Citi Rates Tile Shop Holdings Neutral Despite Irregularities

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Tile Shop Hldgs, Inc. (NASDAQ:TTS) is a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials and the like. Tile Shop buys its tiles and other materials directly from producers, and manufactures its own setting and maintenance materials including thinset, grout and sealers. The company owns and operates 68 stores in 23 states, with a mean store size of more than 23,000 sq ft.

Charges of false invoices and improper accounting

Gotham City Research recently produced a report detailing a number of improprieties in invoicing, which in turn have led to issues with inventory and gross margins, and even employee relationships with an exporter company. Besides the accounting irregularities that will likely result in the need to review the last several years’ earnings, Gotham City’s report points to a number of other negatives as reasons to sell Tile Shop Hldgs, Inc.(NASDAQ:TTS), including:

  • 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.

According to Gotham City, Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s shares are worth no more than $1.54 to $3.34 a share, making the shares currently priced at $16.05 attractive for short sellers.

Citi Research rates Tile Shop as Neutral/High Risk

Citi Research put out a note today updating their coverage of Tile Shop Hldgs, Inc. (NASDAQ:TTS). They downplayed the accounting irregularities as outside of management’s control and emphasized an investigation into the ownership of the export company in question was underway. They also noted ongoing retail expansion and continued top line growth, as well as the fact that TTS recently opened a distribution center in Durant, OK for its planned expansion to the West Coast. According to Citi, “we think a conclusive investigation noting there was no questionable activity will be a positive catalyst for the stock.” Citi rates TTS as Neutral/High Risk and has a 12-month price target of $18 on the stock.

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