure proper vendor relationships in the future, direct and indirect costs relating to the Company’s investigation into and disclosure of previously unknown relationships with Mr. Nishi, unforeseen events that may affect the retail market or the performance of the Company’s stores. The Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances. Investors are referred to the most recent reports filed with the SEC by the Company.
For Tile Shop Holdings, Inc.
Source: Tile Shop Holdings, Inc.