A question for Tile Shop's institutional shareholders
The management of Tile Shop Holdings (NASDAQ:TTS) have spent the last few days in New York and Boston talking to institutional investors mainly to reassure them after the "hit piece" published by Gotham Research. That "hit piece" was described in my last post on Tile Shop.
I am sitting in an office in out-of-the-way Sydney Australia. I get glorious sunshine and harbour views and a rather good surf beach down the road but alas I don't get to New York for my privileged access to management.
I have to do my own thinking.
And the thing that I am thinking is that I don't understand tile shop's margins. You see this is - at least on the margins - a truly wonderful business.
I compared Tile Shop Holdings to the fattest margin fast-growth retail business I could think of. As a comparison I used arguably the greatest retailer of our age: Louis Vuitton.
Louis Vuitton sells leather handbags and purses and similar luxury goods for absurd mark ups. There is however a lot of selling expense - they need to maintain expensive stores and maintain the image. So you would expect an ultra-fat gross margin and a lot of selling and administrative expense (SG&A) relative to sales.
Also Louis Vuitton has been in the hottest part of retail - selling super-luxury goods to the world's burgeoning elites - especially the Asian nouveau wealthy.
Here (courtesy of the ever useful CapitalIQ) are the last three full years of LVMH's profit and loss statement. The numbers are in millions of Euro.
Income Statement
For the Fiscal Period Ending12 months
Dec-31-201212 months
Dec-31-2011Reclassified
12 months
Dec-31-2010CurrencyEUREUREUR
Revenue28,103.023,659.020,320.0Other Revenue---Total Revenue28,103.023,659.020,320.0
Cost Of Goods Sold9,917.08,092.07,184.0Gross Profit18,186.015,567.013,136.0
Selling General & Admin Exp.12,265.010,304.08,815.0R & D Exp.---Depreciation & Amort.---Other Operating Expense/(Income)---
Other Operating Exp., Total12,265.010,304.08,815.0
Operating Income5,921.05,263.04,321.0
Gross margin65%66%65%Sales growth19%16%
Louis Vuitton has 65 percent gross margins (give or take about a percent) and a 16 to 19 percent growth rate. (These calculations are mine...)
These are astounding numbers for a retailer but they are what you might expect from LVMH given the mega-trend it is riding (along with seriously competent management).
And here are the same numbers - also from CapitalIQ - for Tile Shop Holdings. The numbers in this case are in millions of dollars.
Income Statement
For the Fiscal Period Ending12 months
Dec-31-2012Restated
12 months
Dec-31-2011Restated
12 months
Dec-31-2010CurrencyUSDUSDUSD
Revenue182.7152.7135.3Other Revenue---Total Revenue182.7152.7135.3
Cost Of Goods Sold49.640.336.1Gross Profit133.0112.499.2
Selling General & Admin Exp.94.778.468.1Stock-Based Compensation--0.5R & D Exp.---Depreciation & Amort.---Other Operating Expense/(Income)---
Other Operating Exp., Total94.778.468.6
Operating Income38.334.030.7
Gross margin73%74%73%Growth – year on year20%13%
The gross margin here is 73 percent plus or minus a percent or so.
Who could have known that selling tiles in big-box stores in places like Tulsa Oklahoma could have a fatter gross margin than LVMH selling bags that cost pittance to manufacture for thousands of dollars? Note I am talking margin before SG&A.
Tile Shop grows just as fast as LVMH too.
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I am puzzled about this. And unlike the top institutional shareholders I don't have access to Tile Shop's management so I have to try and work it out for myself.
And frankly this time I can't.
So I am going to pitch this question at the top shareholders - the ones who warrant a management stopover in New York. Dear shareholders (or readers for that matter) finish this sentence:
I believe that Tile Shop's gross margins are stable and sustainably higher than Louis Vuitton's gross margins because...
I have a further sentence too:
Last week Tile Shop admitted that its largest supplier was an undisclosed related party. This however does not change my belief about the margins because...
Thanks in advance for your answers.
John