The Container Store Group, Inc. Announces Third Quarter Fiscal 2018 Financial Results

Consolidated Net Sales down 0.6%; TCS Net Sales up 0.5%

Comparable Store Sales down 0.8%; holiday departments down 15.8%
impacting overall Comparable Store Sales by negative 3.0%

Custom Closets up 4.5%, impacting overall Comparable Store Sales
by positive 1.8%

EPS of $0.19; Adjusted EPS of $0.07

Q4 Fiscal January* Comparable Store Sales up 9.4%

Updates Fiscal 2018 Outlook

COPPELL, Texas–(BUSINESS WIRE)–The Container Store Group, Inc. (NYSE:TCS) (the “Company”), today
announced financial results for the third quarter of fiscal 2018 ended
December 29, 2018.

  • Consolidated net sales were $221.6 million, down 0.6%. Net sales in
    The Container Store retail business (“TCS”) were $204.9 million, up
    0.5%. Elfa International AB (“Elfa”) third-party net sales were $16.7
    million, down 12.6% primarily due to foreign currency translation.
  • Comparable store sales for the third quarter of fiscal 2018 decreased
    0.8%, with holiday departments’ sales down 15.8%, contributing an
    approximate 3.0% decline and Custom Closets sales up 4.5%,
    contributing an approximate 1.8% increase.
  • Q4 Fiscal January* comparable store sales up 9.4%.
  • Consolidated net income and net income per share (“EPS”) were $9.3
    million and $0.19 compared to net income of $28.4 million and $0.59,
    respectively, in the third quarter of fiscal 2017. Adjusted net income
    per share (“Adjusted EPS”) was $0.07 compared to $0.11 in the third
    quarter of fiscal 2017 (see Reconciliation of GAAP to Non-GAAP
    Financial Measures table).
  • Adjusted EBITDA (see Reconciliation of GAAP to Non-GAAP Financial
    Measures table), was $21.8 million compared to $25.6 million in the
    prior year period.

“We had mixed performance in the third quarter. We were very pleased
with our Custom Closets business which once again delivered strong
results, generating 180 basis points of positive comparable store sales,
and our other product categories outside of holiday also generated
positive comparable store sales growth. However, our three holiday
departments, which represent a disproportionate amount of our sales in
this quarter, but only a small portion of our annual sales,
underperformed resulting in our comparable store sales decline for the
third quarter,” said Melissa Reiff, Chief Executive Officer. “We
continue to test and learn in a disciplined manner across the business,
especially in support of our number one strategic priority which is To
Own Custom Closets
. In light of the success we continue to see
around Custom Closets and the learnings from our Dallas flagship store
redesign, we are planning to remodel two existing stores this summer
with more focus and space allocated to Custom Closets and related
solutions to help our customers accomplish their projects. We also have
an exciting new product roadmap for our Custom Closets business that we
look forward to unveiling next month. In addition, we are making strides
with more targeted marketing campaigns that better leverage the growing
insights we have generated with our 7 million POP! Stars.”

Reiff added, “As we look to the final quarter of our fiscal year we are
encouraged with the strong start to our fourth quarter. We have updated
our fiscal 2018 outlook to reflect our year-to-date performance.”

_________________________

*Q4 Fiscal January consists of the 4-week period beginning
December 30, 2018 and ending January 26, 2019. The Company’s
fourth quarter of fiscal 2018 is not yet complete, and our
comparable store sales for fiscal January are not necessarily
indicative of the comparable store sales results that may be
expected to occur for the fourth quarter of fiscal 2018, or the
entire fiscal year 2018. Our comparable store sales results for
fiscal January are unaudited, and, because they do not represent
results for a completed fiscal quarter, they have not been
reviewed by our independent auditor.

 

New and Existing Stores

During the third quarter of fiscal 2018, the Company relocated its
Tysons Corner, Virginia store on October 20, 2018, and relocated its
Cherry Creek store in Denver, Colorado on November 10, 2018. The Company
has completed all of its planned store openings for fiscal year 2018.

Third Quarter Fiscal 2018 Results

For the third quarter (thirteen weeks) ended December 29, 2018:

  • Consolidated net sales were $221.6 million, down 0.6% as compared to
    the third quarter of fiscal 2017. Net sales at TCS were $204.9
    million, up 0.5%, with the increase driven by incremental sales from
    new stores, partially offset by a comparable store sales decrease of
    0.8%. Elfa third-party net sales were $16.7 million, down 12.6%
    compared to the third quarter ended December 30, 2017, due to the
    negative impact of foreign currency translation during the quarter
    which decreased third-party net sales by 7.4%, combined with lower
    sales in Nordic and Russian markets.
  • Consolidated gross margin was 58.7%, an increase of 10 basis points
    compared to the third quarter of fiscal 2017. TCS gross margin
    increased 30 basis points to 58.4%, primarily due to lower cost of
    goods associated with the Optimization Plan, partially offset by
    higher promotional activities and a negative impact from foreign
    currency. Elfa gross margin declined 390 basis points primarily due to
    higher direct materials costs attributable to a shift in product mix
    and a weaker Swedish krona.
  • Consolidated SG&A expense increased by 4.6% to $108.7 million in the
    third quarter of fiscal 2018 from $103.9 million in the third quarter
    of fiscal 2017. SG&A as a percentage of net sales increased 240 basis
    points. This was primarily due to the deleverage of occupancy and
    payroll costs associated with negative comparable store sales, as well
    as increased marketing expense in the third quarter of fiscal 2018
    associated with a shift in the timing of recognition of
    campaign-related marketing costs from the fourth fiscal quarter to the
    third fiscal quarter due to accounting changes.
  • Pre-opening costs decreased to $0.7 million in the third quarter of
    fiscal 2018 compared to $1.9 million in the third quarter of fiscal
    2017. The Company opened two relocation stores in the third quarter of
    fiscal 2018 and three stores, including one relocation store, in the
    third quarter of fiscal 2017.
  • Consolidated net interest expense decreased 17.7% to $6.0 million in
    the third quarter of fiscal 2018 from $7.3 million in the third
    quarter of fiscal 2017. In September 2018, the Company amended its
    Senior Secured Term Loan Facility, which decreased the applicable
    interest rate margins.
  • The effective tax rate was -72.8%, as compared to -330.1% in the third
    quarter of fiscal 2017. In the third quarter of fiscal 2018, the
    effective tax rate fell below the U.S. statutory rate primarily due to
    the finalization of the one-time transition tax on foreign earnings
    related to the Tax Cuts and Job Act (the “Tax Act”) enacted in fiscal
    2017. In the third quarter of fiscal 2017, the effective tax rate fell
    below the blended U.S statutory rate primarily due to the provisional
    estimate of the remeasurement of deferred tax balances as a result of
    the Tax Act.
  • Net income was $9.3 million, or $0.19 per share, in the third quarter
    of fiscal 2018 compared to net income of $28.4 million, or $0.59 per
    share in the third quarter of fiscal 2017. Adjusted net income was
    $3.5 million, or $0.07 per share, in the third quarter of fiscal 2018
    compared to adjusted net income of $5.1 million, or $0.11 per share in
    the third quarter of fiscal 2017 (see Reconciliation of GAAP to
    Non-GAAP Financial Measures table).
  • Adjusted EBITDA was $21.8 million in the third quarter of fiscal 2018
    compared to $25.6 million in the third quarter of fiscal 2017 (see
    Reconciliation of GAAP to Non-GAAP Financial Measures table).

For the year-to-date (thirty-nine weeks) ended December 29, 2018:

  • Consolidated net sales were $641.9 million, up 2.8% as compared to the
    first thirty-nine weeks of fiscal 2017. Net sales at TCS were $593.9
    million, up 3.6%, with the increase driven by incremental sales from
    new stores, combined with a comparable store sales increase of 1.5%.
    Elfa third-party net sales were $48.0 million, down 6.3% compared to
    the first thirty-nine weeks of fiscal 2017, primarily due to the
    negative impact of foreign currency translation which decreased
    third-party net sales by 5.3%.
  • Consolidated gross margin was 58.5%, an increase of 80 basis points
    compared to the first thirty-nine weeks of fiscal 2017. TCS gross
    margin increased 70 basis points to 58.0%, primarily due to lower cost
    of goods associated with the Optimization Plan, partially offset by
    higher promotional activities and increased costs associated with
    shipping services. Elfa gross margin declined 310 basis points
    primarily due to higher direct materials costs attributable to a shift
    in product mix and a weaker Swedish krona.
  • Consolidated SG&A expense increased by 4.6% to $320.9 million in the
    first thirty-nine weeks of fiscal 2018 from $306.9 million in the
    first thirty-nine weeks of fiscal 2017. SG&A as a percentage of net
    sales increased 90 basis points. The increase was primarily
    attributable to deleverage of occupancy costs, higher payroll costs,
    and increased marketing expense associated with the branding campaign
    launch in the second quarter of fiscal 2018.
  • Pre-opening costs decreased to $1.9 million in the first thirty-nine
    weeks of fiscal 2018 compared to $4.7 million in the first thirty-nine
    weeks of fiscal 2017. The Company opened four new stores, including
    two relocations in the thirty-nine weeks ended December 29, 2018, and
    five new stores, including one relocation in the first thirty-nine
    weeks ended December 30, 2017.
  • Other expenses decreased to $0.3 million in the first thirty-nine
    weeks of fiscal 2018 compared to $4.9 million in the first thirty-nine
    weeks of fiscal 2017. The decrease is primarily due to severance costs
    incurred in the first thirty-nine weeks of fiscal 2017 to implement
    the Optimization Plan.
  • Consolidated net interest expense increased 22.4% to $21.3 million in
    the first thirty-nine weeks of fiscal 2018 from $17.4 million in the
    first thirty-nine weeks of fiscal 2017 primarily due to the amendment
    of our Senior Secured Term Loan Facility in the second quarter of
    fiscal 2017, which increased the applicable interest rate margins.
  • The effective tax rate was 3135.6%, as compared to 429.3% in the first
    thirty-nine weeks of fiscal 2017. In the first thirty-nine weeks of
    fiscal 2018, the effective tax rate rose above the U.S. statutory rate
    due to the finalization of the one-time transition tax on foreign
    earnings and other items associated with the Tax Act, the recognition
    of a tax benefit for the remeasurement of deferred tax balances as a
    result of a change in the Swedish tax rate in fiscal 2018, combined
    with the impact of a year-to-date pre-tax loss position. In the first
    thirty-nine weeks of fiscal 2017, the effective tax rate rose above
    the U.S. statutory rate due to the provisional estimate of deferred
    tax balances related to the Tax Act, combined with the impact of a
    year-to-date pre-tax loss position.
  • Net income was $5.8 million, or $0.12 per share, in the first
    thirty-nine weeks of fiscal 2018 compared to net income of $19.8
    million, or $0.41 per share in the first thirty-nine weeks of fiscal
    2017. Adjusted net income was $4.3 million, or $0.09 per share, in the
    first thirty-nine weeks of fiscal 2018 compared to adjusted net income
    of $5.2 million, or $0.11 per share in the first thirty-nine weeks of
    fiscal 2017 (see Reconciliation of GAAP to Non-GAAP Financial Measures
    table).
  • Adjusted EBITDA was $58.6 million in the first thirty-nine weeks of
    fiscal 2018 compared to $58.5 million in the first thirty-nine weeks
    of fiscal 2017 (see Reconciliation of GAAP to Non-GAAP Financial
    Measures table).

Balance sheet and liquidity highlights:

       
(In thousands)

December 29,
2018

December 30,
2017

Cash $ 20,969 $ 22,653
Total debt, net of deferred financing costs $ 304,913 $ 314,103
Liquidity (1) $ 90,056 $ 102,636
Free cash flow (2) $ (3,505 ) $ 19,291

_________________________

(1)  

Cash plus availability on revolving credit facilities.

(2)

Represents fiscal thirty-nine week periods only. See
reconciliation of GAAP to Non-GAAP Measures table.

 

Outlook

The Company updated its previously provided outlook for fiscal 2018 as
follows:

     
  Current Outlook
Net sales (1) Lower end of $885 million to $895 million
Net new store openings 4, including 2 relocations
Comparable store sales Higher end of up 1.5% to up 2.5%
Net income per common share (2) Low end to slightly below $0.44 to $0.54
Adjusted net income per common share (3) Low end to slightly below $0.41 to $0.51
Assumed tax rate (4) 30%
Estimated share count 49 million

_________________________

(1)  

Updated outlook reflects an $8 million currency headwind due to
the continued weakening of the SEK to USD and the related impact
of foreign currency translation on the Company’s consolidated
statement of operations.

(2)

Includes $4.9 million of consulting costs to complete the
fiscal 2017 Optimization Plan, or $0.08 per diluted share, which
was incurred in the first quarter of fiscal 2018, as well as an
expected $2 million reduction in interest expense, or $0.03 per
share, related to the Senior Secured Term Loan Facility amendment
and approximately $2 million in debt extinguishment costs. Also
includes a $0.12 per share benefit related to the finalization of
the one-time transition tax on foreign earnings recognized in the
third quarter of fiscal 2018.

(3)

See Reconciliation of GAAP to Non-GAAP Financial Measures
Table. Also reflects aforementioned interest expense savings of $2
million or $0.03 per share.

(4)

Does not include the benefit related to the finalization of the
one-time transition tax on foreign earnings recorded in the third
quarter of fiscal 2018, or the tax benefit recorded in the first
quarter of fiscal 2018 as a result of a reduction in the Swedish
tax rate (see footnote “e” in Reconciliation of GAAP to Non-GAAP
Financial Measures Table). Including these items would result in
an expected GAAP effective tax rate of approximately 1% for fiscal
2018.

 

Recent Management Announcements

On January 24, 2019 the Company submitted an 8-K filing announcing that
Kip Tindell will transition from Chairman of the Board to Chairman
Emeritus and Melissa Reiff, Chief Executive Officer, will succeed him
and add Chairman of the Board to her role, effective as of the Company’s
2019 Annual Meeting.

It was also disclosed in the filing that Sharon Tindell, President and
Chief Merchandising Officer, will retire from her role as President and
Chief Merchandising Officer and transition to President Emeritus at the
conclusion of the 2019 Annual Meeting. At that time, John Gehre, who
joined The Container Store in June 2018 as Executive Vice President of
Merchandising and Planning, will succeed Ms. Tindell as the Company’s
Chief Merchandising Officer.

Ms. Reiff commented, “Recently we announced some exciting, yet
bittersweet news. Kip and Sharon Tindell, who have helped build our
great company since its founding in 1978, will be retiring in August of
this year becoming Chairman Emeritus and President Emeritus
respectively. We, The Container Store, celebrated our 40th anniversary
last July, and Kip and Sharon have been here every step of the way. As
my dear friends and colleagues, I’m thrilled for them to be able to
spend more time together and move to the next chapter of their lives.
Thank you, Kip and Sharon, for building an incredible and sustainable
company, and for your love and generosity.”

Conference Call Information

A conference call to discuss third quarter fiscal 2018 financial results
is scheduled for today, February 5, 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 13686634.
The replay will be available until March 5, 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
remodel certain of our stores; anticipated financial performance and tax
rate for fiscal 2018; and anticipated comparable store sales for Q4
Fiscal January.

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 comparable store sales
results for Q4 Fiscal January are not necessarily indicative of the
comparable store sales results that may be expected to occur for the
fourth quarter of fiscal 2018 or the entire fiscal year 2018, and our
comparable store sales results for such periods may be lower than our
comparable store sales results for fiscal January; 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 31, 2018, 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 — a concept they originated in 1978.
Today, with locations nationwide, the retailer offers more than 10,000
products designed to save space and time, a suite of custom closet
systems and an array of digital shopping services. Visit www.containerstore.com
for more information about store locations, the product collection and
services offered. Visit www.containerstore.com/blog
for real solutions from the really organized 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 Thirteen Weeks Ended Thirty-Nine Weeks Ended
per share amounts) (unaudited)       December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017
Net sales $ 221,637 $ 222,986 $ 641,913 $ 624,464
Cost of sales (excluding depreciation and amortization)   91,580     92,425     266,510     263,919  
Gross profit 130,057 130,561 375,403 360,545
Selling, general, and administrative expenses (excluding
depreciation and amortization)
108,688 103,894 320,949 306,866
Stock-based compensation 632 585 1,987 1,589
Pre-opening costs 691 1,872 1,918 4,676
Depreciation and amortization 8,887 9,477 27,352 28,524
Other expenses 80 751 297 4,908
(Gain) loss on disposal of assets   (324 )   83     (284 )   236  
Income from operations 11,403 13,899 23,184 13,746
Interest expense, net 6,008 7,300 21,293 17,398
Loss on extinguishment of debt           2,082     2,369  
Income (loss) before taxes 5,395 6,599 (191 ) (6,021 )
Benefit for income taxes   (3,926 )   (21,780 )   (5,989 )   (25,848 )
Net income $ 9,321   $ 28,379   $ 5,798   $ 19,827  
 
Net income per common share — basic and diluted $ 0.19 $ 0.59 $ 0.12 $ 0.41
 
Weighted-average common shares — basic 48,139,582 48,067,754 48,139,132 48,057,974
Weighted-average common shares — diluted 48,381,455 48,167,882 48,407,337 48,128,682
 
         
The Container Store Group, Inc.
Consolidated balance sheets
 
December 29, March 31, December 30,
(In thousands) 2018 2018 2017
Assets (unaudited) (unaudited)
Current assets:
Cash $ 20,969 $ 8,399 $ 22,653
Accounts receivable, net 29,549 25,528 29,548
Inventory 116,006 97,362 110,391
Prepaid expenses 8,877 11,281 11,668
Income taxes receivable 640 15 1,450
Other current assets   10,404   11,609   10,338
Total current assets 186,445 154,194 186,048
Noncurrent assets:
Property and equipment, net 151,860 158,389 160,836
Goodwill 202,815 202,815 202,815
Trade names 226,996 229,401 230,379
Deferred financing costs, net 259 312 329
Noncurrent deferred tax assets, net 1,898 2,404 2,308
Other assets   1,749   1,854   1,684
Total noncurrent assets   585,577   595,175   598,351
Total assets $ 772,022 $ 749,369 $ 784,399

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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