The Tile Shop: Like Crazy Eddie’s, But With An Undisclosed Related Party and A Chinese Twist
- Gotham City Research LLC
- Nov 14, 2013
- 2 min read
Gotham City Research initiates coverage on Tile Shop Holdings, Inc. Summary of Gotham City Research’s findings:
Tile Shop’s 2013 LTM earnings are overstated by over 200%. TTS’s actual 2013 LTM EPS is closer to $0.18/share.
TTS will restate several years’ historical results as a result of the issues covered in this report.
The company has used its China-based undisclosed related party and improper accounting to overstate profits.
Gross margins will continue to decline through 2014, as TTS must reverse prior years’ accounting overstatements.
Tile Shop’s shares are worth no more than $1.54-$3.34/share, implying 84%-93% downside.
TTS’s creditors will likely restrict additional indebtedness & capital expenditures until TTS’s accounting is corrected.
Summary of the Bases of Opinions:
TTS’s largest supplier, Beijing Pingxiu, is an undisclosed related company, and accounts for 20-30+% of TTS’s COGs.
Beijing Pingxiu is secretly controlled by Fumitake Nishi. Mr. Nishi is the CEO’s brother-in-law and a TTS employee.
Beijing Pingxiu invoices sent to the Tile Shop are directed to Fumitake Nishi. Beijing Pingxiu has no presence in one of its listed addresses, and a minimal presence in another.
Days sales’ inventory for FY2011 & LTM 2013 exceed 365 days, at 396 & 414 days respectively.
TTS inventory growth exceeds sales growth by 3x, as of 9/30/2013. Inventory growth has, on average, exceeded sales growth by 2.1x over the last 5 years.
The CEO believes TTS is worth somewhere between $83.6 and $180.4 million ($1.0-$2.2 million per store).
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.
The full report:
Wow, this is a brutal takedown. The 414 days of inventory is just insane for a retail operation—at that point you're not selling tiles, you're running a warehouse. And the Beijing Pingxiu connection being routed through the CEO's brother-in-law is the kind of red flag that makes you wonder how auditors missed it for so long. Speaking of things that look off, this reminds me of how easy it is to make a bad quality image these days—sometimes the visual evidence in these reports can be manipulated or just look so pixelated you can't tell what's real. Either way, at $0.18 real EPS, this stock was priced like a growth story when it was really just an accounting story.
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