NEW YORK (TheStreet) -- Investment firm Gotham Research has made it clear it is no fan of Tile Shop Holdings (TTS) after it initiated coverage of the retailer with a price target of less than $3.34 and a recommendation to sell immediately.
Shares of the specialty stone tile retailer were decimated 27% to $15.33 by 10:30 a.m. EDT, triggering a waterfall of short-selling. By midday, shares clawed their way back to $16.04, but are still down 24.4% since the beginning of the day. More than 7.4 million shares have changed hands, 10 times the 90-day average daily trading volume.
Gotham said the Plymouth-based business had inflated 2013 earnings by 200% thanks to a China-based supplier Beijing Pingxiu, controlled by Tile Shop CEO Robert Rucker's brother-in-law.
The report argues Beijing Pingxiu, supplier of 20% to 30% of cost of goods sold, has been selling its goods to the retailer at cost, leading Tile Shop to boast a doctored, overly-inflated gross margin. The short-seller alleges Tile Holdings is worse than 1980's electronics chain Crazy Eddie's, a textbook example of corporate fraud.
"If margins seem too good to be true (and too smooth to be true), they probably are. We believe that the chickens are about to come home to roost for Tile Shop and CEO Bob Rucker. We recommend you sell shares immediately," the report reads.
At the time of publishing, a spokesperson for The Tile Shop had not responded to requests for comment.
TheStreet Ratings team rates Tile Shop Holdings INC as a Hold with a ratings score of C-. The team has this to say about their recommendation: