Tile Shop Stock Jumped 10% Friday: Here's What's Happening

What happened

Shares of Tile Shop Holdings (NASDAQ: TTS) were up 10% at 1:38 p.m. EDT on Friday, having moderated a little from the big 15% surge earlier today. The double-digit jump comes on the heels of Thursday's 7% drop, which put the company's stock price at an all-time low, below $4 for the first time in its history as a public company.

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So what

Today's surge is likely the result of a couple of catalysts. First, U.S. stocks are rallying today, with the S&P 500 and Dow Jones Industrial Average both up more than 1%, a typically unpredicted reaction to Thursday's relatively weak jobs report for May. In short, it seems many investors expect the Federal Reserve could take action soon to lower interest rates to spur the economy.

At the same time, Tile Shop filed two Securities and Exchange Commission disclosures -- SEC Form 4 -- for two of its directors, Peter Jacullo and Peter Kamin, saying that both made substantial buys of Tile Shop stock this week.

Kamin purchased over 105,000 shares on June 4 and 5, increasing his total stake to more than 2 million shares he directly or indirectly controls. Jacullo bought shares on June 4, 5, and 6, and now directly or indirectly controls more than 6 million shares of Tile Shop, nearly 12% of the company.

Now what

In all, that's three catalysts likely driving Tile Shop's stock higher today:

  • The market is rallying.
  • Tile Shop shares hit an all-time low yesterday.
  • Two major insiders bought a lot of shares near that all-time low.

A couple of takeaways to consider before you act. First, none of the three catalysts is particularly material to Tile Shop's prospects, even the investments by insiders. To the contrary, it's reasonable to assume they didn't buy based on any special knowledge they have. That's illegal, and it would be pretty clear and blatant for two directors of a company to both buy at the same time based on insider information.

Yet that doesn't make it a bad sign that they're buying. These are wealthy, informed, successful individuals, and if they're putting their money on the company, it is a good signal, if not particularly material.

Second, investors would do well to consider the company's recent financial performance. In Tile Shop's first quarter, it reported weak traffic, a 5% drop in sales, and profits that fell by two-thirds from the year-ago quarter. The biggest reason: A new product and market strategy -- shifting its selection to higher-end products with more focus on upscale shoppers and pro customers -- has caused sales and traffic to slow over the past year.

But at the same time, gross margins from those higher-end products are rising, and operating cash flows -- a good metric for cash profits -- almost doubled to $20 million year over year.

The bottom line is this: Tile Shop does look relatively cheap based on its improving profitability metrics, but only if it can return to traffic and sales growth in the very near future. That's not a certainty, and you'll need to be willing to ride out a lot more volatile days before we find out if the new strategy pays off. Who ever knew selling tile could be so exciting?

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Jason Hall owns shares of Tile Shop Holdings. The Motley Fool recommends Tile Shop Holdings. The Motley Fool has a disclosure policy.