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Player Avatar BravoBevo (99.97) Submitted: 11/14/2013 4:35:49 PM : Outperform Start Price: $12.95 TTS Score: +6.36

A shareholders' derivative lawsuit was filed against Tile Shop Holdings (TTS), the parent of The Tile Shop. The suit alleges that TTS obtains up to 30% of its products from Beijing Pingxiu (Pingxiu), and that Pingxiu sells its products "at cost" to TTS. The suit further alleges that Pingxiu is "secretly controlled" by a guy named Fumitake Nishi (Nishi), who is reported to be the brother-in-law of TTS's CEO. Clearly, there is information that needs to have been disclosed to TTS investors (I'm assuming that it was not disclosed). But if Nishi sells products "at cost" to TTS and does not profit from his relationship to the TTS CEO, then I cannot see where TTS suffered any damages. No harm, no foul. Unless I'm missing something, there likely will be some nuisance value paid for the lawyers in the lawsuit to go away, but the settlement shouldn't adversely affect TTS's business operations. I expect the lawsuit will be a non-event, other than a learning experience for TTS and an opportunity for investors to catch TTS stock at a "spooked" price.

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Member Avatar papsrus (< 20) Submitted: 11/15/2013 9:57:05 AM
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If, as alleged, Pingxui was "compensated" with inflated TTS stock, that might be a problem, no?

From the Citi downgrade: "TTS, in turn, pays Pingxiu with capital gains from rise in the shares, according to the report."

Member Avatar papsrus (< 20) Submitted: 11/15/2013 10:55:54 AM
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Credit Suisse is not swayed from its buy rating, and offers some more detail than Citi had on the relationship between TTS and Pingxiu:

"However, the crux of the allegations yesterday about TTS' financial model appear inaccurate, including that the aforementioned related party Beijing Pingxiu was one of the largest suppliers to TTS, selling to them at a 0% market up, which inflated TTS' industry-leading 70% gross margins. Based on the disclosure last night, we do not believe that to be the case; Beijing Pingxiu appears to be a trading company, not a supplier producing goods for no profit for the good of TTS stock. It is essentially a middleman in the transaction between TTS and its actual suppliers, and gets a small fee from the vendors, which alone does not change the economics of TTS business.

Paps

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