The Container Store Group, Inc. Announces Third Quarter 2014 Financial Results

The Container Store Group, Inc. (NYSE:TCS) (the “Company”), today announced financial results for the third quarter and year-to-date ended November 29, 2014. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures.

• Adjusted net income was $3.2 million or $0.07 per adjusted diluted common share in the third quarter of fiscal 2014, meeting consensus estimates.
• Net sales were $190.9 million, up 1.4% compared to the third quarter of fiscal 2013.
• Company comparable store sales for the third quarter were down 3.5% which were at the low end of the Company’s guidance of flat to negative low single digits.
• Comparable store sales are up 2.7%¹ for the fourth quarter-to-date over the same period last year.
• Online sales increased 13.2% for the quarter compared to the third quarter of 2013.

“While we are working vigorously to improve our comparable store sales and traffic trend, we’re pleased with many other third quarter key metrics like our stable gross margins, disciplined expense management and our comparable store average ticket increase of almost 2% due to our expertise in solutions-based selling,” said Kip Tindell, Chairman and Chief Executive Officer. “While it’s still early into our ever important Annual elfa^® Sale, and there are many selling days that remain, we are particularly encouraged by our fourth quarter-to-date comparable store sales, which include a 620¹ basis point improvement over the third quarter. Our fourth quarter-to-date comparable store sales gain consists of both an increase in average ticket and traffic.”

The Company’s three key initiatives that are designed to increase traffic and average ticket; POP! ^®, Contained Home ^SM and TCS Closets ^TM continue to roll out through the end of 2015. The Company expects that like with every major merchandising, marketing and customer service-oriented initiative it has introduced throughout its history, each month, each quarter and even each year that they mature, these initiatives will be more impactful to the business.

• POP! Perfectly Organized Perks^®: The Container Store’s new customer frequency program has reached more than 1.5 million customer enrollments since launching in all stores in July 2014. Early analysis of the program shows that customers who were part of the pilot in California, and have been in the program for over one year, have increased their frequency on average by at least one visit since joining the program. The POP! program should become even more relevant in 2015 with the deployment of additional technology to support deeper, one-on-one, customized connections, offers and conversations with these loyal, omni-channel customers.
• Contained Home ^SM: The Company’s in-home, customized design and organization service is currently available in 25 stores with rollout next week in its White Plains, NY, Westbury, NY, and Paramus, NJ, stores and in the Company’s five San Francisco Bay-area stores in February. As it continues its rollout to all stores by the end of 2015, the Company is encouraged by the service’s average ticket to date of over $2,000.
• TCS Closets ^TM: The Company launched the pilot of TCS Closets, its new, exclusive collection of solid, custom, built-in closet solutions, in the Dallas/Fort Worth market in November. Early results of the pilot show an average ticket significantly greater than the Contained Home average ticket of over $2,000. Rollout of TCS Closets will continue in March, next launching in the Company’s four Washington DC-area stores and remaining five Texas stores. The product collection is expected to be available in all stores by the end of 2015.

The Company will open one more store this fiscal year in Glendale, AZ, on February 7, achieving its 12% minimum square footage growth goal for the year. The Company plans to open 10 new stores, including one relocation, in fiscal 2015.

Third Quarter 2014 Results

For the third quarter (thirteen weeks) ended November 29, 2014, on a consolidated basis:

• Net sales were $190.9 million, up 1.4% as compared to the third quarter of fiscal 2013. Net sales in The Container Store retail business were $168.5 million, up 2.9% as compared to the third quarter of fiscal 2013, primarily due to new store sales. This more than offset the comparable store sales operating measure decline of 3.5%. Elfa’s third party net sales increased by 1.9% in Swedish krona; however, due to the depreciation of the Swedish krona against the U.S. dollar, Elfa’s third party net sales decreased by 8.6% in U.S. dollars. The translation of Elfa’s net sales from Swedish krona into U.S. dollars negatively impacted Elfa’s third party net sales by approximately $2.6 million in the third quarter of fiscal 2014.
• Gross margin was 59.6%, a decrease of 40 basis points compared to the third quarter of fiscal 2013, primarily due to a decrease in Elfa segment gross margin, which was due to a shift in sales mix.
• Selling, general and administrative expenses (“SG&A”) were $93.8 million, compared to $88.8 million in the third quarter of fiscal 2013. SG&A as a percentage of net sales increased 200 basis points primarily due to decreased leverage of fixed costs during the quarter as a result of lower comparable store sales, increased costs as a result of being a public company, and implementation of strategic initiatives.
• The Company ended the third quarter with 69 stores in 25 states and the District of Columbia. The Company opened two new stores in each of the third quarters of fiscal 2014 and fiscal 2013.
• Net interest expense decreased to $4.3 million from $5.8 million in the third quarter of fiscal 2013.
• The effective tax rate for the third quarter of fiscal 2014 was 34.2%, as compared to (39.9%) in the third quarter of fiscal 2013.

• Adjusted EBITDA was $23.4 million compared to $24.1 million in the third quarter of fiscal 2013, (see GAAP/Non-GAAP reconciliation table).

For the year-to-date (thirty-nine weeks) ended November 29, 2014, on a consolidated basis:

• Net sales were $557.6 million, up 4.9% as compared to year-to-date fiscal 2013. Net sales in The Container Store retail business were $493.0 million, up 5.7% as compared to year-to-date fiscal 2013. The increase in net sales was driven by new store sales and the extension of Our Annual elfa^® Sale in the fourth quarter of fiscal 2013, which led to an increase in merchandise delivered to customers during the thirty-nine weeks ended November 29, 2014 as compared to the thirty-nine weeks ended November 30, 2013. This more than offset the comparable store sales operating measure decline of 1.6%. Elfa’s third party net sales increased by 4.1% in Swedish krona; however, due to the depreciation of the Swedish krona against the U.S. dollar, Elfa’s third party net sales decreased by 0.9% in U.S. dollars. The translation of Elfa’s net sales from Swedish krona into U.S. dollars negatively impacted Elfa’s third party net sales by approximately $3.3 million in the thirty-nine weeks ended November 29, 2014.
• Gross margin was 58.9%, a decrease of 10 basis points compared to year-to-date fiscal 2013.
• Selling, general and administrative expenses (“SG&A”) were $275.0 million, compared to $257.9 million in year-to-date fiscal 2013. SG&A as a percentage of net sales increased 80 basis points primarily due to increased costs as a result of being a public company, implementation of strategic initiatives, and decreased leverage of fixed costs as a result of lower comparable store sales.
• Net interest expense decreased to $13.0 million from $16.9 million in year-to-date fiscal 2013.
• The effective tax rate was 22.5%, as compared to (32.4%) in year-to-date fiscal 2013.

• Adjusted EBITDA was $57.0 million compared to $56.8 million in year-to-date fiscal 2013, (see GAAP/Non-GAAP reconciliation table).

Balance sheet highlights as of November 29, 2014:

• Cash: $14.0 million
• Total debt: $364.1 million
• Total liquidity (cash plus availability on revolving credit facilities of $60.4 million): $74.4 million

Outlook

The Company is updating its annual fiscal 2014 guidance as follows:

After incorporating third quarter actual results and the recent strengthening of the U.S. dollar, full fiscal 2014 consolidated net sales are expected to be $785 - $795 million based on announced store openings and estimated comparable store sales growth of flat to slightly negative. Net income is expected to be $0.52 to $0.55 per diluted common share based on estimated diluted common shares outstanding of 49 million. The Company expects its tax rate for the full fiscal year 2014 on a GAAP basis to be approximately 31%, or 40% on an adjusted basis, after excluding one-time gains on the sale of an Elfa subsidiary and building, as well as non-recurring tax benefits. Adjusting for these items, adjusted net income is expected to be $0.41 to $0.44 per diluted common share based on estimated diluted common shares outstanding of 49 million. Adjusted EBITDA is expected to be $93 to $96 million.

The Company also expects comparable store sales to increase in the low-single digits in the fourth quarter of fiscal 2014.

Conference Call Information

A conference call to discuss third quarter fiscal 2014 financial results is scheduled for today, January 8, 2015, 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 containerstore.com in the investor relations section of the website.

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 (877) 870-5176 (international replay number is (858) 384-5517). The pin number to access the telephone replay is 13597595. The replay will be available through January 15, 2015 at 11:59 PM Eastern Time.

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 regarding our effort to increase store traffic, expectations regarding our three major initiatives – POP! Contained Home and TCS Closets, including timing of rollout and their expected impact on our business; expectations for new store openings, expectations on achieving our annual square footage growth goal, and anticipated financial performance and liquidity, including with respect to fourth quarter to date comparable store sales.

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 inability to successfully implement our three major initiatives – POP!, Contained Home and TCS Closets ; 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; our dependence on a single distribution center for all of our stores; our vulnerability to natural disasters and other unexpected events, including cyber attacks and inclement weather; 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; 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; and our indebtedness may restrict our current and future operations.

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 28, 2014, 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 (NYSE: TCS) is the nation’s leading retailer of storage and organization products and the only retailer solely devoted to the storage and organization category of retailing. The Company originated the concept of storage and organization retailing when it opened its first store in 1978. Today, the retailer has 69 store locations nationwide that each average 25,000 square feet. The Container Store has over 10,000 products to help customers save space and, ultimately, save them time. As the pace of modern life accelerates and being organized is not a luxury anymore but a necessity, The Container Store is devoted to making customers more productive, relaxed and happier by selling customized, complete solutions. Since its inception, the retailer has nurtured an employee-first culture and couples its one-of-a-kind product collection with a high level of customer service delivered by its highly trained organization experts. The Company has been named to FORTUNE magazine’s 100 Best Companies To Work For® – 15 years in a row. Visit containerstore.com for more information about store locations, the product collection and services offered. To find out more about The Container Store’s unique culture, Foundation Principles and devotion to Conscious Capitalism, visit the retailer’s blog at whatwestandfor.com or read Chairman & CEO Kip Tindell’s new book UNCONTAINABLE: How Passion, Commitment, and Conscious Capitalism Built a Business Where Everyone Thrives (available at The Container Store, uncontainable.com and anywhere books are sold).

¹ Based on fourth quarter-to-date comparable store sales as of January 7, 2015.

The Container Store Group, Inc. Supplemental Information - Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except share and per share amounts)
(unaudited)

The table below reconciles the non-GAAP financial measures of adjusted net income and adjusted net income per diluted common share with the most directly comparable GAAP financial measures of GAAP net income (loss) available to common shareholders and GAAP net income (loss) per diluted common share.

The table below reconciles the non-GAAP financial measure Adjusted EBITDA with the most directly comparable GAAP financial measure of GAAP net income (loss).

Note Regarding Non-GAAP Information

This press release includes financial measures that are not calculated in accordance with GAAP, including adjusted net income, adjusted net income per diluted common share, and Adjusted EBITDA. The Company has reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in a table accompanying this release. The Company believes that these non-GAAP financial measures not only provide its management with comparable financial data for internal financial analysis but also provide meaningful supplemental information to investors. Specifically, these non-GAAP financial measures allow investors to better understand the performance of the Company’s business and facilitate a meaningful evaluation of its fiscal 2014 quarterly and year-to-date diluted income (loss) per common share and actual results on a comparable basis with its fiscal 2013 quarterly and year-to-date results. In evaluating these non-GAAP financial measures, investors should be aware that in the future the Company may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. The Company’s presentation of non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. The Company has provided this information as a means to evaluate the results of its ongoing operations. Other companies in the Company’s industry may calculate these items differently than it does. Each of these measures is not a measure of performance under GAAP and should not be considered as a substitute for the most directly comparable financial measures prepared in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company’s results as reported under GAAP.