Tile Shop is a compelling risk/reward at $7.5 per share or ~5.4x FY21E Adj. EBITDA of $60MM and a mid- teens FCF yield ex-cash. We believe a combination of technical tailwinds over the coming months along with operational execution, a strong R&R environment and capital allocation will allow TTSH to rerate to ~$12 per share. If not, we believe TTSH would make an excellent acquisition/platform candidate for a sponsor.
Tile Shop is a specialty retailer of floor and wall tiles, with 143 stores and 5 DCs covering a majority of the US. It is estimated as the third largest independent flooring/tile retailer. For the LTM period TTSH generated $351MM of rev and ~$52MM of Adj. EBITDA.
Why Does This Opportunity Exist?
➢Complicated corporate history ranging from an accurate short report on inventory/related party issues to a delisting that ended up in litigation, former CEO/founder throwing mgmt. under the bus in a public letter, etc.
oThe delisting/pink sheets headwind has been resolved as well as indiscriminate selling
from the founder.
➢ERP roll-out issues which have since been alleviated.
➢Recent selling for the ousted former CEO has been an overhang on the stock.
Catalyst to Re-rate & Investment Highlights
➢Technical catalysts include sell-side coverage, eligibility into the fundamental small cap long only
crowd and R2000 inclusion in FY22. This should lead to 20%+ of float acquired by passive
➢In response to COVID, TTSH reduced store hours, particularly for Sundays. With TTSH selectively
reopening stores on Sundays, we should see incremental volumes from the corresponding comp
uplift. We believe an MSD sales comp is sustainable over the coming two years.
oIn conjunction with operating leverage, incremental EBITDA margins should be in excess
30% leading to strong flow-through.
oTTSH can increase their store footprint within existing markets as well as potential evergreen opportunities now that the balance sheet and other issues are resolved. Once the market sees positive comps and positive unit growth, the multiple will likely expand.
➢TTSH utilized COVID to right size their cost structure, reducing low-end sales performers. This increased the commission pool for its better employees, aligning incentives
➢TTSH has excess capital with a Fort Knox balance sheet of ~$40MM and ought to generate well over $30MM of FCF for FY21E. We’d expect some type of return of capital either buybacks or dividends.
➢TTSH screens well on a fundamental basis with earnings/EBITDA growth and FCF inflecting –positive for algos.
➢Per the shareholder litigation/depositions in 2020, it was revealed by the board that their intent was to sell ultimately clean up and sell the company. With the company appearing to be mostly cleaned up, we think TTSH could be an attractive platform candidate for a sponsor. HOME/MIK sold for ~9x+ EBITDA multiples, while SIC sold off its assets in excess of 10x EBITDA. We think TTSH would fetch $11 to $14 in a sale.
➢Cycle turns negative for repair and remodel or other potential housing headwinds. Thus far, results and commentary for the go forward have been positive. Moreover, cost structure is now more in line vs the past issues.
➢Supply chain issues have plagued multiple issues. We believe they have a good handle on their inventory plus we think companies in general are more prone to getting a pass for supply chain mishaps this upcoming Q (particularly after the BBBY/MU/NKE blow ups)
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