The Container Store Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to The Container Store's First Quarter 20 24 Earnings Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill.

Operator

Please go ahead, ma'am.

Speaker 1

Good afternoon, everyone, and thanks for joining us today for The Container Store's Q1 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 have 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's plans and objectives for the business 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 forward looking statements.

Speaker 1

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 ks 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 their forward looking statements. Finally, the speakers may refer to certain adjusted or non GAAP financial measures on this call.

Speaker 1

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 atwww.containerstore.com. I will now turn the call over to Satish. Satish?

Operator

Thanks, Caitlin,

Speaker 2

and thank you all for joining us. I'll begin today's discussion with a review of our Q1 performance, and then Jeff will discuss the details of our financial results before we open up the call to questions. Now turning to our Q1 results. While we continue to contend with a challenging macro environment, we were encouraged by the sequential improvement in year over year sales trend we delivered in the Q1 compared to the Q4. Comparable sales declined 13.7% for the Q1 and reflected sequential month over month improvement in both general merchandise and custom spaces as the quarter progressed with notable improvements in June.

Speaker 2

General Merchandise experienced a 21.8% decline in comparable sales, while Custom Spaces delivered a positive 1.9% increase in comparable sales for the quarter. We attribute the change in Custom Spaces sales trajectory to the enthusiastic response to our Garage Plus and the Core Plus by Alpha launches and our premium wood based Preston line, which had the best sales order quarter in its history. Additionally, we saw a 300 basis point improvement in our gross margin rate due to reduced freight costs, continued disciplined promotional activity and favorable product mix. With respect to profitability, adjusted loss per share was $0.26 for the Q1 compared to a $0.21 loss in Q1 of fiscal 2023, which was a result of deleverage of fixed costs on lower sales despite the gross margin improvement. I wanted to take a moment now to recognize our teams for their continued dedication and outstanding customer service.

Speaker 2

Despite the challenging macroeconomic backdrop, our teams from the support center to the distribution centers to our stores remain committed and focused on positioning The Container Store for success. Their hard work was rewarded this quarter by delivering exceptional net promoter scores across our retail stores, custom spaces and buy online pickup in store orders. Based on our latest survey work, we once again confirmed consumers continue to have an undeniable need for our unique offering. We learned that one half of Americans believe they have at least one room in their home that is overwhelmed with clutter and that the average American wishes they had 3 more rooms in their home to have space for all their belongings. Our custom space systems, complementary organizing solutions and in home services gives customers the power to overcome their clutter and utilize the existing space they have in ways they did not know possible.

Speaker 2

Additionally, we recently hosted our 2nd Vendor Summit, which drove incredible energy and excitement across our vendor base. During the summit, we focused on our strategies, including deepening our relationship with customers, expanding our reach and strengthening our capabilities, while also highlighting our near term priorities for fiscal 2024 that we discussed on our Q4 earnings call. These include growing our custom spaces business through expanding our Alpha and Preston offerings, stabilizing our general merchandise business and increasing brand awareness. Following the summit, we believe there is a renewed level of conviction in our brand from our partners who are thrilled to see our ongoing focus on our core products. In addition, they are looking forward to working closely with us on expanding our core offering and providing complementary solutions that complete our Custom Spaces.

Speaker 2

As I mentioned, we were pleased to see Custom Spaces deliver a positive comp for the Q1, especially given the prevailing macro related headwinds. Our design specialists are getting better and better at leveraging our improved design tools and converting leads, especially for our Preston line, which delivered a record quarter as I mentioned earlier. We continue to see opportunity to double our Preston business by improving conversion rates and believe we are on a path to achieving this over time. We're also generating great engagement through our enhanced product offering with Alpha. Following the launch of Garage Plus by Alpha last fall, we kicked off a marketing campaign in the spring to bring awareness to our newest line.

Speaker 2

As part of this campaign, we collaborated with Jason and Kylie Kelsey, as well as Michael Sebastian, Editor in Chief of Esquire to transform their garages into calming spaces that are now both functional and aesthetically pleasing. These real life transformation resonated with both our customers and their audiences across marketing channels and resulted in notable media coverage. The positive trends and reception we are seeing for Garage Plus can be attributed to the marketing efforts we launched in April. During the quarter, we were excited to finally reveal further innovation in our modular wall hanging cuckling space offering with the launch of Decor Plus by Alpha in June. This new system gives customers elevated options like LED lighting, back panels that give their space a built in look and the fully enclosed birch wood drawers they have been asking for.

Speaker 2

It comes at an exceptional value and in a system that they can do it themselves or have professionally installed. While still early days, the launch has been well received by our customers and is generating a lot of excitement in stores. The initial response to these recent alpha launches only strengthens our belief that we can grow custom spaces from 40% of sales to 60% of sales over time. We'll continue to expand and innovate across our assortment, build and strengthen our in home and in store design services and sharpen the focus of our marketing efforts to drive brand awareness for our differentiated solution oriented offering. Turning next to the work in stabilizing our general merchandise business.

Speaker 2

With 94% of our customers shopping general merchandise, it is essential that we focus on ensuring we are always in stock in the critical traffic driving core SKUs, while still infusing newness and innovation. This includes new core premium products to complement custom spaces plus discovery products to build a basket. In our stores, we are reallocating space and inventory to be more effective, more reflective of our core storage and organizing offering, which is resulting in significant improvements in productivity. During the quarter, we relocated our downtown San Francisco store and opened a new location in Springfield, Virginia. The new store in Springfield saw a great response with more than 100 people waiting in line on the 1st day and the relocation in San Francisco is off to a strong start as well.

Speaker 2

Most recently following quarter end, we opened another new store in Virginia in Ashburn. Again, our team experienced a robust welcome and excitement from the community with more than 100 people waiting in line on opening day. We're still on track to open 2 new stores in Florida later this year and look forward to a similar reception from those communities. In summary, while we cannot control the current macro environment, we are pleased with the progress we're making on our initiatives and continue to believe in the opportunities ahead as more and more customers realize the power of organization. We are controlling the controllables, tightly managing expenses and capital while strengthening our competitive position, all of which will serve us well when the market condition normalizes.

Speaker 2

The board and management continue to work on plans to refinance our credit facility and concurrently are continuing to review strategic alternatives and in effort to ensure we are maximizing both the potential of the business and returns for shareholders. We will not be taking any questions regarding the strategic review process at the end of the call nor do we intend to comment further until disclosure is deemed necessary or advisable. And now I'll turn the call over to Jeff to discuss our financial results in more detail. Jeff?

Speaker 3

Thank you, Satish, and good afternoon, everyone. As Satish reviewed, our Q1 results reflect sequential month over month improvement through the period and ongoing relative strength within custom spaces, which delivered positive comparable sales growth for the quarter. For the Q1, consolidated net sales decreased 12.2% year over year to 181,900,000 By segment, net sales for The Container Store retail business were $171,500,000 a 12.1% decrease compared to $195,100,000 in the prior year. The decrease is inclusive of a comp store sales decrease of 13.7%, driven primarily by the 21.8% decline in our general merchandise categories, which negatively impacted comp store sales by 14.40 basis points. Custom spaces comp store sales increased 1.9% compared to last year and positively impacted comp store sales by 70 basis points.

Speaker 3

Sales from non comparable stores were a net benefit to total TCS sales of 160 basis points. For the Q1 fiscal 2024, our online channel decreased 25.6% year over year and our website generated sales, which includes curbside pickup, decreased 19.2% compared to last year. Website generated sales represented a total of 22.2 percent of TCS net sales in Q1, which is 200 basis points lower than 24.2% in Q1 of last year. Unearned revenue decreased to $16,600,000 in Q1 this year versus $17,000,000 last year, which is reflective of the decline in overall sales. Elfa third party net sales of $10,300,000 decreased 13.7% compared to the Q1 of fiscal 2023.

Speaker 3

Excluding the impact of foreign currency translation, Alpha third party net sales decreased 12.4% year over year, primarily due to a decline in sales in the Nordic markets. From a profitability standpoint, our consolidated gross margin for Q1 increased 300 basis points to 58.3% compared to 55.3% last year. By segment, CCS gross margin increased 3.40 basis points compared to last year, primarily due to freight tailwinds, decreased promotional activity and favorable mix in Q1 of this year. Alpha gross margin increased 4 70 basis points compared to last year, primarily due to price increases to customers. Consolidated SG and A dollars decreased $6,000,000 or 5.4 percent to $105,400,000 compared to $111,400,000 in Q1 last year.

Speaker 3

As a percentage of net sales, SG and A increased 410 basis points year over year to 57.9%. The increase is primarily due to deleverage of fixed cost associated with lower sales and increased marketing spend in the Q1 of fiscal 2024. In the Q1, we recorded $900,000 of a long live asset impairment related to a store which has been identified for closure in fiscal 2024. Also in the Q1, we recorded $1,700,000 of other expenses, almost all of which is legal and professional fees related to strategic alternatives incurred in the Q1 of fiscal 2024. Our net interest expense in the Q1 of fiscal 2024 increased to $5,500,000 compared to $5,000,000 in the Q1 of last year.

Speaker 3

The year over year increase is primarily due to higher borrowings on the revolving credit facility as well as higher year over year interest rates on our term loan during Q1. The effective tax rate for the Q1 was 23.4% compared to 23.3% in the Q1 of last year. Net loss for the quarter on a GAAP basis was $14,700,000 or $0.30 per share as compared to a GAAP net loss of $11,800,000 or $0.24 per share in the first quarter last year. Adjusted net loss was $12,700,000 or $0.26 per share as compared to last year's adjusted net loss of $10,100,000 or $0.21 per diluted share. Our adjusted EBITDA decreased to $1,700,000 in the Q1 of this year compared to $2,900,000 in Q1 last year.

Speaker 3

Turning to our balance sheet. We ended the quarter with $44,100,000

Speaker 2

in cash, dollars 216,700,000

Speaker 3

in total debt and total liquidity, including availability on our revolving credit facilities of $95,400,000 Our current leverage ratio is 3.8 times. We ended the quarter with consolidated inventory down 7.5% compared to the Q1 of last year. The decline reflects a concerted effort to tightly manage inventory in the current environment and is primarily the result of lower freight costs and fewer inventory units year over year. At TCS, on a unit basis, on hand inventory was down approximately 10.8% year over year, driven by general merchandise. Capital expenditures were $8,600,000 in the Q1 of fiscal 2024 versus $8,900,000 in the Q1 of fiscal 2023.

Speaker 3

As a reminder, we plan to spend $20,000,000 to $25,000,000 of capital in fiscal 2024. We are continuing to prioritize investments in our stores and technology this year. Free cash flow used for the Q1 of fiscal 2024 was $16,700,000 versus a use of $11,900,000 in the Q1 of fiscal 2023. Given our current process of evaluating strategic alternatives, we are not providing financial outlook. However, I will share some qualitative commentary on our quarter to date trends thus far, as well as initial thoughts on how we are viewing the remainder of the fiscal year.

Speaker 3

Order to date in Q2, our year over year sales decline has improved slightly from the decline we just reported for Q1. Our performance in Q2 continues to be driven by relative strength in our custom spaces business with year over year growth in our Alpha and Preston product lines. However, our general merchandise category remains challenged, resulting in double digit year over year total sales declines, but not of the magnitude reported for the Q1 of fiscal 2024. Despite freight cost pressure we are currently seeing, for the full year, we expect to benefit from lower freight costs. We also expect to continue exercising discipline in our promotional activity and with continued favorable business mix should result in stable to modestly expanding consolidated gross margins for the full year.

Speaker 3

It should be noted gross margins were more negatively impacted by promotional activity in Q1 of fiscal 2023 than any other quarters in fiscal 2023 making it the easiest compare from a gross margin rate perspective. On the SG and A front, we executed meaningful cost actions in fiscal 2023 and expect to remain extremely disciplined in our SG and A spend in fiscal 2024. Capital expenditures are expected to be approximately $20,000,000 to $25,000,000 primarily related to new store openings in fiscal 2024 as well as investments in technology and manufacturing infrastructure. We opened 1 store and relocated 1 store during the Q1 of fiscal 2024. Subsequent to the end of the Q1, we opened a new store in Ashburn, Virginia, and we have plans to open 2 more new stores in the remainder of fiscal 2024 as well as close one store.

Speaker 3

This concludes our prepared remarks. I'll now turn it over to the operator to begin the Q and A session for questions.

Operator

Thank you very much, sir. At this time, we will be conducting a question and answer session. The first question we have comes from Kate McShane of Goldman Sachs. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking our questions. I wondered if I could start with asking about the reallocation of space within the store to core storage and organization. What is being changed out as a result of this change in the store?

Speaker 2

Yes. Hi, Kate. This is Satish. I'll take that question. I'll take a step back and say, firstly, as we look to stabilize our general merchandise that benefited quite well during the pandemic, we're really looking at 4 distinct ways to really continue to kind of stabilize that.

Speaker 2

So first is, as you quite rightly pointed out, reallocation of certain space as it relates to our end caps. Some of the seasonal merchandise that we have had there is now being replaced with some of our core more tried and trued collections. And we've definitely seen an increase in productivity there. But that's also added it to some of the other things that we're doing such as promoting more of our exclusive private label business, which currently sits around 45% of our general merchandise business. And we're seeing great success with our Everything Organizer collection and is up quite a lot relative to Q1 of 2023.

Speaker 2

And as a reminder that everything organized a collection complements our Elfa solutions perfectly. And through our integrated marketing approach and in store designers, we believe we can bundle Elfa and our Everything Organizer collection in a more meaningful way and thereby driving a much higher attachment rate. Additionally, I would say we're also focusing on our discovery categories and so you'll see a lot more of that in our stores as well. They continue to do incredibly well for us in particular on the go travel solutions and home fragrances and believe we have significant opportunity there. And then lastly, I would say we're looking to expand our premium core assortment, which will also make its way in some of our headers.

Speaker 2

And these include products like our vegan leather bins, lux acrylic, Birchwood bins, even heavyweight canvas with more leather accents. So really excited about being able to introduce that and seeing the customer reception as we start to integrate more premium core storage and organization, general merchandise, which helps finish out our more premium custom spaces.

Speaker 4

Okay. Thank you for that. And what can we expect with regards to seasonal offering going forward? Was that historically a certain percentage of sales and it will now be a smaller percentage of mix going forward?

Speaker 2

Yes. Our seasonal offering typically is limited to 2 main occasions and that's back to college, which is what we have in our stores right now and then our holiday assortment. And so you would likely see more of that continue in the future years as well.

Speaker 4

Okay. Thank you. And then, our second question was just about the store closure you mentioned on the call. Was this store unprofitable? And can we expect to see any other store closures or store closure announcements over the next few months?

Speaker 3

Yes, Kate, it's Jeff here. As we look at our store portfolio, we're always evaluating continued operation in certain locations. In this particular store opening, there was a renewal that we chose not to take and decided to have a closure. We have not announced any other store closures in the future at this point, but we're continuously evaluating our store fleet. As you know, we're very proud of our store fleet that's been grown over the many years of the operation of the business and very proud of the productivity of those stores.

Speaker 3

We're looking forward to fiscal 'twenty four. As we mentioned on the call, we have opened 2 stores already. 1 is a relocated store at San Francisco, the other in Springfield, Virginia, and also opened 1 post quarter end in Ashburn, Virginia. Both of those store openings opened with an excited customer base waiting at the door. And so, we still feel really good about the new store openings that we have planned for fiscal 'twenty four.

Speaker 3

Certainly, just given where we are from a business standpoint, wanting to drive store growth and awareness through the store growth, We pull back on openings for fiscal 2025 beyond at this point, but still see a very large white space for us to continue to expand as the business and the macroeconomics conditions change.

Speaker 4

Okay. Thank you. Our last question is just on the refinancing of the credit facility. I know you mentioned in the prepared comments that that was being worked on. Is there any indication of timing of when that can be figured out?

Speaker 3

We have not announced any timing associated with refinancing. We just continue to work with our financial partners on that front.

Speaker 4

Okay. Thank you.

Operator

Thank you. The next question we have comes from Chris Horvers of JPMorgan. Please go ahead.

Speaker 5

Hi, good afternoon. This is Jolie Wasserman on for Chris Horvers. As you mentioned, the consumer has been pretty under pressure for some time now with pure commentary suggesting this has worsened in recent months and we're seeing a lot of retailers investing in promotions right now to drive units. I know you mentioned sequential top line improvement quarter to date, but are you seeing the consumer notably worse than you were 6 months ago? Are you seeing some more aggressive competitor pricing in response to all of the unfavorable macro you were talking about?

Speaker 5

And if the answer to that last part is yes, would that suggest that you would also need to keep investing in price to continue to stay competitive, especially as you're heading into back to school season?

Speaker 2

Yes. I'll take perhaps the first part and then let Jeff weigh in as it relates to gross margins. Look, there's no doubt our customers continue to contend with elevated interest rates, inflation, rising living costs, uncertainties in the job and housing markets. And they do impact their purchase decisions, especially as it relates to general merchandise products. We have observed strong customer engagement during promotional events, but we've also seen and those will retreat during non promotional periods.

Speaker 2

That's why our promotional strategies are so carefully targeted. We found that creating a sense of urgency through time events, time limited events really enables us to drive sales more profitably compared to extended promotions. Having said that, let's not forget the consumer need for The Container Store still remains incredibly strong as Americans continue to contend with the stress of clutter in their homes and the need of more space. And we are uniquely equipped to help, then we claim not only their well-being, but their spaces as well. And so that's how we are counterbalancing the current macro environment that we are living in today.

Speaker 2

Any other follow ups?

Speaker 5

That will be it. Thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question and answer session

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The Container Store Group Q1 2024
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