Good day, and thank you for standing by, and welcome to the Q2 2021 Tile Shop Holdings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr. Mark Davis. Thank you. Please go ahead.

Thank you, Felicia. Good morning to everyone, and welcome to the Tile Shop's Second Quarter Earnings Call. Joining me today are Cabby Lolmaugh, our Chief Executive Officer; and Nancy DiMattia, our Chief Financial Officer. Certain statements made during the call today constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our earnings press release issued earlier and in our filings with the SEC. Forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements. Today's call will also include certain non-GAAP measurements. Please see our earnings release for a reconciliation of those non-GAAP financial measures, which has also been posted on our company website. With that, let me now turn the call over to Cabby. Cabby?

Thanks, Mark. Good morning, everyone, and thank you for joining us today for an update on our business and a review of our second quarter financial results. We had an excellent quarter that was headlined by setting an all-time quarterly sales record. The $96.2 million of revenue reported this morning represents a 42% increase from the second quarter of 2020, a 4.5% sequential increase in revenue from our first quarter of 2021, and an 8.2% increase from the revenue in the second quarter of 2019, which is prior to the pandemic. While the current strength in the home improvement sector provides a nice tailwind, this success would not be possible without the strong execution of our entire Tile Shop organization. I'd like to take a moment to say thank you to our frontline sales force, our warehouse warriors, our distribution center team, and our corporate employees. The incredible results we've been able to achieve would not have been possible without you. Our formula for success is built on doing three things incredibly well: curating an amazing assortment; inspiring our customers with in-store displays and digital content; and providing exceptional service. Ultimately, it's our people who are the key to our success. Our ability to help our customers navigate our assortment, design beautiful spaces, and create an exceptional experience is rooted in having an engaged, knowledgeable, and passionate team. The Tile Shop team has performed at a high level through the first half of 2021, and we're excited to invest in our team to keep our momentum going. This includes, first, we promoted several individuals within our retail sales and pro sales divisions. These positions will help drive the strategy, monitor execution, and manage the day-to-day activities critical to achieving our goals within our sales teams. Second, we increased the number of regional sales leaders from 6 to 9. Our regional leaders are instrumental in attracting and retaining talent, training our field teams, and ensuring best practices are followed throughout our stores. The expansion of the regional leadership team will help increase their frequency of touchpoints between our regional leaders in our stores, including more on-site visits. We expect that this investment will accelerate the improvements we've seen with respect to our retail execution goals and help develop our bench of up-and-coming talent that can move into store leadership roles in the future. Third, we added headcount in our stores, making it possible to expand our store hours, which we reduced due to the COVID pandemic. During the quarter, we increased the number of stores open on Sundays from 29 stores at the end of the first quarter to 38 stores as of the end of the second quarter. We plan to open an additional 17 stores on Sundays during the third quarter. We will continue to evaluate the results of these tests, perform additional tests, and make adjustments to our store hours, as test results show that the incremental business generated by extending store hours supports the additional investment in store overhead expenses. These changes are exciting as they are expected to help grow sales within our existing store base and provide a foundation to support future store growth. At this time, we do not anticipate any further store openings in 2021. We are currently evaluating options for store growth as well as other internal initiatives to drive top line growth in 2022 and beyond. I'd now like to provide an update on the progress we've made with respect to our three top priorities for 2021. Our first priority is focusing on retail execution. We've continued to see improvements in our key metrics in this area. Our field teams are doing a nice job controlling discounting, improving our collection rate when we deliver products to our customers, and keeping inventory shrinkage and damage losses in check. It's this attention to detail that helped us achieve a 130 basis point increase in gross margin rates during the first six months of 2021 compared to the first six months of 2020. Our seasoned pro market managers continue to do a great job cultivating relationships with pros and sharing the benefits of our pro loyalty program. We've seen a nice increase in pro sales this year, and our year-to-date pro mix has eclipsed 60% of our total sales. Our second priority is to enhance our customers' online experience. Now it was just one year ago that we really ramped efforts to sell our products online in response to the COVID-19 pandemic. Our web orders in 2021 are on track to contribute to our overall sales performance at a level consistent with one of our top stores, and we're just getting started. We feel good about the direction we are heading and how our digital experience complements our in-store experience. In addition, our visualizer has been delivering an improved customer experience to inspire and help select products. During the second half of 2021, we're planning to refine the way we merchandise our products on our website. The changes we're making will make it easier to browse our assortment online, enhance the quality of the images on our website, and provide recommendations of complementary products needed to complete a tiling project. Our third priority to refine our purchasing and distribution processes has remained a challenge. We continue to see elevated levels of backorders as our suppliers work through production challenges resulting from COVID-19. Our team is actively working with our network of international suppliers to secure delivery of back-ordered products. Additionally, global shipping capacity constraints have compounded challenges to source inventory in a timely manner. We've also seen an increase in the cost to ship products to the United States. In some cases, our rates have doubled from the inbound freight rates we've seen in the past. We have taken steps to increase our prices and plan to continue to adjust pricing to combat rising costs. Additionally, the diligent execution by our retail teams will continue to be critical to maintaining our strong gross margin rates. Overall, I'm very pleased with the results that we were able to generate during the quarter and the progress we're making on our priorities. I'll now turn the call over to Nancy, who will take you through the financial details. Nancy?

Thanks, Cabby. Good morning, everyone. As Cabby mentioned, our second quarter results were headlined by the record sales of $96.2 million. This was up 42% year-over-year, 4.5% sequentially from the first quarter of 2021, and 8.2% when we compare against the second quarter of 2019. Comparable store sales increased by 41.6% during the second quarter of 2021 when compared to the second quarter of 2020. We were very pleased with this top line performance, especially given that we continue to carry a larger-than-usual backlog at the end of the second quarter, due in part to product shortages stemming from manufacturing and shipping delays as a result of COVID-19. Customer deposits placed by customers to secure delivery of products in future periods also remain elevated over historical norms at $16.5 million on June 30, 2021, which was down slightly from $17.8 million at the end of the first quarter. Gross profit during the second quarter of 2021 was $66.4 million, an increase of $21 million when compared to the second quarter of 2020, largely due to the increase in sales. Our gross margin rate was 69.1%, 200 basis points higher than the second quarter 2020. The improvement in our gross margin rate in the second quarter of 2021 compared to the prior year period was primarily due to better pricing and an improvement in customer delivery collection rates. Sequentially, gross margin decreased 60 basis points from 69.7% during the first quarter of 2021. The sequential decrease in gross margin is due to an increase in product costs, in particular, inbound freight costs from international suppliers. Additionally, an increase in customer delivery mix contributed to the lower gross margin rate during the second quarter of 2021 compared to the first quarter of 2021. Our selling, general and administrative costs increased by $11.6 million during the second quarter of 2021 when compared to the second quarter of 2020. The increase in selling, general and administrative costs was due to a $6.2 million increase in variable selling expenses; a $1.5 million increase in transportation costs to move inventory between our distribution centers and our stores; a $1.5 million increase in wages, largely due to an increase in headcount; a $0.9 million increase in consulting and temporary labor costs; and a $0.5 million increase in marketing expenses. Sequentially, SG&A expenses increased $1.5 million from the first quarter of 2021 to the second quarter of 2021. The majority of the increase was driven by higher levels of compensation expenses and transportation costs to move products between our distribution centers and our stores. Net income increased $6.3 million from a net loss of $0.8 million during the second quarter of 2020 to a net income of $5.5 million during the second quarter of 2021. Adjusted EBITDA increased $8.8 million from $6.6 million during the second quarter of 2020 to $15.4 million during the second quarter of 2021. The adjusted EBITDA margin rate improved 620 basis points from 9.8% during the second quarter of 2020 to 16% during the second quarter of 2021. Diluted earnings per share increased $0.13 from a loss of $0.02 during the second quarter of 2020 to earnings of $0.11 during the second quarter of 2021. During the second quarter, we relocated one store in Madison, Wisconsin. As of the end of the quarter, our total store count remained at 143 stores. As Cabby indicated, we do not plan to open any additional stores in 2021. During the first six months of 2021, we generated operating cash flow of $42 million. This is strong evidence of the cash-generating power of our model. This has been used to fund $6.2 million of capital expenditures over the same timeframe to finish the build-out of the new store opened during the first quarter, relocate one store during the second quarter, remodel existing stores, invest in information technology and enhance merchandising assets. We ended the quarter with a $44.8 million cash balance and no debt. As I close, I wanted to touch on a topic that we announced on June 25, that's a little more personal. After spending over 30 years working with companies in the hard surface flooring industry, I've made the decision to retire. When I came to the Tile Shop two years ago, I couldn't have imagined we'd go through so much in such a short span of time, and I'm proud of all we've been able to accomplish during my tenure. I'm confident that Cab and the rest of the executive leadership team will continue to guide the company down the right path. The company has launched a search process, and I'm committed to assist in an orderly transition once the position is filled. With that, Felicia, I'll turn the call back to Cabby.

Thanks, Nancy. I also wanted to make a few comments regarding Nancy's retirement. Nancy has been a great partner to me and our company, and she will be missed. Her deep intimate knowledge of our space has been invaluable, especially during these unprecedented times. On behalf of our Board and our entire company, thank you, Nancy, for everything you have done for us as we execute our growth strategy. With that, let's move to Q&A.

Our first question comes from Jeff Moore of Burr Oak Capital.

Yes. I was curious about the deposits that you guys have. I think you said it was just under $17 million in customer deposits. How much revenue does that represent over however long it takes to get the supply chain issues resolved?

That varies actually depending on the product mix that is in that back order. Our margins varied depending on whether it's stone or material. So it's a little difficult to say, and that changes on a daily basis given the orders that are in process and currently waiting for fulfillment.

Yes. On top of that, Jeff, retail customers put 100% down, where pro customers depending have small deposits or no deposits based on their tiers. So it does impact at different levels according to the customer type. So it's obviously going to be a little bit more than the deposit itself.

So in terms of the mix of that deposit on your balance sheet, how much of that would be pro customers? And how much of that would be just a regular home remodeler that's buying it for their own house?

Yes, it's a mix. I mean, right now, if you listen to our prepared remarks, our pro business has eclipsed 60%. So we have 40% retail. And so you think that they have to put 100% down, and you can do the math. So it is higher than the deposit itself, but it's not substantially higher.

Okay. Also, last conference call, I asked you about your borrowing facility and whatnot. And I know it's got a long-dated maturity and everything. There's nothing drawn on it. But I was curious if you guys have looked into other borrowing facilities that have lower interest rates or more attractive terms or anything like that, and what updates you could provide on that?

We continue to have a great relationship with our existing bank. And we're always evaluating our options and what's going to produce the best performance for us and for our shareholders. But at this time, there's nothing new to update or share.

Okay. And then what about the investigation of returning capital to shareholders?

That's something that's come up a lot. We continue to be really pleased about the cash flow that we're generating. And frankly, I think having a cash cushion during these unusual times that we're in today is really a good thing. Keep in mind that we've only been debt-free really for two full quarters. This isn't something that we feel a need to rush on, but we do continue to evaluate our options, and certainly, we'll keep our shareholders in mind as we do so.

Okay. And then one last question. In terms of valuations for floor covering companies and whatnot, I'm sure you guys have your finger on the pulse of M&A. What kind of multiples and valuations are you seeing for other companies as they kind of get folded up into larger entities?

We're really not looking to discuss M&A or other companies at this time.

Any particular reason?

It's just not part of a strategy that we're prepared to discuss for competitive reasons. And again, it really varies.

Our next question comes from Jon Hollander of CAG.

Great quarter. Just a few quick questions. One is I wanted to chat about the store remodeling process. How many stores have been remodeled, and how many do you expect to be remodeled over the next 12 months?

Well, thanks for the question. Yes, we want to remodel. We came out with a certain list of stores at the beginning of the year to remodel and enhance. Now we do analysis based on the tenure of the store, the segment of the customer, the dates of the vignettes, and how much we want to spend on these remodels. We've remodeled around a half dozen this year so far. We've scaled back a little bit just due to some of the inventory and shipping constraints that we're experiencing, but we're going to continue remodeling some stores throughout the remainder of the year, hopefully over 10, if not a few more, depending on how things shake out here in the next few months.

I'm sorry, was that 10 additional or going from 6 to 10?

Hopefully, 10 additional, but we're going to say 10% right now, but we'll see as product continues to come in through the multiple ports.

And what type of returns or lift do you see on the store remodel?

We've done the analysis on this. And depending on how much we invest, it can be anywhere from 2 to 4 years depending on if we're investing a smaller amount to a larger amount or a full store remodel. If we're doing just a scrape on some vignettes, we can see the return quite quickly. But if we're investing a substantial amount in the remodel, it could take 2 years.

And what is the impact on the employees and the manager of the local store after you do the remodel?

From beginning to end, it's exciting. It raises morale. I was a manager for 15 years and a salesman. And when you have remodels going on in stores, the customers get excited. They actually go around and watch this being done. The staff's excited to get new product in the stores. We try to do any demo or anything that's disruptive to the business during the evening hours and setting and grouting of tile and applying fixtures during the day. So it's not disruptive at all, and it creates a lot of excitement.

Well, I will put in a shameless plug for the Glen Burnie, Maryland store. If you could do a remodel there, it would be very good.

I appreciate it. I'm sure they're happy to hear that too. So thank you.

And a follow-up question. In your press release, you track your return on capital employed metric. And I was hoping to understand better why this is the metric that the company tracks.

This is Mark. We feel that the return on capital employed metric is a very good metric to assess the health of the business as well as the quality of the earnings that we're able to produce on our capital over time. We do feel that seeing continued improvement in this metric is helpful, but that's the primary return on capital metric that we think is most important to us as we evaluate the health of our business.

Are management bonuses at all tied to this metric?

No.

This metric has significantly increased, so congratulations on that. Last quarter, it was 7.2%, and this quarter it is 13.9%. When modeling, it becomes clear why this is happening, as we're excluding 4 quarters from 2020 and incorporating these strong quarters from 2021. How does management feel about the different levels? Currently, you're at nearly 14%. What happens if this number increases? Does this affect management's behavior?

I think the easiest way to answer that question is we feel really good about the progress we've made over the course of the last year, but we think that we can do better. That doesn't necessarily change our behaviors, but we're continually striving to get a better return as we move forward.

Okay. And finally, just about inventory and shipping delays. Could you comment a little bit about the current delays of your orders from your international suppliers? Have these delays shortened at all? Have they lengthened? Has there been any impact of the Delta variant with what's going on in Asia right now? Just any qualitative commentary would be helpful.

Thanks, Jon. Yes, it's been a struggle for almost a year, over a year now. So what we're seeing though are our vendor partners are able to produce the product. The people are back at work all over the world. And they're getting the product made. We find a container shortage is continuing to be a struggle. But once we get the containers on the ships, the ships are sitting at ports. And you have longshoreman strikes at the ports of Montreal. We got fires in the Northeast that are closing rail lines. But I mean, there's always going to be challenges in logistics. But the good news is, we're still continuing to receive a lot of product more so today than in the past nine months. So things are slightly opening up. We're able to get a lot of our back orders in our distribution centers, but we're also opening a lot of businesses as well. So as we receive back orders, we're continually creating some new ones. When you have 6,000 SKUs, it's a balancing act, who can ship what and when it is going to arrive, at what port and what challenges are we going to incur not only at the ports, but in rail, trucking, and everything else. But the good news is it's getting better.

And do you lose any deposits because of these delays? Or are customers not able to cancel? I just wanted to understand how that rolls through.

Yes, customers can cancel whenever they want. We're very accommodating with our customers. As a customer myself, I can relate to the situation. I'm currently waiting on furniture and other items for my home. Our customers are going through similar experiences; they are remodeling and purchasing not just tile but also cabinets, windows, and siding. Everyone seems to be facing the same challenges. From what I hear from our leadership in the field and during conversations with customers, they are understanding of the current difficulties. Therefore, we are not experiencing any increased cancellation rates, which is not a concern for us. While customers could choose to cancel if they wanted to, I’m not observing that happening at this time.

And then in terms of deposits, where is the best place to track that in the financials?

The deposits are included in the cash that you'll see on our balance sheet. Right now, we've got $16.5 million for part of the cash that is from deposits.

And is that broken out like in the Q? Because just obviously in the press release, I'm only seeing the $44.75 million and your restricted cash amount.

This is Mark. It is broken out in the Q. The actual deferred revenue that we have associated with customer deposits is in other accrued liability, and we have a breakdown of other accrued liabilities as part of our Q.

Our next question comes from Jeff Moore of Burr Oak Capital.

I was curious about the B. Riley Summer Summit that you guys are going to be attending on August 18 and 19. Are you all going to be doing some sort of presentation that will be made public?

Jeff, this is Mark. We're not necessarily going to be making a presentation there that will be made public, but certainly happy to meet with folks that have questions as our Investor Relations line is always open.

Okay. I’m curious about what influenced the decision to attend this conference. It seems like a significant shift in how the company is approaching communications or participation in these events. I think it’s great that you all are attending, but I’d like to know what led to this change and what the thinking behind it is.

Jeff, this is Cab. I'm really excited to attend the conference and meet a bunch of people and talk about the Tile Shop. We want to increase transparency to our shareholders. As we've relisted on the NASDAQ, I think it's important that we come back and do the Q&As and hit some conferences and just share the excitement about our company and where we're going to be going. So that's pretty much it.

Okay. What are some of the other conferences you guys have kind of looked at and we might expect to see you all doing presentations or doing Q&As at in the future?

We'll let you know when we book them. There's a few out there that we're analyzing, but we'll let you know, Jeff. None at this time.

Our next question comes from David Kanen of Kanen Wealth Management.

Congratulations, and thank you for taking my questions. I'm traveling and don’t have WiFi, so some of my questions might already be addressed in the press release. Regarding customer deposits, Nancy, could you please provide the sequential changes from Q4 to Q1 and then to Q2? That would be helpful.

I don't know off the top of my head exactly what it was for Q4. It was $17.8 million in Q1, and we're at $16.5 million in Q2.

So David, I believe we're going to continue.

I beg your pardon.

So it's basically flat. So basically, it was flat with...

Yes. There's a slight decrease. It is fluctuating and has been over the last three quarters. And it goes back to some of what Cabby had mentioned earlier. It depends on what product is coming in, given the availability for transportation internationally. And as we fulfill some orders, other products will then go on back order. So it does fluctuate somewhat.

I see. Okay. So as the lead times compress as you can ship product quicker to the customer, that number should work its way down and then ultimately move over to revenue, correct?

Yes. Yes, that's correct.

Okay. And then in general, are you seeing that trend where you're able to get product to customers, some of the supply chain issues are improving, not about resolving but are they improving?

They are improving, while they're definitely not resolved yet. But it looks like we're starting to trend in the right direction.

Yes. We focused this year on our strategies, which included retail execution, improving our customers' online experience, and enhancing our supply chain. All these factors contributed to our growth. We're actively working on various fronts to impact our business. Our professional division has indeed expanded, surpassing 60%, as noted in my prepared remarks. We hope that as our professional business grows, it will also positively affect our retail side. While I prefer not to discuss specific numbers, I believe we're on the right track and will persist with our initiatives, which should continue to benefit the business. Growth is our primary focus, so that's a great question.

Congratulations on your achievements. As a shareholder, I am very pleased. However, I would like to express my opinion that having cash sitting on the balance sheet and returning very little is not a sustainable strategy for the long term. I understand that someone else mentioned this earlier, and I believe you are addressing it. I have confidence in your capable Board and management team. I would prefer to see that cash returned to shareholders unless there is a high return on investment opportunity for it. That seems like a prudent approach. Keep up the excellent work, and I look forward to our conversation next quarter.

Thanks, David.

I'm showing no further questions at this time. I'd like to turn the call back over to Mark Davis for any closing remarks.

Thank you for listening to our earnings conference call. We anticipate filing our Form 10-Q later today. We look forward to providing our next update in November. Thank you for your interest in the Tile Shop, and have a great day.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.