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Can You Make a Case for The Container Store?

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Throughout Tuesday's trading, investors seemed increasingly confident that The Container Store (NYSE: TCS  ) would post big-time earnings for its recently ended quarter, with the stock closing up nearly 7% by 4 p.m. Shortly thereafter, after-hours trading turned things back the other way as the company released guidance that failed to meet the hype. Wednesday's trading continued the drag downward, more than 14% today as of this writing.

There is no denying that The Container Store has a winning formula and a tremendous growth runway. Thus far, management has played its hand wisely. But this is another case of Mr. Market's mania, as the stock trades well above 100 times forward earnings prospects -- a rich figure even for the most hockey-stick growth-touting tech shop. Can investors possibly see a positive long term at today's pricing?

Messy numbers
The Container Store is everything a compulsive organizer could ever want -- its products can bring to fruition even the most complex lifestyle efficiency fantasies. The company IPO'd in early November 2013 to market fanfare. The Container Store's $18 offering price leapt up to more than $40 per share by the time December rolled around.

For the company's first publicly reported quarter, things turned south as The Container Store posted a $9.5 million net loss, even though sales rose 7.3% to $188.3 million. On an adjusted basis, excluding IPO compensation costs, the company earned $5.2 million, or $0.11 per share -- slightly lower than the year-ago quarter's $5.3 million. Same-store sales grew 4.7%.

The future outlook is slightly better. Management guided for full-year per-share profits of $0.40, which is $0.02 ahead of estimates. Net sales are set for $754 million, slightly under estimates.

The road ahead
The Container Store has just 63 locations, giving each store a market value of roughly $30 million. Of course, that number is skewed, as the market is far more interested in the future number of stores than today's handful.

Still, this presents an all-too-common question for investors -- does the company's value warrant the super-premium price?

Obviously, this stock is not on the radar of even the most minimal of value investors. Paying 100 times projected full-year 2013 earnings is simply out of the realm of reason. But realistically, valuation plays no part in the investment thesis behind The Container Store. Investors in the stock are captivated by this niche retailer's amazing competitive position. As mentioned in the beginning of this piece, The Container Store is a retail machine. In today's retail environment, that's an increasingly rare accolade, reserved for just a few high-profile stores. For those who are concerned about pricing but love the company, the easy answer is to wait. At some point, IPO-mania will fade and the company's prospects will draw slightly more rational valuations. With a forward P/E under 50, you could start to build a case for The Container Store. Right now, though, I'd sit tight. 

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2014, at 11:58 AM, Daniel414 wrote:

    Finely crafted article and very helpful as I'm looking into buying a small chunk of this company on the downward spiral of yesterday and today. Agreed that the Forward P/E is outrageous, but I think it unlikely that the stock price will dip to $20 again - which would be necessary to cover your advice to wait until the Forward P/E dips below 50. That is, if my calcs based on current management guidance are correct - $20/$0.40 = 50.

    Other opinions more than welcome, as I find that I am frequently filled with fertilizer.

    Daniel in Denver

  • Report this Comment On January 09, 2014, at 12:45 PM, jppoczatek wrote:

    Are you serious?? This has been a MF pick for two months as a buy and now you put this out? What are we supposed to do with this now? Sell and lose or hold and wait? You say wait till p/e of 50?? We'll that is a huge loss for all of us if we hold? I for one am not happy at all with this. Please put out more info for us and quickly! If you were wrong just say so, apologize and tell us to sell it.

  • Report this Comment On January 09, 2014, at 1:37 PM, Awebb30 wrote:

    The author of this article has a different opinion than David Gardner, who recommended TCS. David won't be scared away by a short-term move and I'm sure will be just as bullish now as ever. I'd suggest hitting the Community section in SA to get an official commentary on the current events on this stock. Might also want to switch to decaf...just sayin'.

  • Report this Comment On January 09, 2014, at 3:11 PM, jppoczatek wrote:

    Is he a MF employee? If not then I totally apologize! If he is then they should be close to the same opinion don't ya think? You don't want to contradict each other that badly? I have read the boards now and feel a little better. Hope it stops dropping though!

  • Report this Comment On January 10, 2014, at 10:18 AM, crca99 wrote:

    TMF advertises its diversity. You can find investing pros and cons in one website and know the parent company is not raking in money off the opinions, something I appreciate.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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