Can You Make a Case for The Container Store?

At 100 times expected full-year earnings, The Container Store is one of the most richly valued retail operations around. We know it will grow, but can it possibly justify today's price?

Jan 8, 2014 at 7:00PM

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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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends The Container Store Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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