Tile Shop Holdings (TTS): Ready to Crack or a Short Squeeze? LL, HD & LOW

The shorts appear to be trying to crack small cap Tile Shop Holdings, Inc (NASDAQ: TTS) – meaning it might be worth taking a realistic look at the stock and any potential problems surrounding it plus the performance of other home improvement retailers or peers like Lumber Liquidators Holdings Inc (NYSE: LL), which is not into tiles, and The Home Depot, Inc (NYSE: HD) and Lowe's Companies, Inc (NYSE: LOW) which would be into tiles.

What is Tile Shop Holdings?

Small cap Tile Shop calls itself a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials and related accessories in the United States. Specifically, the Tile Shop says it offers a wide selection of products, good value and enhanced customer service in a unique showroom setting. As of June 30, The Tile Shop operated 80 stores in 25 states, with stores having an average footprint of 23,000 square feet.

What You Need to Know About Tile Shop Holdings

On Monday, an anonymous author calling him or herself the Infitialis Research Collective, published an article on Seeking Alpha entitled: The Tile Shop: Poisoned Tile, Bad Actors, Unsustainable Margins, And A Stock Ready To Crack. The numerous accusations hurled at the company included:

Independent laboratory testing results indicating that a "significant number of The Tile Shop products have DANGEROUS lead contaminations, up to 13,900% greater than the United States' Consumer Product Safety Commission limits for products that come in contact with children." The company's current management team is "wholly unfit for public company stewardship with a Founder/CEO convicted of FRAUD and the SVP of Operations is presently out on PROBATION." The Chan Brothers, with their "dubious and notorious lineage in Hong Kong real estate, have been selling down their ~30% ownership stake." Unsustainable margins for a commodity product.

Of course and while the report looks pretty slick and is crammed full of "facts," info or just plain insinuations, the article also comes with the disclosure "I am short TTS," which might tell you everything you need to know about the motivations of the author. In addition, the name of the independent lab is not mentioned (you can bet if there is smoke, we will soon see some fire in the form of press releases from trial lawyers and consumer or "shareholder rights activists" investigating the company) while The Home Depot and Lowe's Companies would also be sourcing tiles and probably sourcing them from the same overseas sources (meaning they would face the same potential lead liabilities).

Investors can read the report from Infitialis Research Collective and form their own opinion but here are some facts that we do know about Tile Shop Holdings:

Insiders were selling shares for much of last summer according to Yahoo! Finance data, but the last transaction was a buy at the beginning of the month. There is no trailing P/E but the company's forward P/E is 36.60 according to Yahoo! Finance data. The company does have aggressive growth plans as the number of new stores expected to open in 2013 was raised to 20 from 17 (in the last earnings call). In 2014, the company anticipates opening approximately 25 stores. The last time the company reported earnings, comp store sales were up 14.3% in the second quarter and total sales were up 25.59% with two-thirds of the sales growth driven by ticket and the other third by increased store traffic.

In the last earnings call (the transcript is available on Seeking Alpha here), the SVP of retail noted:

Our strategy for continuing to grow sales in built on four pillars, first opening stores in market with suitable demographics. Second, leveraging our strength to take market share from the competition. Third, offering a vast selection of products incredibly presented to grab consumers from the moment they walk through our doors, and fourth, early training our sales managers and their associates to deliver exceptional customer service.

Share Performance: Tile Shop Holdings vs. LL, HD and LOW

On Monday, small cap Tile Shop Holdings fell 8.04% to $23.79 (TTS has a 52 week trading range of $12.00 to $30.88 a share) for a market cap of $1.32 billion but the stock is up is up 40.3% since the start of the year, up 61.8% over the past year and up 94.2% since August 2012.

Here is a quick look at Tile Shop Holdings' performance verses that of Lumber Liquidators Holdings and mass market home improvement stores The Home Depot and Lowe's Companies:

As you can see from the above chart, both the Tile Shop Holdings and Lumber Liquidators Holdings have far outperformed both The Home Depot and Lowe's Companies over the long term albeit the performance of TTS has come back down to earth.

Finally, here is a look at the latest technical charts for all four home improvement stocks:

The Bottom Line. Again, investors should be cautious about acting on a report (no matter how good it looks) written by someone shorting a stock just like they should also be careful about buying a stock based on a report written by a shareholder, but it will be interesting to see how the company responds to the article. With that said and while Tile Shop Holdings has put in a pretty good performance verses other home improvement stocks, it may not be compelling enough to get into right now – other than to squeeze shorts like the Infitialis Research Collective.