The Container Store Group Q2 2024 Earnings Call Transcript

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October 29, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to The Container Store's Second Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thanks for joining us today for The Container Store's Q2 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, 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 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 the 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 at Relations page of the website at www.containerstore.com. I will now turn the call over to Satish. Satish?

Speaker 2

Thanks, Caitlin, and thank you all for joining us. I'll begin today's discussion with a review of our 2nd 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 top line trends as compared to earlier this year. For the Q2, year over year comparable sales declined 12.5%.

Speaker 2

However, we continue to see relative outperformance in custom spaces and achieved another quarter of sequential improvement in general merchandise 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 merchandise, 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 sneakercon, the world's premier sneaker event.

Speaker 2

This elevated version of a longtime customer favorite features crystal clear 360 degree views, a magnetic closure, 4 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 complement any office space.

Speaker 2

We plan to expand the product line with additional SKUs for the kitchen and closet as well as introducing it to the bath 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 were up 4.5% compared to the prior year.

Speaker 2

This relative strength in custom spaces is partly due to the newness we've introduced over the past few quarters. For example, we are seeing more and more customers choosing Garage Plus by Alpha to transform their cluttered garages into organized, aesthetically pleasing spaces that meet their storage needs. Similarly, the Core Plus by Alpha 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 2 of his kids spaces with Alpha Decor Plus and the necessary general merchandise completion products, highlighting the durability and versatility of the line. Looking ahead, we are excited to continue rolling out innovative products for custom spaces.

Speaker 2

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 Alpha Metal Box solutions, this new product offers 9 versatile configurations for closets up to a 6 feet. We believe customers will appreciate its elevated premium design and flexible options throughout their home. 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.

Speaker 2

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 format and general merchandise offering to drive increased traffic across our businesses.

Speaker 2

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 portfolio of e commerce banners as well as other ventures where Bed Bath and Beyond future licensed stores exist, thereby creating expanded distribution of our iconic custom spaces offering. I would now like to take an 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.

Speaker 2

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 merchandise business and positioning ourselves for when the market conditions become more favorable. And now I'll turn the call over to Jeff to discuss our financial results in more detail.

Speaker 3

Jeff? Thank you, Satish, and good afternoon, everyone. As Satish reviewed, while still challenged, our 2nd quarter results reflect another quarter of sequential improvement compared to the prior quarter ongoing relative strength within custom spaces. For the Q2, consolidated net sales decreased 10.5% year over year to 196,600,000 dollars By segment, net sales for The Container Store retail business were $186,800,000 a 10.4% decrease compared to $208,500,000 in the prior year. The decrease is inclusive of a comp store sales decrease of 12.5 percent, driven primarily by the 18.7% decline in our general merchandise categories, which negatively impacted comp store sales by 1200 basis points.

Speaker 3

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 $18,300,000 last year to $21,800,000 this year, largely as a result of a year over year shift in timing of custom space orders placed versus delivered to customers.

Speaker 3

Sales from non comparable stores were a net benefit to total TCS sales of 2 10 basis points. For the Q2 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. Alpha third party net sales of 9,800,000 dollars decreased 12.9% compared to the Q2 of fiscal 2023. Excluding the impact of foreign currency translation, Alpha third party net sales decreased 16.2% year over year, primarily due to a decline in sales in the Nordic markets.

Speaker 3

From a profitability standpoint, our consolidated gross margin for Q2 decreased 210 basis points to 55.5 percent 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. Alpha gross margin increased 2 50 basis points compared to last year, primarily due to price increases to customers. Consolidated SG and A dollars decreased $4,100,000 or 3.7 percent to $105,200,000 compared to $109,300,000 in Q2 last year. As a percentage of net sales, SG and A increased 380 basis points year over year to 53.5%.

Speaker 3

The increase is primarily due to deleverage of fixed costs associated with lower sales and increased marketing spend in the Q2 of fiscal 2024. In the Q2, we recorded a 3,400,000 dollars long live asset impairment related to 1 underperforming store and a store which had been identified for closure in fiscal 2024. Also in the Q2, we recorded $3,500,000 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 Q2 of fiscal 2024. Our net interest expense in the Q2 of fiscal 2024 increased to $6,000,000 compared to $5,200,000 in the Q2 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.

Speaker 3

The effective tax rate for the Q2 was 21.5% compared to negative 2.6% in the Q2 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 Q2 of fiscal 2023, which drove the effective tax rate negative. Net loss for the quarter on a GAAP basis was $16,100,000 or $4.85 per share as compared to a GAAP net loss of $23,700,000 or $7.17 per share in the Q2 of last year. Adjusted net loss was $10,700,000 or $3.23 per share as compared to last year's adjusted net income of $400,000 or $0.11 per diluted share. Our adjusted EBITDA decreased to $3,900,000 in the Q2 this year compared to $17,000,000 in Q2 last year.

Speaker 3

Turning to our balance sheet, we ended the quarter with $66,100,000 in cash, $232,000,000 in total debt and total liquidity, including availability on our revolving credit facilities of $96,500,000 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 Q2 of fiscal 2024 among other things. In addition, our revolving credit facility under which we had $71,000,000 outstanding at the end of the quarter matures in 1 year. In light of these factors, you will see the addition of going concern language in our Form 10 Q for the Q2 of fiscal 2024.

Speaker 3

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 Q2 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 costs held in inventory. At TCS, on a unit basis, on hand inventory was down approximately 17% year over year driven by general merchandise categories. Capital expenditures were $15,300,000 in the first half of fiscal twenty twenty four versus $22,000,000 in the first half of fiscal twenty twenty three.

Speaker 3

As a reminder, we plan to spend approximately $20,000,000 to $25,000,000 of capital in fiscal 2024. We're continuing to prioritize investments in our stores and technology this year. We've opened 1 store, closed 1 store during the Q2 of fiscal 2024. For the remainder of fiscal 2024, we plan to open 2 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 in the company's best interest to renew the lease when it ends in February of 2025.

Speaker 3

Free cash flow used in the first half of fiscal twenty twenty four was $10,600,000 versus $1,300,000 in the first half of fiscal twenty twenty three. As noted on 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 the very successful Elfa anniversary sale. That said, we have continued to see sequential improvement in general merchandise. And as Satish reviewed, we believe we are taking the right steps to stabilize that business.

Speaker 3

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 and A session for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Speaker 4

Thanks for taking our question. I wondered if I could start with the mix within general merchandise. 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?

Speaker 5

Yes. Hi, Kate. I'll take the first part of that question. Definitely, we are seeing sequential improvement in our general merchandise and it's primarily thanks to our getting back in stock in our core SKUs. We've seen a positive momentum in Water Hyacinth, for example, now that we're back in stock there.

Speaker 5

But also seeing tremendous growth in our everything organizer connection, as I had mentioned earlier, where it continues to do well. It's 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 Bath. 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 a decisively a significant demand outside of the U. S.

Speaker 5

Into other countries as well.

Speaker 4

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?

Speaker 4

Or maybe better ask like what is typically the delivery time or the amount of time between order placed and order delivered?

Speaker 5

Yes, Kate, this is Jeff. Thanks for the question.

Speaker 3

When we look at the custom space order, it depends on the particular line would drive your average install time frame. I would say an alpha product line would be anywhere between 2 weeks to a month. It could be longer depending on the customer's project time line. But Preston is a little bit longer of a time line. Typically, that's around 4 to 6 weeks from the order placement time.

Speaker 4

Okay. And is Preston becoming a bigger part of the mix, part of the reason why you're seeing this gap occur again?

Speaker 3

No, I wouldn't necessarily say that Preston is becoming a bigger part of the mix at this point yet. Alpha is still the large part of our custom spaces offering. And typically, when we see growth in the business, especially at the end of a quarter, we'll see an increase of our unearned revenue or our prepaid sales at the end of a quarter like that.

Speaker 4

Okay. Okay. And then my last question is just with regards to Elfa. You mentioned the challenging start to Q3 because you're lapping the successful Elfa anniversary sale. Can you just remind us what you are doing with the Elfa brand this year versus last year?

Speaker 5

In terms of the campaigns that we have?

Operator

Yes.

Speaker 5

Yes. This is Satish. So as we mentioned, we decided to actually split the Alpha campaign into kind of 2 halves, which is a new way for us to create kind of a sense of urgency than we had 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 wait a period before we then start the 2nd part of the campaign. In addition, as a reminder, this time last year, we were also we had an anniversary sale and so we're comping over that difference of a discount rate.

Operator

Thank you.

Speaker 5

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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The Container Store Group Q2 2024
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