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

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

COPPELL, Texas–(BUSINESS WIRE)–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.

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) 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 13695097. The replay will be available until November 29, 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 drive more brand awareness and attain market share gains; statements regarding our addressable market for Custom Closets; statements regarding our second distribution center and the timing of its completion; and our anticipated financial performance and tax rate for fiscal 2019.

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 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 30, 2019, 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 Group, Inc. (NYSE: TCS) is the nation’s leading retailer of storage and organization products and solutions – a concept they originated in 1978. Today, with locations nationwide, the retailer offers more than 10,000 products designed to help customers accomplish projects, maximize their space and make the most of their home. The Container Store also offers a full suite of custom closets designed to accommodate all sizes, styles and budgets.

Visit www.containerstore.com for more information about store locations, the product collection and services offered.

Visit www.containerstore.com/blog for inspiration, tips and real solutions to everyday organization challenges,

and www.whatwestandfor.com to learn more about the company’s unique culture.

Note Regarding Non-GAAP Information

This press release includes financial measures that are not calculated in accordance with GAAP, including adjusted net income (loss), adjusted net income (loss) per common share – diluted, Adjusted EBITD, and free cash flow. The Company has reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in a table accompanying this release. These non-GAAP measures should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items.

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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