The Bear Case Against The Container Store Group, Inc.: How Does It Hold Up?

The Container Store (NYSE: TCS  ) is one of the latest companies to go public that has a well-known commitment to conscious capitalism. In fact, during the company's first conference call, CEO Kip Tindell was practically tripping over himself to explain the tenets of the movement and lavished praise upon his employees.

While the company certainly has a feel-good quality to it, not everyone is convinced that it is worthy of their hard-earned dollars. In fact, since topping out at the beginning of the year, shares of The Container Store are down 27%.

This raises the question: Is The Container Store really a good investment?

Source: The Container Store. 

 Every year around the beginning of spring, I review all of my family's stock holdings. Because I'm loath to sell any of our shares, I like to explore the bear thesis and see how it makes me feel. So today, I'm investigating what bears have to say about The Container Store.

What follows are the two most commonly voiced bearish opinions, and my thoughts on them:

These guys will get crushed by e-commerce giants
It's no secret that brick-and-mortar retailers are facing tough times. As more and more shoppers migrate to the Internet, any company that doesn't have a solid e-commerce presence is simply inviting bankruptcy filings.

Furthermore, Amazon.com (NASDAQ: AMZN  ) captures an incredible amount of e-commerce traffic, and it has organizational products available on its site that directly compete with The Container Store. In the past, going head-to-head with Amazon had surely been a losing battle, and shareholders of The Container Store should be appropriately careful about this threat.

My take: Amazon's awesome, but it can't replicate The Container Store experience.

I'm not going to say anything bad about Amazon here. I love the company. I think everyone should own shares. Currently, Amazon accounts for 11% of all my retirement holdings. But The Container Store has one thing that Amazon simply can't offer: an in-store shopping experience that customers simply can't stop raving about.

Full disclosure: I don't have a Container Store location near where I live, so I haven't gotten to experience this firsthand yet. But to a fault, people who have been to the store can't hide their obvious satisfaction with the overall experience.

The customer service experience is something that, sadly, many brick-and-mortar retailers have failed to address. But with The Container Store's employees-first approach, a culture has taken hold that breeds positivity.

That, plus the fact that the company's e-commerce segment has increased sales at a brisk pace -- 17.5% during the first half of 2013 -- leads me to believe that The Container Store is uniquely situated to withstand pressure from Amazon.

The stock is simply too expensive
As things stand now, The Container Store is operating at a loss. The company hasn't turned a profit, though it expects to next year. That said, even if it meets earnings expectations for 2014, it is currently valued at 55 times those earnings.

Though in 2011 the company generated a healthy $30 million in cash flows, that number has now gone negative as well, largely due to capital expenditures focused on building out The Container Store's presence in new markets.

My take: This is a fair concern, but there are more ways to measure the possible value of a company.

I won't deny that The Container Store has a comparatively expensive stock. That's why it currently accounts for 1% of my overall holdings.

But there are several ways to gauge the company's value that make it look more enticing. For instance, at the end of last quarter, there were only 63 stores in 22 states and the District of Columbia. The company thinks that, eventually, there's a potential for more than 300 stores.

That means that there's a potential for almost five times more stores. Once those stores are built out, the capital expenditures will surely subside, and because the company is able to retain its highly qualified employees and cut down on these associated costs, it will be able to churn out much more cash.

The Container Store is valued at $1.6 billion. Though it's tough to find a direct competitor, a store like Bed Bath & Beyond is worth about $14 billion today. That's about nine times the valuation.

I'm not saying this is a perfect comparison, but it gives you an idea of how small the company is now. With The Container Store just getting started in its growth story, and a shopping experience that has won over some raving fans, I'll be just fine holding my shares well into the future.

An enormous bet on an employee-first culture
Our chief technology officer is going to do something crazy: invest more than $100,000 of his own money into one stock.  Like The Container Store, this company sits at the top of the mountain when it comes to treating employees well.  In fact, I agree with him, as I own this stock as well.

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Read/Post Comments (3) | Recommend This Article (5)

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 March 26, 2014, at 12:40 PM, etbob1 wrote:

    Shame on you, recommending such a worthless stock. I guess you will stick with your buy recommendation all the way down into its likely single digit stock price fate.

  • Report this Comment On March 28, 2014, at 11:40 AM, ddirig wrote:

    Buyer experience. E commerce presents a valid bear argument, but I have not found the majority of TCS products on-line. Brick and Mortar has a role when it comes to finding the right container for "your stuff." Squinting at images on a monitor does not compare with bringing your needs (and possibly "your stuff") to an experienced/knowledgeable TCS employee for storage options. Then there's the in-store and on-line custom Elfa options..... Long TCS.

  • Report this Comment On June 06, 2014, at 12:39 PM, MrZed wrote:

    I'm long TCS. This was my first buy on the recommendation from the Fool Stock Advisor, having seen a double recommendation early in the year. I'm currently down 40% and I can't see the stock rebounding within 5 years.

    A quick scan of Stock Advisor's 2014's recommendations show that about half of the recommendations are in negative territory, and many of those are down by double digits. That's the same or worse than picking stock at random.

    There was a recent Foolish article saying "Invest wisely by not doing silly things". A double-recommendation on a recent IPO stock is a silly thing, because a new stock takes time to find its price. That was an expensive mistake.

    I think I'll have to cancel my subscription with Stock Advisor. Unfortunately I cannot take recommendations from this site seriously anymore.

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