Market Overview

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

Share:

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

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

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

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

Updates Fiscal 2019 Outlook

The Container Store Group, Inc. (NYSE:TCS) (the "Company"), today announced financial results for the second quarter of fiscal 2019 ended September 28, 2019.

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

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

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

Second Quarter Fiscal 2019 Results

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

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

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

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

Balance sheet and liquidity highlights:

 

 

 

 

 

 

 

 

(In thousands)

 

September 28, 2019

 

September 29, 2018

Cash

 

$

9,029

 

$

7,212

Total debt, net of deferred financing costs

 

$

285,756

 

$

290,469

Liquidity (1)

 

$

91,526

 

$

80,798

Free cash flow (2)

 

$

(15,779)

 

$

 

(2,533)

(1)

_____________________

Cash plus availability on revolving credit facilities.

(2)

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

Outlook

 

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

 

 

Fiscal 2019 Outlook

Net sales

 

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

New store openings and store relocations

 

2 openings, including 1 relocation (2)

Comparable store sales

 

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

Net income per common share (1)

 

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

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

 

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

Assumed tax rate

 

31%

Estimated share count

 

49 million

(1)

_____________________

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

(2)

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

(3)

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

Conference Call Information

A conference call to discuss second quarter fiscal 2019 financial results is scheduled for today, October 29, 2019, at 4:30 PM Eastern Time. Investors and analysts interested in participating in the call are invited to dial (877) 407‑3982 (international callers please dial (201) 49

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