How Tile Store survived a delisting, shareholder lawsuits and a pandemic

At the moment a yr in the past, Cabell Lolmaugh and different leaders of Tile Store Holdings Inc. have been closing shops, shedding staff and chopping deliveries to deal with the onset of the coronavirus pandemic.

“It was probably the most difficult time of my profession,” mentioned Lolmaugh, who joined the Plymouth-based chain of tile and flooring shops as a warehouse employee in 2001 and have become chief government in 2019. “We needed to furlough or lay off a whole lot of individuals. It was the worst.”

However as 2020 unfolded, Individuals caught at dwelling started transforming or on the lookout for new homes — they usually went purchasing for home-improvement merchandise. The Tile Store, as its shops are known as, benefited considerably: Full-year outcomes launched final month confirmed a stable revenue and an entire wipeout of debt.

“Did it really feel humorous? Completely,” Lolmaugh mentioned. “If I had gone to the board of administrators final yr and mentioned ‘I will decrease hours, lower out Sundays, lower 600 heads, restrict vehicles and lower advertising and marketing. What do you guys assume?’ I’d have been out the door! However when COVID forces you to do these issues and your organization turns round, individuals go ‘huh.’ ”

The journey of Tile Store Holdings stands out amid different “pandemic prosperity” instances, nonetheless, due to a secondary drama that performed out among the many firm’s shareholders.

Two exterior administrators who’re rich traders, Peter Kamin and Peter Jacullo, in late 2019 steered the corporate right into a controversial delisting of its inventory from the Nasdaq essential board to the over-the-counter market. The transfer worn out two-thirds of Tile Store’s market worth and the 2 administrators went on a shopping for spree that gave them management of the 35-year-old agency. Different shareholders rapidly sued.

A short while later, the 2 administrators clashed with firm founder and board Chairman Robert Rucker, resulting in his ouster and bitter public alternate in February 2020.

The subsequent month, the nation shut down because the pandemic hit. Tile Store, which has 143 shops that generate $325 million in annual gross sales, shuttered many instantly. It reopened underneath lowered hours on a state-by-state foundation as governors deemed corporations tied to building to be important companies.

In the course of all of it was Lolmaugh, 42, a former Marine who spent most of his profession as a retailer supervisor and nonetheless enjoys getting out on the ground of the Plymouth retailer to speak with contractors and clients. Chosen by Rucker as solely the third chief of the corporate, Lolmaugh has saved it in the midst of the tile market: under the high-priced mom-and-pop specialists which have a direct line to artisan tilemakers in Europe and above the big-box chains which have low costs and narrower choice.

He additionally aimed to derive about 60% of Tile Store’s income from professionals, both contractors, installers or designers. The agency offers incentives to draw them. “Their lifetime worth is exponentially bigger than a typical retail buyer,” Lolmaugh mentioned.

His first day as CEO in January 2019 coincided with the launch of a brand new enterprise useful resource system that was catastrophe. Problems within the know-how transition wreaked havoc on point-of-sale terminals, stock administration, distribution and monetary reporting.

The issues took months to iron out and contributed to a 5% drop in 2019 gross sales and a large soar in bills, which hit 74% of income that yr. Tile Store’s share value misplaced greater than half its worth throughout that point, dropping under the $5 stage that many institutional traders contemplate a minimal threshold.

After lingering under that stage for a number of months, Kamin and Jacullo prodded Rucker and different administrators to delist. Such a transfer reduces bills and disclosure necessities, usually giving administration and administrators extra respiratory room to reset an organization.

However delisting additionally triggers a sell-off as a result of mutual funds and different institutional portfolios have guidelines towards proudly owning shares in corporations which might be traded over-the-counter. Tile Store shares dropped from $3.35 to $1.13 as main shareholders exited on the October 2019 day the delisting was introduced.

Over the following two weeks, Kamin, a Florida investor with a historical past of reviving delisted corporations, and Jacullo, a longtime adviser to a Hong Kong billionaire household that was an early investor in Tile Store, purchased shares at costs that by no means exceeded $1.80 a share. In that transient interval, their mixed stake rose to round 30% from 17%.

Different shareholders filed a class-action go well with, and a decide compelled the administrators to cease buying shares in mid-November. Final summer time, the go well with was settled with a $12 million payout to Tile Store shareholders (paid by the corporate’s insurer) who misplaced cash within the transfer. Kamin and Jacullo agreed to a standstill till mid-June 2023.

The 2 administrators declined to remark by means of the corporate. A name to Rucker was not returned.

As pre-delisting shareholders in Tile Store tried to recuperate misplaced worth in court docket, different traders started wanting on the firm due to the maneuver. One in every of them was Sean Kirkwood, who runs a Philadelphia hedge fund known as SRK Capital, and research delisted corporations searching for trapped worth. After the coronavirus hit, Tile Store shares traded under $1 for a number of weeks final March and April.

“It was principally being priced for chapter, when that actually wasn’t seemingly for those who dug by means of the numbers,” Kirkwood mentioned. His evaluation led him to imagine Tile Store had loads of liquidity for a minimum of a yr even when gross sales plunged 40%. He purchased 1000’s of shares at costs averaging 81 cents.

Wes Cummins, an investor in Dallas, took discover of Tile Store after the settlement of the class-action go well with. Cummins began his hedge fund, 272 Capital, in February 2020, simply earlier than the market collapse. By summer time, he had attracted capital and Tile Store had been by means of probably the most troublesome interval of the pandemic. Most of its shops have been open a minimum of for weekday hours that catered to contractors and installers.

“The corporate traded at a big low cost to everybody else within the group,” Cummins mentioned, referring to home-improvement retailers.

The pandemic compelled executives and managers to have a look at prices and operations in new methods, Lolmaugh mentioned. Shops are being run with fewer staff and deliveries are taking longer in some instances. The corporate’s head rely dropped to round 1,150 from 1,600 and bills dropped to 65% of gross sales. Prospects, he mentioned, have been extra understanding than he can ever recall.

“In the end our aim is to reinforce service. However we do not wish to return to the place we have been earlier than,” he mentioned. “Since we have been capable of flip the expense construction the wrong way up, it is actually benefited the Tile Store.”

The reworking pattern helped. Tile Store completed 2020 with a 4.5% drop in income, however it noticed a 4% acquire within the final quarter. By October, the corporate worn out $63 million in debt, and it ended the yr with money readily available. Tile Store’s inventory ended 2020 at $4.30 and is now buying and selling round $7.

“They did an distinctive job, means higher than my best-case evaluation,” mentioned Kirkwood, who continues to personal shares and informed his shoppers Tile Store turned out to be a “large winner.”

Cummins wrote a letter to Tile Store executives and administrators final fall urging them to think about shifting again on to the Nasdaq essential board, or “uplisting.” The return of institutional traders ought to give one other jolt upward to its share value.

Not seeing any motion from Tile Store, he enlisted one other activist investor to become involved and, in February, wrote a letter that threatened a proxy battle.

When the corporate introduced its 2020 outcomes final month, it mentioned administrators had determined to use to uplist. A return to the Nasdaq essential board may occur inside weeks.

Cummins has not withdrawn the proxy menace. However he mentioned final week, “I am far more happy. I see much more alternative for shareholders. It looks like they are going to deal with the shareholders pretty. There’s numerous alternative within the inventory.”

One prospect is a sale to a different firm, an end result that the administrators mentioned in depositions within the class-action go well with. “I feel that is a particularly beneficial asset for somebody to buy,” Cummins mentioned. “Opportunistic consumers have in all probability knocked on the door already.”

Lolmaugh mentioned Tile Store will take small steps in 2021, with plans for just one new retailer, one relocation and updates to others. “We have stabilized,” he mentioned, “and now we’re investing to get to that subsequent stage, the place we will do what we wish to, be it develop, be it not.”

Evan Ramstad • 612-673-4241

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