TILE SHOP HOLDINGS, INC. Q2 FY2023 earnings call

• Macro headwinds like rising interest rates and slowing housing turnover affected store traffic and comparable store sales.
• Implemented measures to navigate headwinds: improved reach to retail customers, financing options, expanded pro relationships (75% of sales mix from pros or professional customers), e-commerce growth (30% YoY increase in orders due to digital ad investment and improved online experience).
• Strong product assortment with expanded LVT lines, average ticket prices trending positive, strong conversion rates despite macro conditions.
• Opened new store in Colorado Springs in June, on track to relocate one store in 2023 and look for growth in 2024 within existing distribution area.

Comparable store sales decreased by 8% from the second quarter last year. Gross margin rate was 64.2% in the second quarter, in line with last quarter but 180 basis points lower than the same quarter last year. SG&A expenses decreased by $5.7 million compared to Q2 2022. Net income was $5.1 million in Q2 2023 compared to $6.9 million in the same period last year. Inventory decreased sequentially to $106.9 million at the end of Q2. Year-to-date operating cash flow was $41.4 million, debt reduced from $45.4 million at the beginning of the year to $20 million at the end of Q2, and ended Q2 with a cash balance of $14.6 million.

• Expect gross margin improvement in the second half of 2023 due to lower international freight rates and better sourcing of quality products.
• Inventory is expected to continue decreasing as better-priced products arrive, leading to margin improvement.
• Anticipate continued growth in e-commerce and LVT categories.

• Macro headwinds (rising rates, slowing housing turnover) persisting could impact business.
• LVT and back shelf products have lower gross margins, which may pressure overall gross margin rate over time.
• Inventory still relatively high at over $100 million, need to effectively manage down.

Q: Update on the new store in Colorado Springs?

A: Cab visited the new store last week, had a pro event, positioned well for traffic and pros/retail customers, high hopes with so far good results.

Q: Thoughts on LVT performance?

A: LVT is gaining awareness, seeing increasing sales in that segment, results so far through summer are positive with no slowdown seen.

Q: Comfort level with inventory today?

A: Inventory has been brought down, still over $100 million but can be lowered further as better-priced products come in, expecting margin improvement in coming quarters.

Q: What's needed to spur consumer spending on products?

A: Trend with housing turnover, remodeling activity still exists but impacted by rates, hoping for back half improvement with better-priced inventory.