The Container Store Group, Inc. Announces First Quarter Fiscal 2016 Financial Results

 

Company Posts 4.4% Increase in Net Sales

Sees Positive Impact from TCS Closets® and SG&A Savings Initiatives

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Launches its New Customer Financing Program

The Container Store Group, Inc. (TCS) (NYSE: TCS) (the “Company”), today announced financial results for the first quarter of fiscal 2016 ended July 2, 2016. In light of the Company’s previously announced fiscal year end change, all references to prior year results are based on the recast 13 weeks ended July 4, 2015.

Consolidated net sales were $177.4 million, up 4.4%. Net sales in The Container Store retail business were $161.2 million, up 5.1%. Elfa International AB third-party net sales were $16.2 million, down 1.8%.
Comparable store sales for the first quarter of fiscal 2016 were down 1.4% based on the new comparable store sales reporting method, or down 0.2% based on the prior reporting method (see «Change in Comparable Store Sales Reporting Method» section in this press release for detail on the new reporting method).

Consolidated net loss per diluted share (EPS) was ($0.04) compared with ($0.12) in the first quarter ended July 4, 2015. The ($0.04) is inclusive of an approximate $0.05 benefit from new employment arrangements entered into with key executives during the quarter.

The Company opened one new store in the first quarter of 2016 and plans to open an additional seven locations (inclusive of one relocation) in the remainder of fiscal 2016, opening two stores in the second quarter and the remaining five in the second half of fiscal 2016. The Company had 80 stores at the end of the first quarter of fiscal 2016, as compared to 72 as of July 4, 2015.

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On July 12, 2016, the Company launched its previously announced Customer Financing Program through Synchrony Financial.

Melissa Reiff, Chief Executive Officer, stated, “In our first fiscal quarter of 2016, we saw a benefit from the strategic investments and ‘closet domination’ focused initiatives we implemented in fiscal year 2015. TCS Closets was again a key driver of comparable store sales performance providing a 230 basis point lift. And, we improved our operating profitability, as we maintained strong gross margins and delivered SG&A efficiencies.”

Reiff continued, “Looking ahead to the rest of the year, we remain committed to maximizing the targeted results of our fiscal year 2016 SG&A savings program. While we are encouraged by the progress being made and resulting improvement in our bottom line performance, we still have work to do on the top line. My primary focus in my new role, in collaboration with our leadership team, is to drive consistent sales and profit growth, all with our continued commitment to The Container Store’s principled way of doing business.”

First Quarter 2016 Results

For the first quarter ended July 2, 2016, on a consolidated basis:

Net sales were $177.4 million, up 4.4% as compared to the first quarter ended July 4, 2015. Net sales in The Container Store retail business were $161.2 million, up 5.1%, with the increase driven by new store sales, which more than offset the comparable store sales decline of 1.4% (or a decline of 0.2% under the prior reporting method). Elfa third-party net sales declined $0.3 million compared to the first quarter ended July 4, 2015, primarily due to lower sales in Russia, partially offset by the positive impact of foreign currency translation during the quarter.
Gross margin was 59.0%, an increase of 40 basis points compared to the first quarter ended July 4, 2015. The Container Store retail business gross margin declined 10 basis points to 58.6% as a growing mix of lower margin products and services was partially offset by the impact of a stronger U.S. dollar. Elfa gross margin improved 330 basis points primarily due to lower direct materials costs and production efficiencies. On a consolidated basis, gross margin increased 40 basis points, as the decline in The Container Store retail business gross margin was more than offset by the increase in the Elfa gross margin.
Selling, general and administrative expenses (“SG&A”) decreased by 2.1% to $92.3 million from $94.3 million in the first quarter ended July 4, 2015. SG&A as a percentage of net sales decreased 350 basis points. This was primarily due to the impact of amended and restated employment agreements entered into with key executives during the first quarter of fiscal 2016, leading to the reversal of accrued deferred compensation associated with the original employment agreements, net of costs incurred to execute the agreements, of $3.9 million, or 220 basis points. Additionally, the Company’s SG&A savings program contributed, in part, to decreased spending on certain major initiatives and decreased 401(k) costs. The Company also experienced lower healthcare costs during the quarter.
Net interest expense decreased to $4.1 million from $4.2 million in the first quarter ended July 4, 2015.
The effective tax rate was 33.3%, as compared to 36.8% in the first quarter ended July 4, 2015. The decrease in the effective tax rate is primarily due to a shift in the mix of domestic and foreign earnings.
Net loss was $2.1 million, or ($0.04) per share, in the first quarter of fiscal 2016 compared to net loss of $5.8 million, or ($0.12) per share in the first quarter ended July 4, 2015. The net loss of $2.1 million in the first quarter of fiscal 2016 includes a benefit from the impact of amended and restated employment agreements entered into with key executives during the quarter, net of costs incurred related to management transition and income taxes, of approximately $2.2 million, or $0.05 per share.
Adjusted EBITDA was $12.0 million in the first quarter of fiscal 2016 compared to $4.7 million in the first quarter ended July 4, 2015 (see GAAP/Non-GAAP reconciliation table). The Adjusted EBITDA of $12.0 million in the first quarter of fiscal 2016 includes a benefit from the impact of amended and restated employment agreements entered into with key executives during the quarter, net of costs incurred to execute the agreements, of $3.9 million.

Change in Comparable Store Sales Reporting Method

In the first quarter of fiscal 2016, the Company changed its comparable store sales operating measure to reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery. Prior to the first quarter of fiscal 2016, the comparable store sales operating measure in a given period was based on merchandise and service orders placed in that period, excluding shipping and delivery, which did not always reflect when the merchandise and services were received by the customer and, therefore, recognized in the Company’s financial statements as net sales. This revision has no impact on prior, or current, period reported net sales. The Company believes that changing the comparable store sales operating metric to better align with net sales presented in the Company’s financial statements will assist investors in evaluating our financial performance. See Recast Operating Data table for recast quarterly and full year fiscal 2015 comparable store sales on this revised basis.

Change in Fiscal Year

As previously disclosed, the Company changed its fiscal year end from the Saturday closest to February 28 to the Saturday closest to March 31 of each year. The fiscal year change was effective beginning with the Company’s current 2016 fiscal year, which began on April 3, 2016 and will end on April 1, 2017. Recast historical unaudited quarterly and full year financial information for fiscal 2015 is included in this press release, as well as posted on the Company’s website under the Investor Relations link. As recast, the first quarter of fiscal 2015 would have ended on July 4, 2015; the second quarter of fiscal 2015 would have ended on October 3, 2015; the third quarter of fiscal 2015 would have ended on January 2, 2016; and the fourth quarter and full fiscal year 2015 would have ended on April 2, 2016.

Outlook

The Company is maintaining its fiscal 2016 Outlook expecting consolidated net sales to be $830 to $845 million, based on its planned store openings, and a comparable store sales range of -1.5% to +0.5%. Net income is still expected to be $0.20 to $0.30 per diluted common share based on estimated diluted common shares outstanding of 49 million. This assumes a tax rate of approximately 39% for the full year.
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 80 store locations nationwide that each average 25,000 square feet. The Container Store has over 11,000 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-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® — 17 years in a row. Visit www.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 PrinciplesTM and devotion to Conscious Capitalism®, visit the retailer’s blog at www.whatwestandfor.com.

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