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: