ITE
M 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, unexpected delays or expenses related to maintaining or renovating existing stores, changes to our promotional strategy changes to economic or market conditions and customer preferences, disruptions in our supply chain, or inventory management, changes to our product assortment, competitive factors, increases to interest rates or other impacts on our ability to obtain or maintain financing, unanticipated expenses related to operating as a public company and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview and Recent Trends
We are a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of
September 30, 2018
, we operated
140
stores in
31
states and the District of Columbia, with an average size of
20,200
square feet.
We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, and we believe that we are a leading retailer of natural stone and man-made tiles, accessories, and related materials in the United States.
We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened
2
new stores in the first
nine
months of
2018
, and opened
15
new stores during
2017
. Between
October
1, 2017 and
September 30, 2018
, we opened
6
new store locations. We do not plan to open any additional stores in
2018
. We believe that there will continue to be additional expansion opportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill transactions at these new locations.
For the
three months ended September 30, 2018 and 2017
, we reported net sales of
$89.3
million and
$84.4
million, respectively. The increase in sales for the
three months ended September 30, 2018
compared to the
three months ended September 30, 2017
was primarily due to net sales of
$3.0
million from stores not included in the comparable store base,
and an increase
in comparable stores sales of
2.1%
, or
$1.8
million. For the
nine months ended September 30, 2018 and 2017
, we reported net sales of
$273.3
million and
$266.0
million, respectively. The increase in sales for the
nine months ended September 30, 2018
compared to the
nine months ended September 30, 2017
was primarily due to net sales of
$13.4
million from stores not included in the comparable store base, partially offset by a decline in comparable store sales of
2.3%
, or
$6.1
million.
The increase in sales at comparable stores for the
three months ended September 30, 2018
is attributable to a higher average ticket due to decreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve
months.
The decrease in sales at comparable stores for the
nine months ended September 30, 2018
was primarily the result of weaker store traffic due in part to our shift in promotional strategy.
The table below sets forth information about our comparable store sales growth
and (decline)
for the
three and nine months ended September 30, 2018 and 2017
.
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For the three months ended
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For the nine months ended
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September 30,
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September 30,
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2018
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2017
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2018
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2017
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Comparable store sales growth (decline)
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2.1
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%
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1.1
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%
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(2.3)
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%
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2.2
|
%
|
For the
three months ended September 30, 2018 and 2017
, we reported gross profit of
$63.0
million and
$56.7
million, respectively. The gross margin rate for the
three months ended September 30, 2018 and 2017
was
70.6%
and
67.1%
, respectively. For the
nine months ended September 30, 2018 and 2017
, we reported gross profit of
$192.4
million and
$183.8
million, respectively. The gross margin rate for the
nine months ended September 30, 2018 and 2017
was
70.4%
and
69.1%
, respectively. The improvement in gross profit for the
three and nine months ended September 30, 2018 and 2017
is attributable to an increase
in both net sales and
gross margin rate. The increase in the gross margin rate is primarily due to decreased promotional activity.
For the
three months ended September 30, 2018 and 2017
, we reported income from operations of
$3.9
million and
$4.4
million, respectively. For the
nine months ended September 30, 2018 and 2017
, we reported income from operations of
$17.4
million and
$29.5
million, respectively. The decrease in income from operations was primarily driven by
an increase in occupancy costs from new stores and
strategic
investments made in store compensation, regional leadership, website design and customer relationship management capabilities.
Inventory increased by $
5.9
million from $
100.4
million on
June
3
0
, 2018 to $10
6.3
million on
September 30, 2018
. The increase was attributable to new products added to our assortment during the quarter.
Long term debt increased $
1
6
.5
million from $
29.5
million on
June
3
0
, 2018 to
$46.0
million on
September 30, 2018
. The increase was attributable to the expansion of our product assortment resulting in an increase in inventory and capital investments associated with store remodels and merchandising.
Net cash provided by operating activities was
$15.7
million and
$49.4
million for the
nine months ended September 30, 2018 and 2017
, respectively. The decrease in operating cash flow is due to investments made to expand
our
product assortment during 2018. Cash flows generated by operating activities
and borrowings against our line of credit
were
used to fund operations, inventory purchases, store remodel and merchandising investments, and dividends.
We
expect to fund capital expenditures and daily operations from operating cash flows
in future periods
. As of
September 30, 2018
, we had cash of
$10.1
million and working capital of
$77.6
million compared with cash of
$6.6
million and working capital of
$43.5
million at
December 31, 2017
.
Key Components of our Consolidated Statements of Income
Net Sales
Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes control of the merchandise or final delivery of the product has occurred. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.
Comparable store sales growth is a percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable stores sales growth calculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation.
Cost of Sales
Cost of sales consists primarily of material costs, freight, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consists primarily of compensation costs, occupancy, utilities, maintenance costs, advertising costs, shipping and transportation expenses to move inventory from our distribution centers to our stores, depreciation and amortization.
Pre-opening Costs
Our pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general, and administrative expenses.
Provision for Income Taxes
We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business.
Non-GAAP Measure
We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales.
We believe that this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. This measure is used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other specialty retailers, many of which present a similar non-GAAP financial measure to investors.
The reconciliation of Adjusted EBITDA to net income for the three and nine months ended September 30, 2018 and 2017 is as follows:
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(in thousands)
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Three Months Ended
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September 30,
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2018
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% of net sales
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2017
|
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% of net sales
(1)
|
Net income
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$
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2,553
|
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2.9
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%
|
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$
|
2,438
|
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2.9
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%
|
Interest expense
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|
715
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0.8
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%
|
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|
505
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0.6
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%
|
Income taxes
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|
652
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0.7
|
%
|
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|
1,468
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1.7
|
%
|
Depreciation & amortization
|
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|
7,202
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8.1
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%
|
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|
6,803
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8.1
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%
|
Stock based compensation
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|
735
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0.8
|
%
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|
989
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1.2
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%
|
Adjusted EBITDA
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$
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11,857
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13.3
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%
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$
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12,203
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14.5
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%
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(in thousands)
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Nine Months Ended
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September 30,
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2018
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% of net sales
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2017
|
% of net sales
(1)
(2)
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Net income
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$
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11,522
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4.2
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%
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$
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18,170
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6.8
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%
|
Interest expense
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1,866
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0.7
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%
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1,438
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0.5
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%
|
Income taxes
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4,157
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1.5
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%
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10,034
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3.8
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%
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Depreciation & amortization
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21,180
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7.7
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%
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19,395
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7.3
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%
|
Stock based compensation
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1,950
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0.7
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%
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2,759
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1.0
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%
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Adjusted EBITDA
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$
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40,675
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14.9
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%
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$
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51,796
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19.5
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%
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(1)
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In prior periods, the Company also adjusted for special charges, including shareholder and other litigation costs. The Company has recast the Adjusted EBITDA presentation for the three and nine months ended September 30, 2017 to conform to the current presentation.
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(2)
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Amounts may not foot due to rounding.
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We
calculate pretax return on capital employed by taking income from operations divided by capital employed. Capital employed equals total assets less accounts payable, income taxes payable, other accrued liabilities, deferred rent and other long-term liabilities.
We believe this
non-GAAP measure
is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate Pretax Return on Capital Employed differently,
which
limits
the usefulness of the measure for comparative purposes.
The calculation of
Pretax Return on Capital Employed
is as follows:
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(in thousands)
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September 30,
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2018
(1)
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2017
(1)
|
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Income from operations (trailing twelve months)
|
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$
|
13,769
|
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$
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31,160
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Total Assets
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281,996
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263,140
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Less: Accounts payable
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(29,015)
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(21,669)
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Less: Income tax payable
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(71)
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(844)
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Less: Other accrued liabilities
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(26,751)
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(26,482)
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Less: Deferred rent
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(42,401)
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(38,815)
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Less: Other long-term liabilities
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(4,346)
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(5,409)
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Capital Employed
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179,412
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169,921
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Pretax Return on Capital Employed
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7.7
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%
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18.3
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%
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(1)
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|
Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.
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Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they excludes significant expenses and income that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents its non-GAAP financial measure
s
in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.
Results of Operations
Comparison of the
three months ended September 30, 2018
to the
three months ended September 30, 2017
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(in thousands)
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2018
|
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% of sales
(1)
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2017
|
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% of sales
|
Net sales
|
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$
|
89,259
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$
|
84,421
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Cost of sales
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26,248
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29.4
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%
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27,759
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32.9
|
%
|
Gross profit
|
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63,011
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70.6
|
%
|
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|
56,662
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67.1
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%
|
Selling, general and administrative expenses
|
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59,131
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66.2
|
%
|
|
|
52,285
|
|
61.9
|
%
|
Income from operations
|
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|
3,880
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4.3
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%
|
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|
4,377
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5.2
|
%
|
Interest expense
|
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(715)
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(0.8)
|
%
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(505)
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(0.6)
|
%
|
Other income
|
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40
|
|
0.0
|
%
|
|
|
34
|
|
0.0
|
%
|
Income before income taxes
|
|
|
3,205
|
|
3.6
|
%
|
|
|
3,906
|
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4.6
|
%
|
Provision for income taxes
|
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(652)
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|
(0.7)
|
%
|
|
|
(1,468)
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(1.7)
|
%
|
Net income
|
|
$
|
2,553
|
|
2.9
|
%
|
|
$
|
2,438
|
|
2.9
|
%
|
|
(1)
|
|
Amounts do not foot due to rounding.
|
Net Sales
Net sales for the
third
quarter of
2018
increased
$4.8
million, or
5.7%
, compared with the
third
quarter of
2017
, primarily due to a
$3.0
million increase in net sales from stores not include
d in the comparable store base and an increase of
$1.8
million in net sales generated by comparable stores.
Comparable store sales growth was
2.1%
for the
third
quarter of
2018
versus
1.1%
for the
third
quarter of
2017
.
The increase in sales at comparable stores for the three months ended September 30, 2018 is attributable to a higher average ticket due to decreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve months.
Gross Profit
Gross profit for the
third
quarter of
2018
increased
$6.3
million, or
11.2%
, compared with the
third
quarter of
2017
due to an increase in net sales and the gross margin rate. The gross margin rate was
70.6%
and
67.1%
for the
third
quarter of
2018
and
2017
, respectively. The improvement in the gross margin rate was primarily due to decreased promotional activity.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the
third
quarter of
2018
increased
$6.8
million, or
13.1%
, compared with the
third
quarter of
2017
. The
$6.8
million increase in selling, general, and administrative expenses was driven primarily by costs associated with opening and operating
6
new stores during the period from
October
1,
2017
through
September 30, 2018
, i
nvestments in store and warehouse staff compensation, and the addition of regional sales leader
and pro market manager
positions. Included in the selling, general, and administrative expenses increase during the
third
quarter of
2018
was $
1.9
million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities.
Additionally, we incurred approximately $1.0 million of incremental legal expense during the
third
quarter of
2018
to resolve our derivative securities litigation.
Pre-opening Costs
During
the
three months ended September 30, 2017
, we incurred pre-opening costs of
$0.5
million
.
We incurred no pre-opening costs during the three months ended September 30, 2018.
Interest Expense
Interest expense was
$0.7
million and
$0.5
million for the
third
quarter of
2018
and
2017
, respectively. The increase was
primarily
due to higher interest rates
and a higher average debt balance
during the
third
quarter of
2018
.
Provision for Income Taxes
Income tax provision decreased
$0.8
million for the
third
quarter of
2018
compared with the
third
quarter of
2017
due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to
the Tax Cuts and Jobs Act of 2017 (the “
Tax Act
”)
. Our effective tax rate for the three months ended
September 30, 2018
and
2017
was
20.3%
and
37.6%
, respectively.
The difference between the Company’s effective tax rate of 20.3% and the expected federal statutory rate of 21.0% is primarily due to favorable adjustments from the filing of the 2017 tax return.
Comparison of the
nine months ended September 30, 2018
to the
nine months ended September 30, 2017
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(in thousands)
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2018
|
|
% of sales
|
|
2017
|
|
% of sales
|
Net sales
|
|
$
|
273,307
|
|
|
|
|
$
|
266,020
|
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|
|
Cost of sales
|
|
|
80,946
|
|
29.6
|
%
|
|
|
82,265
|
|
30.9
|
%
|
Gross profit
|
|
|
192,361
|
|
70.4
|
%
|
|
|
183,755
|
|
69.1
|
%
|
Selling, general and administrative expenses
|
|
|
174,928
|
|
64.0
|
%
|
|
|
154,245
|
|
58.0
|
%
|
Income from operations
|
|
|
17,433
|
|
6.4
|
%
|
|
|
29,510
|
|
11.1
|
%
|
Interest expense
|
|
|
(1,866)
|
|
(0.7)
|
%
|
|
|
(1,438)
|
|
(0.5)
|
%
|
Other income (expense)
|
|
|
112
|
|
0.0
|
%
|
|
|
132
|
|
0.0
|
%
|
Income before income taxes
|
|
|
15,679
|
|
5.7
|
%
|
|
|
28,204
|
|
10.6
|
%
|
Provision for income taxes
|
|
|
(4,157)
|
|
(1.5)
|
%
|
|
|
(10,034)
|
|
(3.8)
|
%
|
Net income
|
|
$
|
11,522
|
|
4.2
|
%
|
|
$
|
18,170
|
|
6.8
|
%
|
Net Sales
Net sales for the
nine months ended September 30, 2018
increased
$7.3
million, or
2.7%
, compared with the
nine months ended September 30, 2017
, primarily due to a
$13.4 million increase in net sales from stores not included in the comparable store base, partially offset by a
$6.1
million decrease in net sales generated by comparable stores. The decrease in sales at comparable stores for the
nine months ended September 30, 2018
was
primarily the result of
weaker store traffic due in part to our shift in promotional strategy.
Gross Profit
Gross profit for the
nine months ended September 30, 2018
increased
$8.6
million, or
4.7%
, compared with the
nine months ended September 30, 2017
primarily due to an increase in net sales and an increase in the gross margin rate. The gross margin rate was
70.4%
and
69.1%
for the
nine months ended September 30, 2018 and 2017
, respectively. The improvement in the gross margin rate was primarily due to decreased promotional activity.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the
nine months ended September 30, 2018
increased
$20.7
million, or
13.4%
, compared with the
nine months ended September 30, 2017
. The
$20.7
million increase in selling, general, and administrative expenses was driven primarily by costs associated with opening and operating new stores during the period from
October
1, 2017 through
September 30, 2018
,
investments in store and warehouse staff compensation, and the addition of regional sales leader
and pro market manager
positions. Included in the selling, general, and administrative expenses increase during
the
nine months ended September 30, 2018
was approximately $
6.
1
million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities.
Additionally, we incurred approximately $1.0 million of incremental legal expense during the nine months ended September 30, 2018 to resolve our derivative securities litigation.
Pre-opening Costs
During the
nine months ended September 30, 2018 and 2017
, we incurred pre-opening costs of
$0.1
million and
$0.8
million, respectively.
Interest Expense
Interest expense was
$1.9
million and
$1.4
million for the
nine months ended September 30, 2018 and 2017
, respectively. The increase was due to higher interest rates and a higher debt balance during the
nine months ended September 30, 2018
.
Provision for Income Taxes
Income tax provision decreased
$5.9
million for the
nine months ended September 30, 2018
compared with the
nine months ended September 30, 2017
due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to the Tax Act. Our effective tax rate for the
nine months ended September 30, 2018 and 2017
was
26.5%
and
35.6%
, respectively.
The difference between the Company’s effective rate
for the nine months ended September 30, 2018
of
26.5%
and the expected federal statutory rate of 21.0% for the three and nine months ended September 30, 2018 is primarily due to state income taxes.
Liquidity and Capital Resources
Our principal uses of liquidity have been investments in working capital and capital expenditures. Our principal sources of liquidity are
$10.1
million of cash and cash equivalents at
September 30, 2018
, our cash flow from operations, and borrowings available under our credit facility. We expect to use this liquidity for opening new stores, purchasing additional merchandise inventory, maintaining our existing stores, reducing outstanding debt, paying dividends to our shareholders and general corporate purposes.
On September 18, 2018,
we
and
our
operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America, N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides
us
with a senior credi
t facility consisting of a $100 million
revolving line of credit
through September 18, 2023
. Borrowings pursuant to the Credit Agreement
initially bear interest at a rate of adjusted LIBOR plus 1.75% and may bear interest in a range between adjusted LIBOR plus 1.50% to adjusted LIBOR plus 2.25%, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio.
At
September 30, 2018
, the base interest rate was
6.00%
and the LIBOR-based interest rate was
4.01%
.
The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property.
The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on
our
ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios.
We
are
in compliance with
the
covenants as of
September 30, 2018
.
The Credit Agreement supersedes and replaces in its entirety
our
prior
senior secured credit facility with Fifth Third Bank dated June 2, 2015, as amended on April 5, 2018, July 17, 2017, February 10, 2017 and December 9, 2016. In addition to increasing the
line of credit from $75 million
under the
prior
credit facility to $10
0
million
under the Credit Agreement, the Credit Agreement also provides additional flexibility in
our
fixed charge coverage ratio covenant, which is now 1.25:1
.
00 (as compared to 1.35:1.00 under the
prior
credit facility), and in the calculation of the consolidated total rent adjusted leverage ratio, which now is based on six times the trailing four-quarter rent expense (as compared to eight times the trailing four-quarter rent expense under the
prior
credit facility).
We
drew on the line of credit pursuant to the Credit Agreement to refinance all of the existing
term loan, revolving line of credit
and interest outstanding under
our
prior
credit facility, as well as pay $0.4 million in
debt issuance
costs in connection with the Credit Agreement.
Debt issuance costs are classified as other current assets and other assets in the Consolidated Balance Sheet and amortized on a straight line basis over the life of the Credit Agreement.
We
recorded a $0.1 million charge in interest expense to write-off of
certain
unamortized deferred financing fees associated with the
prior
credit facility as of t
he date of the payoff. Borrowings outstanding consisted
$46.0
million on the revolving line of credit as of
September 30, 2018
.
We also have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of
September 30, 2018
and
2017
, the standby letters of credit totaled
$1.1
million.
There was
$52.9
million available for borrowing on the revolving line of credit as of
September 30, 2018
, which may be used to support our growth and for working capital purposes.
We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under our credit facility, will be sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months.
Capital Expenditures
Capital expenditures were
$22.9
million and
$28.0
million for the
nine months ended September 30, 2018 and 2017
, respectively. The decrease in capital expenditures is primarily due to the decelerated pace of new store openings
in 2018
. We opened
2
and 11
new stores during the
nine months ended September 30, 2018 and 2017
, respectively. During the
nine months ended September 30, 2018
, capital expenditures primarily consisted of
10 store remodels
, merchandising and fixture investments at all 140 stores,
and information technology investments.
Cash flows
The following table summarizes our cash flow data for the
nine months ended September 30, 2018 and 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
|
$
|
15,721
|
|
$
|
49,355
|
Net cash used in investing activities
|
|
|
(22,880)
|
|
|
(28,031)
|
Net cash provided by (used in) financing activities
|
|
|
10,634
|
|
|
(21,018)
|
Operating activities
Net cash provided by operating activities during the
nine months ended September 30, 2018
was
$15.7
million compared with
$49.4
million during the
nine months ended September 30, 2017
. The decrease is attributable to a decrease in net income, along with an increase in inventory.
Investing activities
Net cash used in investing activities totaled
$22.9
million for the
nine months ended September 30, 2018
compared with
$28.0
million for the
nine months ended September 30, 2017
. Net cash used in investing activities was primarily for capital purchases of store fixtures, equipment, building improvements and leasehold improvements for stores opened or remodeled, asset additions in our distribution and manufacturing facilities, information technology infrastructure, a new enterprise resource planning system, and general corporate information technology assets.
Financing activities
Net cash
provided by
financing activities was
$10.6
million for the
nine months ended September 30, 2018
compared with
net cash used in financing activities of
$21.0
million for the
nine months ended September 30, 2017
. Net cash
provided by
financing activities during the
nine months ended September 30, 2018
included $114.1 million in advances on the Company’s line of credit which were partially offset by $95.2 million in payments of long-term debt and capital lease obligations and $7.8 million in dividends paid to stockholders.
Cash and cash equivalents totaled
$10.1
million at
September 30, 2018
compared with
$6.6
million at
December 31, 2017
. Working capital was
$77.6
million at
September 30, 2018
compared with
$43.5
million at
December 31, 2017
.
Off-Balance Sheet Arrangements
As of
September 30, 2018
and
December 31, 2017
, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that could have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Arrangements
As of
September 30, 2018
, there were no material changes to our contractual obligations outside the ordinary course of business.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard. We adopted this standard as of January 1, 2018 using the modified retrospective transition method. See Note 2 in Item 1, Notes to Consolidated Financial Statements in this Form 10-Q for further details.
In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. We adopted the new standard as of March 31, 2018 using the retrospective transition method. Our restricted cash balance was $0.8 million as of
September 30, 2018
. Upon adopting the new standard, we no longer present the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows. In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during
nine months ended September 30, 2017
that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash in the statement of cash flows.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the
C
onsolidated
Balance S
heet. The accounting standards update also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The standard is effective in fiscal year 2019, with early adoption permitted.
We continue
to evaluate the impact of this standard on our financial statements and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls. We are implementing a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and establishing internal controls over the new system. We believe the adoption of the standard will
have a material impact on our C
onsolidated
Balance
Sheet
as virtually all leases will be recognized as a right of use asset and lease obligation.