The Container Store Group, Inc. (NYSE: NYSE:TCS) faced a challenging economic landscape in the second quarter of 2024, as reflected in their recent earnings call. CEO Satish Malhotra and CFO Jeff Miller reported a 10.5% decline in consolidated net sales, which totaled $196.6 million. Despite a decrease in comparable store sales and a general merchandise segment drop, the company introduced new products and strategic partnerships aimed at enhancing customer experience and improving financial stability.
Key Takeaways
- Consolidated net sales fell by 10.5% year-over-year to $196.6 million.
- Comparable store sales decreased by 12.5%.
- The introduction of new products like the Everything Organizer Drop-Front Shoe Box and a wood closet-in-a-box system.
- Strategic partnership with Beyond to leverage data analytics for sales conversion and product distribution.
- Gross margin decreased to 55.5%; net loss improved to $16.1 million.
- Total debt stood at $232 million, with the company actively seeking to amend or refinance credit facilities.
- Elfa's gross margin increased due to price hikes; SG&A expenses decreased by $4.1 million.
- Inventory management led to a 12% year-over-year inventory decrease.
- No financial guidance provided, but a challenging start to Q3 acknowledged.
Company Outlook
- The Container Store is focusing on new product introductions and strategic partnerships to navigate through economic challenges.
- The company is working with lenders to amend or refinance credit facilities to strengthen its financial position.
- No specific financial guidance was provided due to the uncertain economic environment.
Bearish Highlights
- A significant decline in consolidated net sales and comparable store sales indicates a tough retail environment.
- The company is facing challenges in meeting leverage ratio covenants, highlighting financial pressures.
- Increased net interest expense and effective tax rate suggest higher costs of borrowing and taxation.
Bullish Highlights
- Introduction of new products and strategic partnership with Beyond could lead to improved sales conversion and expanded product distribution.
- Tighter inventory management reflects a focus on operational efficiency.
- The amendment of the term loan facility to waive the leverage ratio covenant for Q2 provides temporary relief from financial covenants.
Misses
- The company recorded a net loss of $16.1 million, although this was an improvement from the previous year's loss.
- The gross margin declined to 55.5%, and adjusted EBITDA decreased significantly.
- Free cash flow usage increased, indicating more cash was used in operations and investments compared to the prior year.
Q&A Highlights
- The company is optimistic about the Everything Organizer collection, with plans to introduce additional SKUs and international licensing due to strong demand.
- Custom Spaces, particularly the Elfa product line, remains a primary focus despite longer installation times compared to the Preston line.
- A split campaign strategy for Elfa aims to create urgency and improve Q3 performance following a challenging start.
The Container Store continues to adapt its strategy to the evolving retail landscape, with an emphasis on product innovation and strategic partnerships. While the company navigates financial challenges and a competitive market, it remains focused on improving operational efficiency and customer experience. Investors and stakeholders will be watching closely to see how these efforts translate into financial performance in the upcoming quarters.
InvestingPro Insights
The Container Store Group's recent financial performance aligns with several InvestingPro metrics and tips, providing additional context to the company's current situation. According to InvestingPro data, TCS has a market capitalization of $18.09 million, reflecting its position as a smaller player in the retail sector. This relatively low market cap is consistent with the company's reported challenges and declining sales.
InvestingPro Tips highlight that TCS is trading at a low Price / Book multiple of 0.22, which could indicate that the stock is undervalued relative to its assets. However, this should be considered alongside other factors such as the company's profitability and growth prospects. The stock's poor performance is evident in the InvestingPro data, which shows a significant 75.47% year-to-date price decline and a 69.6% drop over the past year.
The company's financial struggles are further underscored by InvestingPro Tips noting that TCS is not profitable over the last twelve months and analysts do not anticipate profitability this year. This aligns with the reported net loss and declining sales in the earnings call. Additionally, the revenue growth of -14.85% over the last twelve months corroborates the challenging retail environment mentioned in the article.
It's worth noting that InvestingPro offers 12 additional tips for TCS, providing investors with a more comprehensive analysis of the company's financial health and market position. These insights can be valuable for those looking to make informed decisions about TCS stock in light of its current challenges and strategic initiatives.
Full transcript - Container Store Group Inc (TCS) Q2 2024:
Operator: Greetings and welcome to Container Store's Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill, Investor Relations. Caitlin. Thank you. You may begin.
Caitlin Churchill: Good afternoon, everyone, and thanks for joining us today for the Container Store's second quarter fiscal year 2024 earnings results conference call. Speaking today are, Satish Malhotra, Chief Executive Officer; and Jeff Miller, Chief Financial Officer. After Satish and Jeff has made their formal remarks, we will open the call to questions. Before we begin, I would like to remind everyone that certain matters discussed in today's conference call are forward-looking statements relating to future events, management plans and objectives for the business, including the transaction with Beyond and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these follow-looking statements. The risk factors that may affect results are referred to in the Container Store’s press release issued today and in our annual report on Form 10-K filed with the SEC on May 28, 2024 as updated by our quarterly reports on Form 10-Q and other public filings with the U.S. Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call, and the Container Store does not undertake any obligation to update the forward-looking statements. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in the Container Store's press release issued today. A copy of today's press release and investor deck may be obtained by visiting the Investor Relations page of the website at www.containerstore.com. I will now turn the call over to Satish. Satish?
Satish Malhotra: Thanks, Caitlin, and thank you all for joining us. I'll begin today's discussion by with a review of our second quarter performance and progress we are making to drive improvements across the business, including our exciting new strategic partnership with Beyond. Then Jeff will discuss the details of the quarter’s financial results before we open up the call to questions. While we are still contending with a challenging macro and industry backdrop, we are encouraged by the improvements we are seeing in our topline trends as compared to earlier this year. For the second quarter, year-over-year comparable sales declined 12.5%. However, we continue to see relative outperformance in custom spaces and achieved another quarter of sequential improvement in general merchandize trends. Traffic also improved, partly due to increased promotional activity, which while putting pressure on profitability allowed us to move slower moving products. This also enabled us to engage more effectively with customers seeking compelling value offerings. Within general merchandize, we believe our efforts to stabilize the business are gaining traction particularly through improving in-stock levels of our core SKUs that continue to resonate with customers while also delivering innovation and newness across the assortment. Earlier this fall, we introduced our new, Everything Organizer Drop-Front Shoe Box at Sneaker Con, the world’s premiere sneaker event. This elevated version of a longtime customer favorite features crystal clear, 360-degree views a magnetic closure, four corner feet for stable stacking and a tuck-away door for easy access and was met with great enthusiasm at the event. As we move into the holiday season, we look forward to showcasing this new product and this year's curated selection of stocking stuffers, gift wraps, boxes and storage solutions. While we are optimistic about our holiday campaign, we have taken a more disciplined approach with tighter inventory buys around our seasonal items, maintaining our focus on top performing SKUs. Post-holiday season, we are excited about the expected front feature display of our highly sought after Everything Organizer collection developed in collaboration with professional organizer, this collection is designed to optimize any space, simplify organization and seamlessly complements any office space. We plan to expand the product line with additional SKUs for the kitchen and closet, as well as introducing it to the back category. Additionally, we entered into a new licensing partnership with our manufacturer, which is expected to expand the Everything Organizer collection internationally beginning in the new calendar year. Now, turning to Custom Spaces. As noted in our press release, our reported comparable store sales metric reflect only delivered sales. However, when we assess comp trends, based on operational demand, Custom Spaces’ orders placed, but not yet delivered, we are up 4.5%, compared to the prior year. This relative strength in Custom Spaces is partly due to the newness we have introduced over the past few quarters. For example, we are seeing more and more customers choosing Garage+ by Elfa to transform their cluttered garages into organized, aesthetically pleasing spaces that meets their storage needs. Similarly, Décor+ by Elfa continues to also gain traction, offering innovative modular wall hanging solutions with elevated design options, that create a built-in look at exceptional value, while maximizing space. Last week, we launched a new campaign partnership with fashion designer and TV personality, Tan France where he transformed two of his kids spaces with Elfa Décor+ and the necessary general merchandize completion products, highlighting the durability and versatility of the line. Looking ahead, we are excited to continue rolling out innovative products for Custom Spaces. Our next launch will introduce a more affordable premium, wood closet-in-a-box system designed for easy Do-it-Yourself installation. Building on our success and expertise in Custom Spaces and Elfa Metal Box Solutions, this new product offers nine versatile configurations for closets up to a 6 feet. We believe customers will appreciate its elevated premium design and flexible options throughout their homes. Organization should be effortless and this Do-it-Yourself solution empowers customers to creatively personalize how they organize their spaces. With the recent decline in interest rates, we are also optimistic about the future of our premium Custom Space offering Preston, which continues to demonstrate strength despite the current macroeconomic climate. We are pleased to see improvements in our conversion rates for Preston, as well as in our ability to sell more spaces at a higher average space value when compared to the same period last year. Additionally, we are looking forward to the newly announced strategic partnership with Beyond. We believe this partnership would strengthen our capabilities by leveraging Beyond’s data analytics to improve our lead management and conversion model, while offering customers additional financial solutions to support their purchases. This is just one aspect of the partnership with Beyond that we believe will enhance our capabilities, expand our reach and deepen our relationship with customers. Through the licensing of the iconic Bed Bath and Beyond brand, we expect to enhance our store formats and general merchandize offering to drive increased traffic across our businesses. Our customers are also expected to benefit from Beyond’s global loyalty program, multiple payment solutions and ancillary insurance and protection products. In addition, we plan to utilize Beyond's growing data platform to enhance our marketing strategies and reduce customer acquisition and retention costs. We plan to integrate our Custom Spaces’ offering across Beyond’s portfolio of e-commerce banners, as well as other ventures with Bed Bath and Beyond future license stores exist thereby creating expanded distribution of our iconic Custom Spaces offering. I would now like to take the opportunity to acknowledge our teams for their unwavering commitment and exceptional customer service. Despite the challenging economic conditions, our teams, from the support center and distribution centers to our designers and stores have remained dedicated and focused on advancing our strategy and supporting initiatives. While external economic factors are beyond our control, our focus remains on managing what we can, providing the excellent customer service we are known for, controlling expenses and capital, progressing on our initiatives, including stabilizing the general merchandize business and positioning ourselves to win the market conditions become more favorable. And now, I'll turn the call over to Jeff to discuss our financial results in more detail. Jeff?
Jeff Miller: Thank you, Satish, and good afternoon, everyone. As Satish reviewed, while still challenged, our second quarter results reflect another quarter of sequential improvement, compared to the prior quarter with ongoing relative strength within Custom Spaces. For the second quarter, consolidated net sales decreased 10.5% year-over-year to $196.6 million. By segment, net sales for The Container Store retail business were $186.8 million, a 10.4 decrease compared to $208.5 million in the prior year. The decrease is inclusive of a comp store sales decrease of 12.5%. Driven primarily by the 18.7% decline in our general merchandize categories, which negatively impacted comp store sales by 1,200 basis points. Custom Space comp store sales decreased 1.5%, compared to last year and negatively impacted comp store sales by 50 basis points. As a reminder, our comp store sales are reported on a GAAP basis and represent delivered sales. When looking at Custom Spaces’ comps, from an operational demand standpoint, orders placed, but not delivered were up. 4.5% in Q2, representing a modest year-over-year trend improvement from the 2.9% we saw for the same metric in Q1, It has been a while since we have referenced this operational demand comp metric. The delta between operational demand and reported comps for Custom Spaces this quarter is evidenced by the increased unearned revenue from $18.3 million last year to $21.8 million this year, largely as a result of a year-over-year shift in timing of Custom Space orders placed versus delivered to customers. Sales from non-comparable stores were a net benefit to total TCS sales of 210 basis points. For the second quarter of fiscal 2024, our online channel decreased 13.7% year-over-year and our website generated sales, which includes curbside pickup decreased 7.9%, compared to last year. Website generated sales represented a total of 22.4% of TCS net sales in Q2, which is 60 basis points higher than 21.8% in Q2 of last year. Elfa third-party net sales of $9.8 million decreased 12.9%, compared to the second quarter of fiscal 2023. Excluding the impact of foreign currency translation, Elfa third-party net sales decreased 16.2% year-over-year primarily due to a decline in sales in the Nordic markets. From profitability standpoint, our consolidated gross margin for Q2 decreased 210 basis points to 55.5%, compared to 57.6% last year. By segment, TCS gross margin decreased 260 basis points, compared to last year, primarily due to increased promotional activity, and unfavorable mix in Q2 of this year, partially offset by freight tailwinds. Elfa gross margin increased 250 basis points, compared to last year, primarily due to price increases to customers. Consolidated SG&A dollars decreased $4.1 million or 3.7% to $105.2 million, compared to $109.3 million in Q2 last year. As a percentage of net sales, SG&A increased 380 basis points year-over-year to 53.5%. The increase is primarily due to deleverage of fixed cost associated with lower sales and increased marketing spend in the second quarter of fiscal 2024. In the second quarter, we recorded a $3.4 million long live asset impairment related to one underperforming store, and a store, which had been identified for closure in fiscal 2024. Also, in the second quarter, we recorded $3.5 million of other expenses, which is primarily due to legal and professional fees related to the strategic alternatives review, as well as employee retention costs, incurred in the second quarter of fiscal 2024. Our net interest expense in the second quarter of fiscal 2024 increased to $6 million, compared to $5.2 million in the second quarter of last year. The year-over-year increase is primarily due to higher borrowings on the revolving credit facility and higher year-over-year interest rates on our term loan during Q2. The effective tax rate for the second quarter was 21.5%, compared to negative 2.6% in the second quarter of last year. The increase in the effective tax rate was primarily related to the impact of discrete items on a pre-tax loss in the second quarter of fiscal 2023, which drove the effective tax rate negative. Net loss for the quarter on a GAAP basis was $16.1 million or $4.85 per share, as compared to a GAAP net loss of $23.7 million or $7.17 per share in the second quarter of last year. Adjusted net loss was $10.7 million or $3.223 per share, as compared to last year's adjusted net income of $0.4 million or $0.11 per diluted share. Our adjusted EBITDA decreased to $3.9 million in the second quarter of this year, compared to $17 million in Q2 last year. Turning to our balance sheet, we ended the quarter with $66.1 million in cash, $232 million in total debt and total liquidity, including availability on our revolving credit facilities of $96.5 million. As you know, we have faced challenges due to softening demand and increased price sensitivity affecting our financial performance. In addition to the significant expenses incurred as a part of our review of strategic alternatives and refinancing of our credit facilities, all of which have placed pressure on our ability to comply with the leverage ratio covenant in our term Loan facility. As previously communicated, earlier this month, we amended our senior secured term Loan facility to waive the testing of consolidated leverage ratio covenant, for the second quarter of fiscal 2024 among other things. In addition, our revolving credit facility under which we had $71 million outstanding at the end of the quarter matures in one year. In light of these factors you will see the addition of growing concern language in our Form 10-Q for the second quarter of fiscal 2024. We are actively collaborating with our lenders to amend or refinance these facilities and consummate the equity investment transaction with Beyond, which we believe would improve our financial situation. We ended the quarter with consolidated inventory down 12%, compared to the second quarter of last year. The decline reflects a concerted effort to tightly manage inventory in the current environment and is primarily the result of fewer inventory units year-over-year and lower freight cost held in inventory. At TCS, on a unit basis, on-hand inventory was down approximately 17%, year-over-year, driven by general merchandize categories. Capital expenditures were $15.3 million in the first half of fiscal 2024 versus $22 million in the first half of fiscal 2023. As a reminder, we plan to spend approximately $20 million to $25 million of capital in fiscal 2024. We're continuing to prioritize investments in our stores and that - technology this year. We've opened one store, closed one store during the second quarter of fiscal 2024. For the remainder of fiscal 2024, we plan to open two more new stores and have made the strategic decision to close our store in Chicago at Chicago South Loop. We closely monitor the productivity of our stores and decided it was not company’s best interest to renew the lease that ends in February of 2025. Free cash flow used in the first half of fiscal 2024 was $10.6 million versus $1.3 million in the first half of fiscal 2023. As noted in our press release, we're not providing financial guidance at this time. With respect to Q3, we have seen a challenging start to the period largely due to the difficult comparison to last year, which benefited from these very successful Elfa Anniversary Sale. That said, we have continued to see sequential improvement in general merchandize. And as Satish reviewed, we believe we are taking the right steps to stabilize that business. We are controlling the aspects of the business we can control and continue to work diligently to aim to position the company for long-term success. This concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Kate McShane with Goldman. Please proceed with your question.
Kate McShane: Thanks for taking your questions. I wondered if I could start with the mix within general merchandize. Maybe what is trending better if there's anything that's trending worse and if you could give a little bit more commentary on quarter-to-date, which I think you said was sequentially a little bit better.
Satish Malhotra: Yeah, hi Kate, I'll take the first part of that question. Definitely, we are seeing sequential improvement in our general merchandize and that’s primarily, thanks to our getting back in stock in our core SKUs. We’ve seen a positive momentum in what a higher sense for example, now that we're back in stock there, but also seeing tremendous growth in our Everything Organizer connection, as I had mentioned earlier where it continues to do well, it was actually up 14% over the prior quarter and up 50%, compared to the same period last year and that’s why we are super excited about our ability to be able to have the Everything Organizer have a front feature expression post-holiday where we can continue to introduce those additional SKUs in kitchen and closet, as well as the new launch that we have planned within back. It's actually one of the reasons we decided to also work with our vendor to now license the Everything Organizer collection internationally, because we think that there is, decisively a significant demand outside of the US into other countries, as well.
Kate McShane: Okay. Thank you. And then I had a mechanical question with regards to the demand comp. It sounds like the demand comp for Custom Spaces improved sequentially. Could you maybe talk about when your comp catches up to the demand comp? Or maybe better adds like what is typically the delivery time or the amount of time between the order placed and order delivered?
Jeff Miller: Yeah, Kate. This is Jeff. Thanks for the question. When we look at the Custom Space order, it depends on the particular line we drive your average install timeframe. I would say in Elfa product line would be anywhere between two weeks to a month, It could be longer depending on the customer's project timeline. But Preston is a little bit longer of a timeline typically that's around 4 to 6 weeks from the order placement time.
Kate McShane: Okay. And is Preston becoming a bigger – Preston becoming a bigger part of the next part of the reason why you're seeing this gap occur again?
Jeff Miller: No, I wouldn't necessarily say that Preston is becoming a bigger part of the mix at this point yet. Elfa is still the large part of our Custom Spaces operating and typically when we see growth in the business especially at the end of the quarter we’ll see an increase of our unearned revenue or prepaid sales, at the end of the quarter like that.
Kate McShane: Okay. Okay. And then, my last question is just with regards to the Elfa, you mentioned the challenging start to Q3, because you're lapping the successful of the Elfa Anniversary Sale. Can you just remind us what you are doing with the Elfa brand this year versus last year?
Satish Malhotra: In terms of the campaigns that we have?
Kate McShane: Yes.
Satish Malhotra: Yes. This is Satish. So, as we mentioned, we decided to actually split the Elfa campaign into kind of two halves, which is a new way for us to create kind of a sense of urgency than we have normally done in the past where we would essentially just have one long campaign. The durations of the campaigns are actually the same in terms of the number of days, but we just put a pause in the middle. So that we could conclude kind of part A of the campaign as we were ramping up the end of the quarter and then weigh the period before we then start the second part of the campaign. In addition, as a reminder, this time last year, we will also, we had an anniversary sale and so we are comping the deduction, a difference of the discount rate.
Kate McShane: Thank you.
Satish Malhotra: Absolutely.
Operator: We have reached the end of our question and answer session. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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