Analysts Respond to Tile Shop Holding Fraud Allegations

The Rosen Law Firm announced on Thursday that they will investigate potential securities claims against Tile Shop Holdings (NASDAQ: TTS) following allegations that the company uses an undisclosed related party to overstate earnings and has issued misleading business information.

In a press release, Gotham City Research LLC issued a report stating, "the Company's largest supplier, Beijing Pingxiu (“BP”), is an undisclosed related company secretly controlled by Fumitake Nishi, the brother-in-law of the Company's CEO and a Tile Shop employee; Tile Shop uses BP to overstate inventories, understate cost of sales and overstate gross profits; BP sells goods to the Tile Shop at or near cost to allow Tile Shop to achieve an artificial cost advantage; and Tile Shop's 2013 LTM earnings are overstated by over 200%."

Following the fraud allegations, analysts disagree over these concern. Wedbush analyst Joan Storms commented that these allegations are "overblown" but better management oversight is needed. Storms reiterated an Outperform rating and lowered the price target from $32.00 to $25.00.

Peter Keith, Piper analyst, noted that the Tile Shop "confusion and misunderstanding" creates a buying opportunity for investors. Keith added that the Gotham City Research author likely misunderstood Pingxiu's role in the sourcing supply chain, as he does not negotiate prices or hold inventory.

Not all analyst's remain optimistic, however. Citigroup downgraded Tile Shop from Buy to Neutral. Citigroup analyst Kate McShane's target price for Tile Shop was lowered significantly from $32 to $14.75. FCJS Securities cut Tile Shop's rating from Outperform to Market Perform and lowered the PT from $25.00 to $16.00.

Tile Shop's shares closed at $12.95 yesterday after plunging 39 percent following Gotham City's allegations. The stock is currently trading -14.21 percent.