Gotham Research Runs Tile Shop (TTS) Off Cliff

Tickers in this article: TTS

NEW YORK (TheStreet) -- Investment firm Gotham Research has made it clear it is no fan of Tile Shop Holdings  after it initiated coverage of the retailer with a price target of less than $3.34 and a recommendation to sell immediately.

Shares of the specialty stone tile retailer were decimated 27% to $15.33 by 10:30 a.m. EDT, triggering a waterfall of short-selling. By midday, shares clawed their way back to $16.04, but are still down 24.4% since the beginning of the day. More than 7.4 million shares have changed hands, 10 times the 90-day average daily trading volume.

Gotham said the Plymouth-based business had inflated 2013 earnings by 200% thanks to a China-based supplier Beijing Pingxiu, controlled by Tile Shop CEO Robert Rucker's brother-in-law.

The report argues Beijing Pingxiu, supplier of 20% to 30% of cost of goods sold, has been selling its goods to the retailer at cost, leading Tile Shop to boast a doctored, overly-inflated gross margin. The short-seller alleges Tile Holdings is worse than 1980's electronics chain Crazy Eddie's, a textbook example of corporate fraud.

"If margins seem too good to be true (and too smooth to be true), they probably are. We believe that the chickens are about to come home to roost for Tile Shop and CEO Bob Rucker. We recommend you sell shares immediately," the report reads.

At the time of publishing, a spokesperson for The Tile Shop had not responded to requests for comment.

TheStreet Ratings team rates Tile Shop Holdings INC as a Hold with a ratings score of C-. The team has this to say about their recommendation:

"We rate Tile Shop Holdings INC (TTS) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and growth in earnings per share. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TTS's revenue growth has slightly outpaced the industry average of 20%. Since the same quarter one year prior, revenues rose by 28.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 110.66% and other important driving factors, this stock has surged by 53.45% over the past year, outperforming the rise in the S&P 500 Index during the same period. Although TTS had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • Compared to other companies in the Specialty Retail industry and the overall market, Tile Shop Holdings INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for Tile Shop Holdings INC is currently very high, coming in at 76.61%. Regardless of TTS's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 7.13% trails the industry average.
  • The debt-to-equity ratio of 1.18 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with this, the company manages to maintain a quick ratio of 0.25, which clearly demonstrates the inability to cover short-term cash needs.