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

The Container Store Group, Inc. (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.
• 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.

Conference Call Information

A conference call to discuss first quarter fiscal 2016 financial results is scheduled for today, August 9, 2016, 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 www.containerstore.com in the investor relations section of the website.

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 (877) 870-5176 (international replay number is (858) 384-5517). The pin number to access the telephone replay is 13640929. The replay will be available through September 9, 2016 at 11:59 PM Eastern Time.

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 expectations regarding driving consistent sales and profit growth, expectations for new store openings and relocations, and statements regarding our anticipated financial performance.

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 inability to successfully implement our planned fiscal 2016 initiatives in the timeframe we expect or at all; our inability to open or relocate new 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; our dependence on a single distribution center for all of our stores; effects of a security breach or cyber-attack of our website or information technology systems; 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; and our indebtedness may restrict our current and future operations.

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 10, 2016, 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 (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.

Note Regarding Non-GAAP Information

This press release includes financial measures that are not calculated in accordance with GAAP, including adjusted EBITDA. 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. These non-GAAP measures are key metrics used by management, the Company’s board of directors, and Leonard Green and Partners, L.P., its controlling stockholder, to assess its financial performance. The Company presents these non-GAAP measures because it believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by excluding items that the Company does not believe are indicative of its core operating performance and because the Company believes it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in the Company’s industry. In evaluating these non-GAAP measures, you should be aware that in the future the Company will incur expenses that are the same as or similar to some of the adjustments in this presentation. The Company’s presentation of these non-GAAP measures should not be construed to imply that its future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. These non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

The Company defines EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with its credit facilities and is one of the components for performance evaluation under its executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non cash and other items that the Company does not consider in its evaluation of ongoing operating performance from period to period as discussed further below. The Company uses Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and to supplement GAAP measures of performance to evaluate the effectiveness of its business strategies, to make budgeting decisions and to compare its performance against that of other peer companies using similar measures. The Company believes it is useful for investors to see the measures that management uses to evaluate the Company, its executives and its covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in the Company’s industry.

The table below reconciles the non-GAAP financial measure adjusted EBITDA with the most directly comparable GAAP financial measure of GAAP net loss.

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