The Container Store Group, Inc. Announces Second Quarter Fiscal 2019 Financial Results

Comparable Store Sales up 5.4%; Consolidated Net Sales up 5.3%

EPS of $0.08 vs $0.07 in Q218; Adjusted EPS of $0.08 vs. $0.10 in Q218

Results include approximately $3.4 million, or $0.05 per share, in New Distribution Center and Marketing Investments

Second Distribution Center On Time and On Budget; Product Receipts and Outbound Flows On Plan

Updates Fiscal 2019 Outlook

COPPELL, Texas–(BUSINESS WIRE)–The Container Store Group, Inc. (NYSE: TCS) (the “Company”), today announced financial results for the second quarter of fiscal 2019 ended September 28, 2019.

  • Consolidated net sales were $236.4 million, up 5.3%. Net sales in The Container Store retail business (“TCS”) were $221.2 million, up 5.9%. Elfa International AB (“Elfa”) third-party net sales were $15.2 million, down 2.6% due to foreign currency translation.
  • Comparable store sales increased 5.4%, with Custom Closets up 9.3%, contributing 420 basis points of the increase in comparable store sales, and all other product categories up 2.2% contributing the remaining 120 basis points.
  • Consolidated net income and net income per share (“EPS”) was $3.6 million and $0.08 compared to net income of $3.2 million and $0.07, respectively, in the second quarter of fiscal 2018. Adjusted net income per share (“Adjusted EPS”) was $0.08 compared to $0.10 in the second quarter of fiscal 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table). Second quarter fiscal 2019 Consolidated and Adjusted EPS includes $0.05 per share in investments related to the second distribution center and incremental Custom Closets marketing investments.

Melissa Reiff, Chief Executive Officer commented, “It was a solid second quarter during which we continued to make good progress against all of our key strategic priorities. The work we have been doing across stores, merchandising, marketing, technology and infrastructure is having a positive impact and driving our financial performance.”

Ms. Reiff continued, “The newness across our Custom Closets and other product categories is resonating with our customers, as is our refreshed marketing and merchandising, and we have multiple store tests that are generating encouraging early results that we intend to incorporate into our go-forward store growth plans. Additionally, our new distribution center is proceeding on plan and on budget, and we have successfully received initial inventory to stock the facility, as well as commenced outbound shipments to stores and customers. All of this work positions us well to capitalize on the many opportunities that lie ahead, including an estimated $6 billion total addressable market for Custom Closets and substantial whitespace for store growth beyond our current base of 93 stores.”

Second Quarter Fiscal 2019 Results

For the second quarter (thirteen weeks) ended September 28, 2019:

  • Consolidated net sales were $236.4 million, up 5.3% as compared to the second quarter of fiscal 2018. Net sales at TCS were $221.2 million, up 5.9%, driven by an increase in comparable store sales of 5.4%, combined with incremental sales from new stores. Elfa third-party net sales were $15.2 million, down 2.6% compared to the second quarter of fiscal 2018 due to the negative impact of foreign currency translation during the quarter.
  • Consolidated gross margin was 57.9%, a decrease of 30 basis points, compared to the second quarter of fiscal 2018. TCS gross margin decreased 80 basis points to 57.0%, primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin product and service sales in the second quarter of fiscal 2019. The decrease was partially offset by improvement in foreign currency translation. Elfa gross margin increased 110 basis points primarily due to production efficiencies partially offset by higher direct materials costs attributable to higher raw material prices associated with a weaker Swedish krona.
  • Consolidated selling, general and administrative expenses (“SG&A”) increased by 7.9% to $114.0 million in the second quarter of fiscal 2019 from $105.7 million in the second quarter of fiscal 2018. SG&A as a percentage of net sales increased 110 basis points primarily due to incremental Custom Closets marketing expenses, as well as increased healthcare and real estate property tax expenses, partially offset by ongoing savings and efficiency efforts.
  • Pre-opening costs increased to $2.3 million in the second quarter of fiscal 2019 as compared to $0.9 million in the second quarter of fiscal 2018. The increase is primarily due to $1.7 million of costs associated with the opening of the second distribution center. The company opened one new store in each of the second quarters of fiscal 2019 and fiscal 2018.
  • Consolidated net interest expense decreased 26.8% to $5.4 million in the second quarter of fiscal 2019 from $7.4 million in the second quarter of fiscal 2018. In September 2018, the Company amended its Senior Secured Term Loan Facility (the “Term Loan Amendment”), which decreased the applicable interest rate margins.
  • The effective tax rate was 26.8%, as compared to 30.4% in the second quarter of fiscal 2018. The decrease in the effective tax rate is primarily due to the Company’s jurisdictional mix of income and additional tax deductions related to stock-based compensation.
  • Net income was $3.6 million, or $0.08 per share, in the second quarter of fiscal 2019 compared to net income of $3.2 million, or $0.07 per share in the second quarter of fiscal 2018. Adjusted net income was $3.9 million, or $0.08 per share, in the second quarter of fiscal 2019 compared to adjusted net income of $4.7 million, or $0.10 per share in the second quarter of fiscal 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table).
  • Adjusted EBITDA (see Reconciliation of GAAP to Non-GAAP Financial Measures table) was $22.4 million in the second quarter of fiscal 2019 compared to $24.3 million in the second quarter of fiscal 2018. The decrease in Adjusted EBITDA was primarily due to incremental Custom Closets marketing expenses incurred in the second quarter of fiscal 2019.

For the year-to-date (twenty-six weeks) ended September 28, 2019:

  • Consolidated net sales were $446.0 million, up 6.1% as compared to the first half of fiscal 2018. Net sales at TCS were $416.3 million, up 7.0%, compared to the first half of fiscal 2018, with the increase driven by a comparable store sales increase of 6.5%, as well as incremental sales from new stores. Elfa third-party net sales were $29.7 million, down 5.1% compared to the first half of fiscal 2018, due to the negative impact of foreign currency translation.
  • Consolidated gross margin was 57.5%, a decrease of 90 basis points compared to the first half of fiscal 2018. TCS gross margin decreased 70 basis points to 57.2%, primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin product and service sales. The decrease was partially offset by improvement in foreign currency translation. Elfa gross margin increased 10 basis points primarily due to production efficiencies, partially offset by higher direct materials costs attributable to higher raw material prices associated with a weaker Swedish krona.
  • Consolidated SG&A increased by 4.7% to $222.3 million from $212.3 million in the first half of fiscal 2018. SG&A as a percentage of net sales decreased 60 basis points. This was primarily due to Optimization Plan expenses incurred in the prior year that were not incurred in the first half of fiscal 2019, partially offset by increased Custom Closets marketing expenses, as well as increased real estate property taxes and healthcare expenses.
  • Pre-opening costs increased to $3.5 million in the first half of fiscal 2019 as compared to $1.2 million in the first half of fiscal 2018. The increase is primarily due to $2.8 million of costs associated with the opening of the second distribution center. The Company opened one new store in the twenty-six weeks ended September 28, 2019 as compared to opening two stores in the twenty-six weeks ended September 29, 2018.
  • Consolidated net interest expense decreased 27.3% to $11.1 million in the first half of fiscal 2019 from $15.3 million in the first half of fiscal 2018, primarily due to the Term Loan Amendment, which decreased the applicable interest rate margins.
  • The effective tax rate was 50.3%, as compared to 36.9% in the first half of fiscal 2018. The increase in the effective tax rate is primarily due to the benefit for the remeasurement of deferred tax balances recorded in the first quarter of fiscal 2018 as a result of a change in the Swedish tax rate.
  • Net loss was $0.5 million, or ($0.01) per share, in the first half of fiscal 2019 compared to net loss of $3.5 million, or ($0.07) per share in the first half of fiscal 2018. Adjusted net loss was $0.2 million, or ($0.00) per share, in the first half of fiscal 2019 compared to adjusted net income of $0.7 million, or $0.02 per share in the first half of fiscal 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table).
  • Adjusted EBITDA (see Reconciliation of GAAP to Non-GAAP Financial Measures table) was $33.1 million in the first half of fiscal 2019 compared to $36.7 million in the first half of fiscal 2018. The decrease in Adjusted EBITDA was primarily due to incremental Custom Closets marketing expenses incurred in the first half of fiscal 2019.

Balance sheet and liquidity highlights:

 

 

 

 

 

 

 

 

(In thousands)

 

September 28, 2019

 

September 29, 2018

Cash

 

$

9,029

 

$

7,212

Total debt, net of deferred financing costs

 

$

285,756

 

$

290,469

Liquidity (1)

 

$

91,526

 

$

80,798

Free cash flow (2)

 

$

(15,779)

 

$

 

(2,533)

(1)

_____________________

Cash plus availability on revolving credit facilities.

(2)

Represents fiscal twenty-six week periods only. See Reconciliation of GAAP to Non-GAAP Financial Measures table.

Outlook

 

The Company is updating its outlook for fiscal 2019 as follows:

 

 

Fiscal 2019 Outlook

Net sales

 

At to slightly above previously provided range of $915 million to $925 million

New store openings and store relocations

 

2 openings, including 1 relocation (2)

Comparable store sales

 

At to slightly above previously provided range of up 2.0% to up 3.0%

Net income per common share (1)

 

Towards the low end of previously provided range of $0.41 to $0.51

Adjusted net income per common share (1) (3)

 

Towards the low end of previously provided range of $0.41 to $0.51

Assumed tax rate

 

31%

Estimated share count

 

49 million

(1)

_____________________

Includes approximately $4 million, or $0.06 per common share of net costs associated with the opening of a second distribution center in Aberdeen, MD.

(2)

The Company opened a new store in Memphis, TN during the second quarter of fiscal 2019. Additionally, during the second half of fiscal 2019, the Company plans to relocate an existing store in Dallas TX.

(3)

See Reconciliation of GAAP to Non-GAAP Financial Measures table.

Conference Call Information

A conference call to discuss second quarter fiscal 2019 financial results is scheduled for today, October 29, 2019, at 4:30 PM Eastern Time. Investors and analysts interested in participating in the call are invited to dial (877) 407‑3982 (international callers please dial (201) 493‑6780) approximately 10 minutes prior to the start of the call. A live audio webcast of the conference call will be available online at investor.containerstore.com.

A taped replay of the conference call will be available within two hours of the conclusion of the call and can be accessed both online and by dialing (844) 512‑2921 (international callers please dial (412) 317‑6671). The pin number to access the telephone replay is 13695097. The replay will be available until November 29, 2019.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements, including statements about our future opportunities; expectations regarding our goals, strategies, priorities and initiatives; expectations regarding new store openings and relocations; plans to drive more brand awareness and attain market share gains; statements regarding our addressable market for Custom Closets; statements regarding our second distribution center and the timing of its completion; and our anticipated financial performance and tax rate for fiscal 2019.

These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: our optimization plan may not result in improved sales and profitability; our inability to open or relocate new stores, or remodel existing stores, in the timeframe and at the locations we anticipate; overall decline in the health of the economy, consumer spending, and the housing market; our inability to manage costs and risks relating to new store openings; our inability to source and market new products to meet consumer preferences; our failure to achieve or maintain profitability; risks relating to the opening of a second distribution center; effects of a security breach or cyber-attack of our website or information technology systems, including relating to our use of third-party web service providers; our vulnerability to natural disasters and other unexpected events; our reliance upon independent third party transportation providers; our inability to protect our brand; our failure to successfully anticipate consumer preferences and demand; our inability to manage our growth; inability to locate available retail store sites on terms acceptable to us; our inability to maintain sufficient levels of cash flow to meet growth expectations; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; fluctuations in currency exchange rates; our inability to effectively manage our online sales; competition from other stores and internet-based competition; our inability to obtain merchandise on a timely basis at competitive prices as a result of changes in vendor relationships; vendors may sell similar or identical products to our competitors; our reliance on key executive management, and the transition in our executive leadership; our inability to find, train and retain key personnel; labor relations difficulties; increases in health care costs and labor costs; our dependence on foreign imports for our merchandise; violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; our indebtedness may restrict our current and future operations, and we may not be able to refinance our debt on favorable terms, or at all; effects of tax reform; and uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries.

These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10‑K filed with the Securities and Exchange Commission, or SEC, on May 30, 2019, and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release. Any such forward-looking statements represent management’s estimates as of the date of this press release. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

About The Container Store

The Container Store Group, Inc. (NYSE: TCS) is the nation’s leading retailer of storage and organization products and solutions – a concept they originated in 1978. Today, with locations nationwide, the retailer offers more than 10,000 products designed to help customers accomplish projects, maximize their space and make the most of their home. The Container Store also offers a full suite of custom closets designed to accommodate all sizes, styles and budgets.

Visit www.containerstore.com for more information about store locations, the product collection and services offered.

Visit www.containerstore.com/blog for inspiration, tips and real solutions to everyday organization challenges,

and www.whatwestandfor.com to learn more about the company’s unique culture.

The Container Store Group, Inc.

Consolidated statements of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and

per share amounts) (unaudited)

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

September 28, 2019

 

September 29, 2018

 

September 28, 2019

September 29, 2018

Net sales

 

$

236,432

 

$

224,453

 

$

445,952

 

$

420,276

Cost of sales (excluding depreciation and amortization)

 

 

99,628

 

 

93,878

 

 

189,341

 

 

174,930

Gross profit

 

 

136,804

 

 

130,575

 

 

256,611

 

 

245,346

Selling, general, and administrative expenses (excluding depreciation and amortization)

 

 

113,978

 

 

105,656

 

 

222,309

 

 

212,261

Stock-based compensation

 

 

965

 

 

769

 

 

1,776

 

 

1,355

Pre-opening costs

 

 

2,331

 

 

881

 

 

3,506

 

 

1,227

Depreciation and amortization

 

 

8,742

 

 

9,128

 

 

18,448

 

 

18,465

Other expenses

 

 

403

 

 

24

 

 

376

 

 

217

(Gain) loss on disposal of assets

 

 

 

 

 

 

(4)

 

 

40

Income from operations

 

 

10,385

 

 

14,117

 

 

10,200

 

 

11,781

Interest expense, net

 

 

5,402

 

 

7,377

 

 

11,111

 

 

15,285

Loss on extinguishment of debt

 

 

 

 

2,082

 

 

 

 

2,082

Income (loss) before taxes

 

 

4,983

 

 

4,658

 

 

(911)

 

 

(5,586)

Provision (benefit) for income taxes

 

 

1,337

 

 

1,417

 

 

(458)

 

 

(2,063)

Net income (loss)

 

$

3,646

 

$

3,241

 

$

(453)

 

$

(3,523)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share — basic and diluted

 

$

0.08

 

$

0.07

 

$

(0.01)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares — basic

 

 

48,291,643

 

 

48,138,907

 

 

48,261,395

 

 

48,138,907

Weighted-average common shares — diluted

 

 

48,417,474

 

 

48,519,166

 

 

48,261,395

 

 

48,138,907

The Container Store Group, Inc.

Consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

 

 

September 28,

2019

 

March 30,

2019

 

September 29,

2018

(In thousands)

 

 

 

Assets

 

(unaudited)

 

 

 

 

(unaudited)

Current assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

9,029

 

$

7,364

 

$

7,212

Accounts receivable, net

 

 

26,030

 

 

25,568

 

 

25,400

Inventory

 

 

133,200

 

 

108,650

 

 

110,801

Prepaid expenses

 

 

11,736

 

 

10,078

 

 

11,021

Income taxes receivable

 

 

2,603

 

 

1,003

 

 

3,394

Other current assets

 

 

10,518

 

 

11,705

 

 

10,562

Total current assets

 

 

193,116

 

 

164,368

 

 

168,390

Noncurrent assets:

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

155,107

 

 

152,588

 

 

149,259

Noncurrent operating lease assets

 

 

362,609

 

 

 

 

Goodwill

 

 

202,815

 

 

202,815

 

 

202,815

Trade names

 

 

223,184

 

 

225,150

 

 

226,939

Deferred financing costs, net

 

 

206

 

 

241

 

 

276

Noncurrent deferred tax assets, net

 

 

1,803

 

 

1,912

 

 

1,979

Other assets

 

 

1,732

 

 

1,670

 

 

1,796

Total noncurrent assets

 

 

947,456

 

 

584,376

 

 

583,064

Total assets

 

$

1,140,572

 

$

748,744

 

$

751,454

The Container Store Group, Inc.

Consolidated balance sheets (continued)

 

 

 

 

 

 

 

 

 

 

 

 

September 28,

2019

 

March 30,

2019

 

September 29,

2018

(In thousands, except share and per share amounts)

 

 

 

Liabilities and shareholders’ equity

 

(unaudited)

 

 

 

 

(unaudited)

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

74,376

 

$

58,734

 

$

62,313

Accrued liabilities

 

 

65,522

 

 

67,163

 

 

64,199

Revolving lines of credit

 

 

10,813

 

 

5,511

 

 

1,128

Current portion of long-term debt

 

 

6,936

 

 

7,016

 

 

7,052

Current operating lease liabilities

 

 

61,663

 

 

 

 

Income taxes payable

 

 

254

 

 

2,851

 

 

1,851

Total current liabilities

 

 

219,564

 

 

141,275

 

 

136,543

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

268,007

 

 

254,960

 

 

282,289

Noncurrent operating lease liabilities

 

 

333,603

 

 

 

 

Noncurrent deferred tax liabilities, net

 

 

49,516

 

 

51,702

 

 

50,630

Other long-term liabilities

 

 

10,534

 

 

36,114

 

 

41,020

Total noncurrent liabilities

 

 

661,660

 

 

342,776

 

 

373,939

Total liabilities

 

 

881,224

 

 

484,051

 

 

510,482

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 250,000,000 shares authorized;

48,306,412 shares issued at September 28, 2019; 48,142,319 shares

issued at March 30, 2019; 48,138,907 shares issued at September 29, 2018

 

 

483

 

 

481

 

 

481

Additional paid-in capital

 

 

865,347

 

 

863,978

 

 

862,495

Accumulated other comprehensive loss

 

 

(32,395)

 

 

(26,132)

 

 

(23,167)

Retained deficit

 

 

(574,087)

 

 

(573,634)

 

 

(598,837)

Total shareholders’ equity

 

 

259,348

 

 

264,693

 

 

240,972

Total liabilities and shareholders’ equity

 

$

1,140,572

 

$

748,744

 

$

751,454

The Container Store Group, Inc.

Consolidated statements of cash flows

 

 

Twenty-Six Weeks Ended

 

 

September 28,

2019

 

September 29,

2018

(In thousands) (unaudited)

 

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(453)

 

$

(3,523)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

18,448

 

 

18,465

Stock-based compensation

 

 

1,776

 

 

1,355

(Gain) loss on disposal of assets

 

 

(4)

 

 

40

Loss on extinguishment of debt

 

 

 

 

2,082

Deferred tax benefit

 

 

(1,810)

 

 

(2,927)

Non-cash interest

 

 

931

 

 

1,418

Other

 

 

199

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,858)

 

 

(373)

Inventory

 

 

(25,988)

 

 

(17,066)

Prepaid expenses and other assets

 

 

310

 

 

1,875

Accounts payable and accrued liabilities

 

 

17,424

 

 

13,304

Net change in lease assets and liabilities

 

 

122

 

 

Income taxes

 

 

(4,254)

 

 

(6,083)

Other noncurrent liabilities

 

 

912

 

 

(431)

Net cash provided by operating activities

 

 

5,755

 

 

8,136

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Additions to property and equipment

 

 

(21,534)

 

 

(10,669)

Proceeds from sale of property and equipment

 

 

4

 

 

7

Net cash used in investing activities

 

 

(21,530)

 

 

(10,662)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Borrowings on revolving lines of credit

 

 

35,428

 

 

45,404

Payments on revolving lines of credit

 

 

(29,676)

 

 

(19,267)

Borrowings on long-term debt

 

 

29,000

 

 

272,500

Payments on long-term debt

 

 

(16,775)

 

 

(294,497)

Payment of debt issuance costs

 

 

 

 

(2,244)

Payment of taxes with shares withheld upon restricted stock vesting

 

 

(356)

 

 

(122)

Net cash provided by financing activities

 

 

17,621

 

 

1,774

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(181)

 

 

(435)

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

1,665

 

 

(1,187)

Cash at beginning of fiscal period

 

 

7,364

 

 

8,399

Cash at end of fiscal period

 

$

9,029

 

$

7,212

Note Regarding Non-GAAP Information

This press release includes financial measures that are not calculated in accordance with GAAP, including adjusted net income (loss), adjusted net income (loss) per common share – diluted, Adjusted EBITD, and free cash flow. The Company has reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in a table accompanying this release. These non-GAAP measures should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items.

Contacts

Investors:
ICR, Inc.

Farah Soi/Caitlin Morahan

203-682-8200

Farah.Soi@icrinc.com
Caitlin.Morahan@icrinc.com
or

Media:
The Container Store Group, Inc.

Mara Richter, 972-538-6893

publicrelations@containerstore.com

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