Tile Shop Denies Allegations; Stifel Unearths More Issues

Tile Shop Denies Allegations; Stifel Unearths More Issues

Tile Shop Hldgs, Inc. (NASDAQ:TTS) denied the fraud allegations of Gotham City Research. The retailer of manufactured and natural tiles said it hasn’t overstated its financial statements, and its business practices are appropriate.Tile Shop Hldgs, Inc. (NASDAQ:TTS) said it was previously unaware of the change of ownership at Beijing Pingxiu.

Tile Shop to investigate relationship

Yesterday, Gotham City Research said in a research note that Tile Shop Hldgs, Inc. (NASDAQ:TTS) overstated its 2013 profits by more than 200%. The short seller added that its largest supplier of tiles, Beijing Pingxiu, is secretly controlled by Fumitake Nishi. Mr. Nishi is currently an employee of Tile Shop Hldgs, Inc. (NASDAQ:TTS) and the brother-in-law of the CEO of the Minneapolis-based company.

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Gotham City reviewed some of the invoices sent by Beijing Pingxiu to Tile Shop Hldgs, Inc. (NASDAQ:TTS). The invoices create further suspicion because they are sent by “Fumitake Nishi, Beijing Pingxiu” and are directed to “Fumitake Nishi, Tile Shop.” Tile Shop Hldgs, Inc. (NASDAQ:TTS) said it suspended its business relationship with Beijing Pingxiu immediately after Gotham City made it aware of the ownership change at the Chinese company.

Tile Shop reiterates earnings guidance

Tile Shop Hldgs, Inc. (NASDAQ:TTS) said it will thoroughly investigate the relationship with its Chinese supplier. It also expressed confidence that the change in Beijing Pingxiu’s ownership had no impact on its inventory purchases. The company reiterated its earnings and sales guidance for the current fiscal year.

But Stifel analysts John A. Baugh and Dillard Watt unearthed some issues that may drag Tile Shop Hldgs, Inc. (NASDAQ:TTS) into further trouble:

  • No other flooring retailer has 70%+ gross margins. Tile Shop Hldgs, Inc. (NASDAQ:TTS) argues that it has sustained such high margins due to its exclusive relationships and supply agreements with key suppliers. Stifel says its gross margins have declined from 74% to 70% over the past few quarters. Why would a company give in on price, especially if it enjoys such a large competitive sourcing advantage as TTS claims?
  • Tile Shop went public through a SPAC instead of a formal IPO. Experts say SPACs are nothing but a slick method for the company management and investment banks to collect hefty fees while transferring most of the risk to investors.
  • Tile Shop Hldgs, Inc. (NASDAQ:TTS) has seen three auditors in just two years: Ernst & Young, Deloitte and McGladrey.
  • Where is the CEO? Stifel analysts say they have never met Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s CEO. And neither have they found an investor who has met its CEO Robert Rucker. When the analysts tried to arrange a meeting with Mr. Rucker, they were told that the CEO wasn’t comfortable interacting with Wall Street.
  • When the analysts visited Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s corporate office earlier this year, they were surprised by the limited number of executive positions and office size. That didn’t do justice to the headquarters of a billion dollar company.
  • Material accounting weakness. The flooring retailer has admitted that it experienced accounting issues in 2011 and 2012. The company said it didn’t have executives competent in financial functions and it lacked accurate systems for better financial reporting. At the end of 2012, the company said it has fixed those issues. Again, earlier this year the company said that it had misstated certain accounts, and restated them in March 2013.
  • Ownership by Nabron International. Nabron is a Bahamas-based shell company that owns 21% stake in Tile Shop Hldgs, Inc. (NASDAQ:TTS). It previously owned 30% of the company, but offloaded some of the shares during secondary offerings in December 2012 and May 2013. Nabron International is owned by the Chan family of Hong Kong. Ronnie Chan has served as a director of Enron Corp.

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