Tile Shop Denies Allegations Made By Short Seller

(RTTNews) - Tile Shop Holdings, Inc. (TTS), a specialty retailer of manufactured and natural stone tiles, said Thursday that it "adamantly denies" allegations made by a short seller in a report that the company's historical financial statements may require restatement along with other accounting irregularities.

The Plymouth, Minnesota-based company said it believes that the financial statements are properly stated and its business practices are appropriate. In addition, the company reaffirmed its financial guidance for fiscal 2013.

Short seller Gotham City Research LLC said earlier on Thursday that it has initiated coverage on Tile Shop Holdings. In a report, the short seller alleged that Tile Shop's 2013 LTM earnings were overstated by more than 200 percent and that the company used its China-based undisclosed related party as well as improper accounting to overstate profits.

According to Gotham City, Tile Shop will restate several years' historical results due to the issues covered in its report, while the company's gross margins will continue to decline through 2014.

Further, the short seller alleged that Tile Shop's largest supplier, Beijing Pingxiu, was an undisclosed related company and accounted for 20 percent to 30 percent of Tile Shop's cost of goods sold.

The short seller also alleged that Beijing Pingxiu was secretly controlled by Fumitake Nishi, an employee of Tile Shop as well as the brother-in-law of Tile Shop Chief Executive Officer Robert Rucker.

Responding to the allegations, Tile Shop said it negotiates all inventory purchases directly with each vendor. However, the company noted that certain vendors utilize an export trading company, such as Beijing Pingxiu, for sales to U.S. based companies, while other Chinese vendors maintained their own export licensing authority.

Tile Shop said it has suspended its relationship with Beijing Pingxiu after it was made aware of changes of the ownership of that company that were not previously disclosed to it. The company added that it plans to thoroughly investigate this relationship.

Tile Shop also said it believes any issues associated with the ownership of Beijing Pingxiu, or the utilization of other export trading companies, have not had any material impact on the economics of inventory purchases.

Further, Tile Shop noted that the report alleged its vendors were compensated in some form through stock transfers. However, the company confirmed that there have been no issuances or transfers of stock from the company or inside shareholders to any vendors or to Beijing Pingxiu.

For fiscal 2013, Tile Shop reaffirmed its guidance for net sales in a range of $227 million to $237 million, and adjusted EBITDA of $60 million, along with the opening of 20 new stores for the year ending December 31, 2013.

TTS closed Thursday's regular trading session at $12.95, down $8.27 or 38.96 percent on a volume of 19.63 million shares. However, in after-hours, the stock gained $0.83 or 6.41 percent to $13.78.