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Tile Shop under fire for allegations of inflated earnings

Shortseller Gotham City Research claimed Thursday that Tile Shop Holdings had exaggerated its earnings in its most recent financial report.

The Nov. 14 report alleged that Beijing Pingxiu, the company's largest supplier, is covertly run by Fumitake Nishi, who is the brother-in-law of Tile Shop CEO Robert Rucker as well as a Tile Shop employee. Gotham City claims that the undisclosed relationship, which it discovered through government trade data, has resulted in earnings that are overstated by more than 200%, taking inaccuracies into account that are related to inventories, cost of sales and gross profits. BP also allegedly sells at or near cost to the Tile Shop, resulting in an artificial cost advantage.

The Tile Shop released a formal statement denying these allegations, as well as the charge of transferring stock to BP, and confirmed its intentions to investigate the matter.

"The company negotiates all inventory purchases directly with each vendor," read the statement. "As is common practice, certain vendors utilize an export trading company, such as Beijing Pingxiu, for sales to U.S.-based companies. Other Chinese vendors maintain their own export licensing authority. The company has been made aware of changes of the ownership of Beijing Pingxiu, which were not previously disclosed to the company. As a result of this disclosure, the company has suspended its relationship with this entity."

The Tile Shop reaffirmed full-year sales guidance of $227 million to $237 million in the Nov. 14 statement, which were originally provided in the Oct. 30 financial earnings report.

At press time, shares of Tile Shop (TTS) had declined by nearly 39% to $12.95. Gotham City said it expected to profit from the decline in Tile Shop shares.