Tile Shop Hldgs, Inc. (NASDAQ:TTS), a home remolding retailer, is trading sharply lower after hours as the firm missed its earnings and revenue report in the second quarter.

Tile Shop Hldgs

Tile Shop misses consensus estimate

The company reported second quarter earnings of 8 cents a share, missing consensus estimate of 10 cents a share by 2 cents. Revenue tumbled 14.7% year-over-year to $66.66 million for the quarter, disappointing analysts who had expected revenue of $68.5 million for the quarter.

Tile Shop Holdings was the subject of two activist investors, Gotham City Research and Infitialis, both of whom had sold the company short.

Gotham Research: Tile Shop 2013 LTM earnings were overstated by over 200%

Gotham in particular had issued a scathing research report in November 2013.  The report claimed the Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s 2013 LTM earnings are overstated by over 200%, TTS will restate several years’ historical results, the company used its China-based undisclosed related party and improper accounting to overstate profits.

In January of this year Tile Shop Holdings as much as admitted there were problems with its accounting, but largely blamed others.  Admitted an undisclosed third-party relationship, then fired the brother-in-law of the founder and cut business ties with his company. But it was the brother-in-law who appeared to take the fall for just about everything, according to a report.

Gotham’s report  said that gross margins will continue to decline through 2014, as they exhibited problems in late 2013 and these same issues are expected to continue.  Today’s earnings results are a partial manifestation  of this prediction made in November of 2013.

Tile Shop stock dropped nearly 10%

While the stock dropped nearly 10 percent after hours, it is still trading near $9.50 per share.  In its research report, Gotham had said the shares were “worth no more than $1.54-$3.34/share, implying 84%-93% downside.”  The Tile Shop’s creditors will likely restrict additional indebtedness & capital expenditures until TTS’s accounting is corrected, the report noted.

Although the Tile Shop Hldgs, Inc. (NASDAQ:TTS) addressed some of the irregularities addressed in the report, Gotham’s short thesis regarding earnings appears to be playing out.