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

At this time a year ago, Cabell Lolmaugh and other leaders of Tile Shop Holdings Inc. were closing stores, laying off employees and cutting deliveries to cope with the onset of the coronavirus pandemic.

"It was the most challenging time of my career," said Lolmaugh, who joined the Plymouth-based chain of tile and flooring stores as a warehouse worker in 2001 and became chief executive in 2019. "We had to furlough or lay off hundreds of people. It was the worst."

But as 2020 unfolded, Americans stuck at home began remodeling or looking for new houses — and they went shopping for home-improvement products. The Tile Shop, as its stores are called, benefited significantly: Full-year results released last month showed a solid profit and a complete wipeout of debt.

"Did it feel funny? Absolutely," Lolmaugh said. "If I had gone to the board of directors last year and said 'I'm going to lower hours, cut out Sundays, cut 600 heads, limit trucks and cut marketing. What do you guys think?' I would have been out the door! But when COVID forces you to do those things and your company turns around, people go 'huh.' "

The journey of Tile Shop Holdings stands out amid other "pandemic prosperity" cases, however, because of a secondary drama that played out among the company's shareholders.

Two outside directors who are wealthy investors, Peter Kamin and Peter Jacullo, in late 2019 steered the company into a controversial delisting of its stock from the Nasdaq main board to the over-the-counter market. The move wiped out two-thirds of Tile Shop's market value and the two directors went on a buying spree that gave them control of the 35-year-old firm. Other shareholders quickly sued.

A short time later, the two directors clashed with company founder and board Chairman Robert Rucker, leading to his ouster and bitter public exchange in February 2020.

In the middle of it all was Lolmaugh, 42, a former Marine who spent most of his career as a store manager and still enjoys getting out on the floor of the Plymouth store to talk with contractors and customers. Selected by Rucker as only the third leader of the company, Lolmaugh has kept it in the middle of the tile marketplace: below the high-priced mom-and-pop specialists that have a direct line to artisan tilemakers in Europe and above the big-box chains that have low prices and narrower selection.

He also aimed to derive about 60% of Tile Shop's revenue from professionals, either contractors, installers or designers. The firm provides incentives to attract them. "Their lifetime value is exponentially larger than a typical retail customer," Lolmaugh said.

His first day as CEO in January 2019 coincided with the launch of a new enterprise resource system that turned into disaster. Complications in the technology transition wreaked havoc on point-of-sale terminals, inventory management, distribution and financial reporting.

The problems took months to iron out and contributed to a 5% drop in 2019 sales and a massive jump in expenses, which hit 74% of revenue that year. Tile Shop's share price lost more than half its value during that time, dropping below the $5 level that many institutional investors consider a minimum threshold.

After lingering below that level for several months, Kamin and Jacullo prodded Rucker and other directors to delist. Such a move reduces expenses and disclosure requirements, often giving management and directors more breathing room to reset a company.

Over the next two weeks, Kamin, a Florida investor with a history of reviving delisted companies, and Jacullo, a longtime adviser to a Hong Kong billionaire family that was an early investor in Tile Shop, bought shares at prices that never exceeded $1.80 a share. In that brief period, their combined stake rose to around 30% from 17%.

Other shareholders filed a class-action suit, and a judge forced the directors to stop purchasing shares in mid-November. Last summer, the suit was settled with a $12 million payout to Tile Shop shareholders (paid by the company's insurer) who lost money in the move. Kamin and Jacullo agreed to a standstill until mid-June 2023.

The two directors declined to comment through the company. A call to Rucker was not returned.

As pre-delisting shareholders in Tile Shop tried to recover lost value in court, other investors began looking at the company because of the maneuver. One of them was Sean Kirkwood, who runs a Philadelphia hedge fund called SRK Capital, and studies delisted companies in search of trapped value. After the coronavirus hit, Tile Shop shares traded below $1 for several weeks last March and April.

"It was basically being priced for bankruptcy, when that really wasn't likely if you dug through the numbers," Kirkwood said. His analysis led him to believe Tile Shop had plenty of liquidity for at least a year even if sales plunged 40%. He bought thousands of shares at prices averaging 81 cents.

"The company traded at a significant discount to everyone else in the group," Cummins said, referring to home-improvement retailers.

The pandemic forced executives and managers to look at costs and operations in new ways, Lolmaugh said. Stores are being run with fewer employees and deliveries are taking longer in some cases. The company's head count dropped to around 1,150 from 1,600 and expenses dropped to 65% of sales. Customers, he said, have been more understanding than he can ever recall.

"Ultimately our goal is to enhance service. But we don't want to go back to where we were before," he said. "Since we were able to flip the expense structure upside down, it's really benefited the Tile Shop."

The remodeling trend helped. Tile Shop finished 2020 with a 4.5% drop in revenue, but it saw a 4% gain in the last quarter. By October, the company wiped out $63 million in debt, and it ended the year with cash on hand. Tile Shop's stock ended 2020 at $4.30 and is now trading around $7.

"They did an exceptional job, way better than my best-case analysis," said Kirkwood, who continues to own shares and told his clients Tile Shop turned out to be a "huge winner."

Not seeing any action from Tile Shop, he enlisted another activist investor to get involved and, in February, wrote a letter that threatened a proxy fight.

When the company announced its 2020 results last month, it said directors had decided to apply to uplist. A return to the Nasdaq main board could happen within weeks.

Cummins has not withdrawn the proxy threat. But he said last week, "I'm much more pleased. I see a lot more opportunity for shareholders. It feels like they're going to treat the shareholders fairly. There's a lot of opportunity in the stock."

One prospect is a sale to another company, an outcome that the directors discussed in depositions in the class-action suit. "I think this is an extremely valuable asset for someone to purchase," Cummins said. "Opportunistic buyers have probably knocked on the door already."

Lolmaugh said Tile Shop will take small steps in 2021, with plans for only one new store, one relocation and updates to others. "We've stabilized," he said, "and now we're investing to get to that next level, where we can do what we want to, be it grow, be it not."