TILE SHOP HOLDINGS, INC. Q3 FY2023 earnings call

• Adapting to macro challenges by making changes to assortment, expanding services, and investing in e-commerce. - Added new tile products for middle-market end customers and expanded luxury vinyl tile offerings. - E-commerce orders grew by over 25% in Q3 compared to prior year. - Opened a new store in Colorado Springs, completed a store relocation near Milwaukee, and closed one store. - Worked with suppliers to source tiles at lower cost while maintaining quality. - Focused on enhancing relationships with professional customers through expanded assortment and pro-loyalty program.

Third quarter sales at comparable stores decreased by 4.9% from the third quarter last year. Gross margin rate was 64.7%, a 50 basis point improvement sequentially from Q2 2023 but a 180 basis point decline compared to the same quarter last year. SG&A expenses decreased by $2.4 million compared to Q3 2022. Inventory decreased sequentially to $98.7 million at the end of Q3. Year-to-date operating cash flow was $56.2 million, debt reduced from $45.4 million to $10 million, and cash balance grew to $16.4 million.

• Anticipate improvement in gross margin in near term if successful in sourcing quality products at better costs. - Expect inventory to trend downwards as they optimize levels and replace inventory purchased at higher price points. - Continue to use excess cash to pay down debt in near term.

• Macro environment challenges including higher interest rates impacting store traffic. - Inflationary cost pressures could affect gross margin if not managed properly. - Inventory levels need to be carefully monitored to maintain fulfillment rates.

Q: Discuss changes in consumer trends from Q2 to Q3 and Q4?

A: Consumer is affected by heightened interest rates, traffic decreased but average order increased. Selling more LVT products, targeting budget-conscious consumers while maintaining high-end assortment for designers and pros.

Q: New learnings from Colorado store opening?

A: Focused on smaller footprint and designed forward approach with pro and retail customers, monitoring sales from smaller store and continuing to experiment with remodels.

Q: Sense of comfortable inventory level and how low it can go?

A: Feel there is room to lower inventory while maintaining 95%-98% fulfillment rate.

Q: How much of same-store sales decline was volume-driven or price-driven?

A: Mainly volume-driven due to macro environment impact on traffic, pricing is up but traffic decline is the main factor.