Summary of Gotham City Research's Tile Shop thesis:
- Tile Shop’s 2013 LTM earnings are overstated by over 200%. TTS’s actual 2013 LTM EPS is closer to $0.18/share.
- Tile Shop Hldgs, Inc. (NASDAQ:TTS) will restate several years’ historical results as a result of the issues covered in this report.
- The company has used its China-based undisclosed related party and improper accounting to overstate profits.
- Gross margins will continue to decline through 2014, as TTS must reverse prior years’ accounting overstatements.
- Tile Shop’s shares are worth no more than $1.54-$3.34/share, implying 84%-93% downside.
- Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s creditors will likely restrict additional indebtedness & capital expenditures until TTS’s accounting is corrected.
Summary of the Bases of Opinions:
- Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s largest supplier, Beijing Pingxiu, is an undisclosed related company, and accounts for 20-30+% of TTS’s COGs.
- Beijing Pingxiu is secretly controlled by Fumitake Nishi. Mr. Nishi is the CEO’s brother-in-law and a TTS employee.
- Beijing Pingxiu invoices sent to the Tile Shop are directed to Fumitake Nishi. Beijing Pingxiu has no presence in one of its listed addresses, and a minimal presence in another.
- Days sales’ inventory for FY2011 & LTM 2013 exceed 365 days, at 396 & 414 days respectively.
- TTS inventory growth exceeds sales growth by 3x, as of 9/30/2013. Inventory growth has, on average, exceeded sales growth by 2.1x over the last 5 years.
- The CEO believes Tile Shop Hldgs, Inc. (NASDAQ:TTS) is worth somewhere between $83.6 and $180.4 million ($1.0-$2.2 million per store).
- Free cash flow has gone negative over the last 9 months.
- Tile Shop has had 3 different auditors in the last 2 years.
- TTS has missed EPS guidance 4 out of the last 5 quarters.
- Color Tile, Inc., the only other national specialty tile retailer in US history, filed for Ch. 11 bankruptcy in 1996. CEO Bob Rucker worked for Color Tile.
- Gotham City Research contacted the Tile Shop on several occasions and did not hear back from the Company.