Tile Shop Stock Still Carries A High Multiple, Analyst Says

Shares of
Tile Shop Hldgs, Inc.
plummeted more than 30 percent Tuesday morning and hit a new 52-week low of $8.40 after the company
cautioned investors that its third-quarter sales will likely fall short of investor expectations.

Following the announcement, Telsey Advisory Group's Joseph Feldman downgrades Tile Shop's stock rating from Market Perform to Underperform with a price target slashed from $17 to $7 as the company also withdrew its full-year guidance. In fact, the company's announcement marks the second consecutive quarter where expectations weren't met and there are legitimate concerns this may continue for several more quarters.

Granted, the company's woes could be attributed to recent hurricanes but this was "not called out" by management, Feldman commented in a research report. Instead, the company highlighted the competitive environment that prompted a step up in promotional activity and marketing. Also, consumers appear to be shopping for entry-level price point products, which forced the company to change its assortment.

Despite the fact that Tile Shop's stock is down more than 60 percent since its second-quarter earnings report, the stock's P/E multiple is still high, which implies a risk of further compression in the valuation amid slowing sales and worsening profitability. Specifically, shares are trading at a P/E multiple of 25x and there could be downside to a 20x multiple.

Over the longer term, Tile Shop may be forced to incrementally invest in prices to gain customers and the analyst is modeling a gross margin compression of 165 basis points in 2017 and 200 basis points the following year.

At time of publication, shares were down 36.36 percent at $8.40.

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