Tile Shop Draws Shareholder Lawsuits

Multiple law firms are seeking class-action status for securities fraud lawsuits against Tile Shop, a Minnesota-based company whose stock dropped sharply on allegations of overstated earnings.

Numerous law firms around the country are lining up to file shareholder lawsuits against Plymouth-based Tile Shop Holdings, Inc., a publicly traded retailer of stone tiles and related products.

The company stock was roiled by a November 14 report from Gotham City Research, which charged that the company’s earnings were overstated and argued that the company’s largest supplier was owned by the brother-in-law of Tile Shop CEO Robert Rucker.

Tile Shop’s stock dropped 39 percent on November 14 to close at $12.95 per share. The stock has since rebounded a bit, closing at $16.15 on Wednesday. The stock had crested above $30 per share in July. Gotham City is a short seller that profits when a company’s stock declines.

Based on news reports aggregated by Yahoo! Finance, at least eight law firms have filed actions in the U.S. District Court for the Southern District of New York seeking class-action status for securities fraud suits against Tile Shop. No class has been certified yet. Several law firms are noting that applications to be considered lead plaintiff in the case are due by January 14.

A spokesman for Tile Shop declined to comment.

On November 14, Tile Shop promptly issued a rebuttal, noting: “The company adamantly denies these allegations and believes that the financial statements are properly stated and its business practices are appropriate.” At the same time, the company announced that it was suspending its relationship with the supplier due to changes in ownership that had not been disclosed to the company.

Shareholder lawsuits are common when a company’s stock experiences a steep, unexpected drop.

Tile Shop went public in August 2012 through a reverse merger with a public shell company, Boston-based JWC Acquisition Corporation. For 2012, the company reported a net loss of $46.7 million on revenue of $182.7 million. The loss was driven by a non-cash accounting charge that required the company to record warrants as a liability.

For its third-quarter, which ended in September, Tile Shop reported revenue of $56.8 million and net income of $4.1 million. Those numbers reflected a 28.3 percent increase in sales compared to the third quarter of 2012.

On Wednesday, Tile Shop announced plans to open a new store in Tulsa, Oklahoma. In late October, the company announced plans to open a store in the Lincoln Park area of Chicago. The Tile Shop currently operates 85 stores in 24 states with an average size of 23,000 square feet.