Tile Store Holdings As Well As The Gotham Hit-Piece
Tile Shop Holdings (NASDAQ:TTS) received an unwelcome slice of anonymous interrogation from Gotham Research - run across the original here - or the Seeking Alpha summary here.
This is the most convincing "hit piece" bring out past times whatsoever short-seller (Muddy Waters included) this year.
However convincing does non hateful it is right. I establish Bill Ackman's master 300 page presentation on Herbalife to locomote utterly convincing. I together with so did my ain locomote together with my stance is that Ackman is both convincing and wrong.
It is solely possible that Gotham is convincing and wrong.
At Bronte nosotros have got been brusque Tile Shop Holdings for nearly a yr but inwards pocket-size quantity, the pocket-size quantity reflecting both our lack of conviction (our interrogation was non extensive) together with the lack of whatsoever catalyst nosotros could identify.
Given the stock dropped almost twoscore per centum on the Gotham study I can't locomote displeased. Gotham has provided my catalyst.
That said, until relatively lately existence brusque this was non peculiarly pleasant.
The argue nosotros were short
The reasons nosotros were brusque only tangentially overlap the declaration covered inwards the Gotham report. This was non an solely master brusque either. I have got heard the lift suggested past times several skilled brusque sellers (as good every bit exactly about brusque sellers whose sentence I make non trust).
The principal argue nosotros were attracted to the brusque was that nosotros but could non envisage an economical representative for the business.
The business, bluntly, is super-stores selling really piffling other than tiles.
We have got super-stores for edifice products - they are called Lowes together with Home Depot. And inwards Australia, together with for that affair everywhere else, they have got busily lay specialist edifice materials shops out of business. Killed them rock dead.
I could non imagine "destination shopping" for tiles - together with thus the store did non brand feel to me.
Businesses that don't brand feel eventually larn eaten past times the competition. That was (and remains) my expectation for the end-game here. I would rather wrestle gorillas than compete amongst Lowes together with Home Depot.
The world brusque thesis
As I said, this was a brusque that was discussed from fourth dimension to time. The widely discussed brusque representative was that Tile Shop Holdings had really large inventory numbers.
Gotham reports them inwards days sales of inventory - together with hither I reproduce their table.
Approximately 400 days of inventory inwards a retail store seems really odd. It seems double-odd inwards a big-box retailer. The formula for most retailers is to plough the production over really fast (the faster the better) together with earn a pocket-size margin lots of times over the space. This is the model that emphasizes sales per foursquare foot, property turns, depression pricing.
The conventional model is clearly non the model of Tile Shop Holdings which has a huge amount of inventory, depression turns and very fatty margins.
We idea really piffling of the concern model (destination stores for something you lot powerfulness purchase ane time a decade). Therefore nosotros were short. We did non recollect the fatty margins were sustainable.
----
The publicly discussed short-thesis is non solely convincing. There are models which have got really large amounts of inventory amongst really depression turnover but where it all industrial plant because the margin is fat.
Plumbing supplies is a proficient example.
Our theatre has all matching taps (faucets inwards America).
Suppose ane faucet breaks together with I ask to supersede it.
I would really much similar it to correspond all the other faucets or I may have got to alter them all.
Influenza A virus subtype H5N1 plumbing supplier who tin laissez passer on the axe sell me a matching faucet, non stylish for xv years together with out of production, is a really welcome supplier.
I would happily laissez passer on him a 300 per centum gross margin.
And to larn his gross margin he has to stock a huge hit of plumbing supplies, together with so winds upwardly large inventory together with depression turns.
It was possible that Tile Shop Holdings was similar that. It had a huge hit of tiles together with relied on people falling inwards beloved amongst item tiles together with the hit would let them an increment inwards gross margin. Other than looking at shops together with querying customers I had no existent agency of knowing whether the inventory numbers were sensible or not.
---
The inventory numbers yet are worrying. There are several frauds inwards retailing that have got depended on large together with faked inventory numbers. One of the most famous of these - famous at to the lowest degree inwards business office because ane of the perpetrators talks to short-sellers - is Crazy Eddie. Sam Antar is to a greater extent than than happy to tell short-sellers how he pulled off the Crazy Eddie fraud.
---
Then along comes the Gotham Report. Here is the show-stopper allegation:
After the Gotham Report you lot had a mechanism. That sure as shooting increases the lead a opportunity that the "fraud thesis" is right.
---
The company issued a press release denying most allegations but confirming exactly about allegations inwards the Gotham Report.
Here is the principal business office of that release:
In it the companionship denies accounting irregularities together with confirms that they role intermediate export trading companies to purchase their tiles.
Then they sort-of-confirm the show-stopper allegation. They confirm that at that topographic point is an "ownership" number amongst Beijing Pingxiu that were non previously disclosed to the company. It sounds similar a related party, but they make non confirm that the related political party is the CEO's blood brother inwards constabulary (as per the Gotham allegation).
That said, having confirmed an undisclosed "ownership" number they state that they make non believe this has had a fabric affect on the economic science of inventory purchases. [In the Crazy Eddie representative it may non have got had an affect on the economic science of purchases - but it sure had an affect on the accounting of purchases - but that is a digression.]
Still nosotros right away know that soul failed to reveal a fabric human relationship ("ownership") inwards a major (maybe the major) supplier.
We know at that topographic point is at to the lowest degree ane cockroach. It looks to me to locomote a really large cockroach.
Actions for the board of Tile Shop Holdings
Gotham allege that the related political party to Beijing Pingxiu is the CEO (or at to the lowest degree his family).
If this was non disclosed the board has a occupation - they cannot locomote sure the CEO is trustworthy.
For a board that is a really hard province of affairs - ane I would non envy.
The board should stand upwardly the CEO aside - at to the lowest degree temporarily whilst outside lawyers make an investigation.
The companionship has announced an intention to "thoroughly investigate". There are processes for doing this. And this board has reputable people on it who have got reputations to defend - so I await it to locomote done.
John
This is the most convincing "hit piece" bring out past times whatsoever short-seller (Muddy Waters included) this year.
However convincing does non hateful it is right. I establish Bill Ackman's master 300 page presentation on Herbalife to locomote utterly convincing. I together with so did my ain locomote together with my stance is that Ackman is both convincing and wrong.
It is solely possible that Gotham is convincing and wrong.
At Bronte nosotros have got been brusque Tile Shop Holdings for nearly a yr but inwards pocket-size quantity, the pocket-size quantity reflecting both our lack of conviction (our interrogation was non extensive) together with the lack of whatsoever catalyst nosotros could identify.
Given the stock dropped almost twoscore per centum on the Gotham study I can't locomote displeased. Gotham has provided my catalyst.
That said, until relatively lately existence brusque this was non peculiarly pleasant.
The argue nosotros were short
The reasons nosotros were brusque only tangentially overlap the declaration covered inwards the Gotham report. This was non an solely master brusque either. I have got heard the lift suggested past times several skilled brusque sellers (as good every bit exactly about brusque sellers whose sentence I make non trust).
The principal argue nosotros were attracted to the brusque was that nosotros but could non envisage an economical representative for the business.
The business, bluntly, is super-stores selling really piffling other than tiles.
We have got super-stores for edifice products - they are called Lowes together with Home Depot. And inwards Australia, together with for that affair everywhere else, they have got busily lay specialist edifice materials shops out of business. Killed them rock dead.
I could non imagine "destination shopping" for tiles - together with thus the store did non brand feel to me.
Businesses that don't brand feel eventually larn eaten past times the competition. That was (and remains) my expectation for the end-game here. I would rather wrestle gorillas than compete amongst Lowes together with Home Depot.
The world brusque thesis
As I said, this was a brusque that was discussed from fourth dimension to time. The widely discussed brusque representative was that Tile Shop Holdings had really large inventory numbers.
Gotham reports them inwards days sales of inventory - together with hither I reproduce their table.
Approximately 400 days of inventory inwards a retail store seems really odd. It seems double-odd inwards a big-box retailer. The formula for most retailers is to plough the production over really fast (the faster the better) together with earn a pocket-size margin lots of times over the space. This is the model that emphasizes sales per foursquare foot, property turns, depression pricing.
The conventional model is clearly non the model of Tile Shop Holdings which has a huge amount of inventory, depression turns and very fatty margins.
We idea really piffling of the concern model (destination stores for something you lot powerfulness purchase ane time a decade). Therefore nosotros were short. We did non recollect the fatty margins were sustainable.
----
The publicly discussed short-thesis is non solely convincing. There are models which have got really large amounts of inventory amongst really depression turnover but where it all industrial plant because the margin is fat.
Plumbing supplies is a proficient example.
Our theatre has all matching taps (faucets inwards America).
Suppose ane faucet breaks together with I ask to supersede it.
I would really much similar it to correspond all the other faucets or I may have got to alter them all.
Influenza A virus subtype H5N1 plumbing supplier who tin laissez passer on the axe sell me a matching faucet, non stylish for xv years together with out of production, is a really welcome supplier.
I would happily laissez passer on him a 300 per centum gross margin.
And to larn his gross margin he has to stock a huge hit of plumbing supplies, together with so winds upwardly large inventory together with depression turns.
It was possible that Tile Shop Holdings was similar that. It had a huge hit of tiles together with relied on people falling inwards beloved amongst item tiles together with the hit would let them an increment inwards gross margin. Other than looking at shops together with querying customers I had no existent agency of knowing whether the inventory numbers were sensible or not.
---
The inventory numbers yet are worrying. There are several frauds inwards retailing that have got depended on large together with faked inventory numbers. One of the most famous of these - famous at to the lowest degree inwards business office because ane of the perpetrators talks to short-sellers - is Crazy Eddie. Sam Antar is to a greater extent than than happy to tell short-sellers how he pulled off the Crazy Eddie fraud.
---
Then along comes the Gotham Report. Here is the show-stopper allegation:
TTS's largest supplier, Beijing Pingxiu, is an undisclosed related company, together with accounts for 20-30+% of TTS's terms of goods sold.
Beijing Pingxiu is secretly controlled past times Fumitake Nishi. Mr. Nishi is the CEO's brother-in-law together with a TTS employee.
Beijing Pingxiu invoices sent to the Tile Shop are directed to Fumitake Nishi. Beijing Pingxiu has no presence inwards ane of its listed addresses, together with a minimal presence inwards another.
Days sales' inventory for FY2011 & LTM 2013 locomote past times 365 days, at 396 & 414 days respectively.This is a show-stopper allegation because it provides a machinery to simulated the inventory numbers. Before the Gotham Report you lot powerfulness justice that they had faked their numbers but you lot had no machinery for explaining how they powerfulness have got done it. You had goose egg auditable. Indeed all you lot had was a guess.
After the Gotham Report you lot had a mechanism. That sure as shooting increases the lead a opportunity that the "fraud thesis" is right.
---
The company issued a press release denying most allegations but confirming exactly about allegations inwards the Gotham Report.
Here is the principal business office of that release:
Tile Shop Holdings, Inc. (TTS) (the “Company”), a specialty retailer of manufactured together with natural rock tiles, setting together with maintenance materials, together with related accessories, announced that before today, the Company was made aware of a study which alleges that its historical fiscal statements may require restatement along amongst other accounting irregularities. The Company adamantly denies these allegations together with believes that the fiscal statements are properly stated together with its concern practices are appropriate.
The Company negotiates all inventory purchases direct amongst each vendor. As is mutual practice, sure vendors utilize an export trading company, such every bit Beijing Pingxiu, for sales to U.S. of A. based companies. Other Chinese vendors keep their ain export licensing authority. The Company has been made aware of changes of the ownership of Beijing Pingxiu which were non previously disclosed to the Company. As a effect of this disclosure, The Company has suspended its human relationship amongst this entity.
The Company intends to thoroughly investigate this relationship. The Company believes that whatsoever issues associated amongst the ownership of Beijing Pingxiu, or the utilization of other export trading companies, have got had no fabric affect on the economic science of inventory purchases.
Further, the study alleges that the Company’s vendors are compensated inwards exactly about shape through stock transfers. The Company tin laissez passer on the axe confirm that at that topographic point have got been no issuances or transfers of stock from the Company or within shareholders to whatsoever vendors or to Beijing Pingxiu.
In it the companionship denies accounting irregularities together with confirms that they role intermediate export trading companies to purchase their tiles.
Then they sort-of-confirm the show-stopper allegation. They confirm that at that topographic point is an "ownership" number amongst Beijing Pingxiu that were non previously disclosed to the company. It sounds similar a related party, but they make non confirm that the related political party is the CEO's blood brother inwards constabulary (as per the Gotham allegation).
That said, having confirmed an undisclosed "ownership" number they state that they make non believe this has had a fabric affect on the economic science of inventory purchases. [In the Crazy Eddie representative it may non have got had an affect on the economic science of purchases - but it sure had an affect on the accounting of purchases - but that is a digression.]
Still nosotros right away know that soul failed to reveal a fabric human relationship ("ownership") inwards a major (maybe the major) supplier.
We know at that topographic point is at to the lowest degree ane cockroach. It looks to me to locomote a really large cockroach.
Actions for the board of Tile Shop Holdings
Gotham allege that the related political party to Beijing Pingxiu is the CEO (or at to the lowest degree his family).
If this was non disclosed the board has a occupation - they cannot locomote sure the CEO is trustworthy.
For a board that is a really hard province of affairs - ane I would non envy.
The board should stand upwardly the CEO aside - at to the lowest degree temporarily whilst outside lawyers make an investigation.
The companionship has announced an intention to "thoroughly investigate". There are processes for doing this. And this board has reputable people on it who have got reputations to defend - so I await it to locomote done.
John
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