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Tile Shop Drops 39% After Short Seller Gotham Issues Report

Tile Shop Holdings Inc. shares plunged after short-seller Gotham City Research LLC said the home-improvement retailer used improper accounting to inflate earnings. The company denied the allegations.

Tile Shop lost a record 39 percent to $12.95 today, the biggest retreat in the Russell 2000 Index. Shares of the Plymouth, Minnesota-based company are worth as little as $1.54, a 93 percent decline from yesterday’s close, according to the report from Gotham City posted on its website today.

Tile Shop exerts control on its suppliers, which sell goods to the company at or near cost, helping it increase profit margins, the report from Gotham City said. The company’s largest vendor, Beijing Pingxiu, is controlled by a Tile Shop employee, according to the research firm.

Tile Shop suspended its relationship with Beijing Pingxiu and said changes in the supplier’s ownership had not been disclosed to the company, according to a statement released today. The company rejected the assertions of accounting irregularities and confirmed its sales forecast.

“The company intends to thoroughly investigate this relationship,” Tile Shop said. The company “believes that the financial statements are properly stated and its business practices are appropriate,” the press release said.

Two phone calls and an e-mail to Tile Shop’s investor relations office seeking comment on the report weren’t returned.

Uncover Fraud

Research firms, such as Gotham City and Muddy Waters LLC, have targeted companies with Chinese operations to profit from accounting investigations that claim to uncover fraud. The companies and their clients borrow shares and sell them with the aim of buying the stock back at a lower price and pocketing the difference. Gotham City said in the report that it will make money from a retreat in Tile Shop.

Short sellers increased bets against Tile Shop to a record high of 13 percent of shares outstanding on Nov. 12. Bearish wagers on the stock rose from a low of 0.1 percent in June, according to data compiled by Markit, a London-based research firm. The average short interest for a company in the Russell 2000 Index is 4 percent.

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