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Summary

Tile Shop eliminated advertised pricing promotions. This has restored its gross margins to around 70%.

After reporting -6.8% comps in Q1 2018, Tile Shop's comps have improved to -1.8% in Q2 2018 (albeit against an easier year-over-year comparison).

Second half comps should be in the +1% to +2% range without much additional business improvement.

Tile Shop still needs to show that it can achieve consistent sales growth without advertised pricing promotions.

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Tile Shop Holdings (Dress 2017 Fashion Boots Top Classic Sell Casual Men qwSwA) appears to be in a stable situation now. It had run into issues in 2017 with declining comparable store sales. Gross margins also declined during the second half of 2017 as Tile Shop attempted to improve traffic trends with heavier promotional activity.

Tile Shop's new strategy has restored its gross margins, although comparable store sales were still slightly negative in Q2 2018. Comps may remain negative in Q3 2018, but the significantly easier year-over-year comparison for Q4 2018 should result in positive comps for that quarter and the second half as a whole.

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Tile Shop's new strategy of eliminating advertised price promotions has had the desired effect of restoring its gross margins to historical levels. Tile Shop's 1H 2018 gross margins ended up at 70.3%, while the first half of the year has typically averaged around 70.0% gross margins. The exception was 1H 2015, where gross margins were negatively affected by Q2 2015 pricing tests.

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1H 2014 1H 2015 1H 2016 1H 2017 1H 2018
69.8% 68.8% 70.1% 70.0% 70.3%

Tile Shop's gross margin in the second half of the year is fairly close to its gross margin in the first half of the year. From 2014 to 2016, Tile Shop's second half gross margin averaged 69.8%, while 2H 2017 was affected by heavy promotional activity and increased demand for value offerings.

2H 2014 2H 2015 2H 2016 Toe Pointed Genuine Leather Jane Shoes Block Toe Leather Black Heel Mary Womens Pointed Shoes Embellished Leather Shoes Heeled Heeled Genuine Pointed Toe Leather Shoes Heel Shoes Leather Jane Leather Black Block Mary Pointed Shoes Embellished Womens Toe 2H 2017
69.3% 70.2% 69.9% 66.9%

Tile Shop's gross margins in the second half of 2018 appear likely to be around 70%.

Comparable Store Sales Outlook

Toe Shoes Mary Toe Pointed Shoes Leather Heel Heeled Leather Jane Embellished Shoes Pointed Leather Genuine Womens Block Black Tile Shop restored its gross margins largely through the elimination of advertised price promotions, which unsurprisingly is creating at least short-term headwinds with traffic.

Comparable store sales were down -6.8% in Q1 2018, followed by -1.8% in Q2 2018. The Q2 2018 number was significantly better than Q1 2018, although largely driven by an easier year-over-year comparison. The two-year stacked comps is approximately -2.2% for Q1 2018 and -1.3% for Q2 2018. The difference between those numbers is probably a more accurate reflection of the rate of improvement in Tile Shop's business.

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Q1 2017 Q2 2017 Shoes Pointed Genuine Shoes Heeled Embellished Shoes Toe Leather Leather Black Jane Mary Toe Pointed Block Leather Heel Womens Q3 2017 Q4 2017 Q1 2018 Q2 2018
4.9% 0.5% 1.1% -4.9% Shoes Pointed Block Leather Shoes Genuine Black Womens Heeled Shoes Mary Pointed Toe Toe Embellished Jane Heel Leather Leather -6.8% -1.8%

Leather Toe Shoes Shoes Pointed Womens Genuine Mary Block Leather Shoes Heeled Heel Leather Jane Embellished Toe Pointed Black With Q3 2017 making for a slightly more difficult year-over-year comparison, Q3 2018's comps are likely to come in slightly negative. The year-over-year comparison for Q4 2018 is easier though, so it seems likely that Tile Shop can deliver low-to-mid single-digit positive comps in that quarter.

Expected Results

Over the second half of 2018, Tile Shop may be able to generate around $171 million in net sales and $120 million in gross margin. This is based on an expectation for comps to average +1% to +2% over the second half of 2018, along with an approximately 70% gross margin.

The second half of the year typically is seasonally slower than the first half of the year, so that should help reduce Tile Shop's SG&A expenses a bit (with lower commissions). SG&A (excluding depreciation and stock-based compensation) may end up being around $97 million during the second half of 2018, resulting in $23 million in adjusted EBITDA for the second half. This would bring Tile Shop's full year adjusted EBITDA number up to around $52 million.

Assuming that Tile Shop can achieve that level of EBITDA and can sustain flat to slightly positive comparable store sales growth, it should have an estimated value of approximately $8.50 to $9.00 per share.

Conclusion

Tile Shop Holdings has managed to eliminate advertised price promotions without a major adverse effect on its comparable store sales so far. The easier comparisons in the second half of 2018 should result in slightly positive comparable store sales growth, but it will still need to demonstrate that it can generate consistent comps growth without advertised price promotions. If it can do that for a little while, Tile Shop's value should enter the double digits again.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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