The Container Store Hit Hard by ‘Retail Funk’

Amid a broader trend of retail weakness, home-goods retailer The Container Store came up with some fairly disappointing results.

Jul 17, 2014 at 9:30AM

Retailers don't always blame the weather for bad results, but when they do, there is often something else going on as well. While several product categories have remained largely immune to the broader downturn affecting retail, such as cars and houses, the uneven economic recovery means that many retailers operating with less expensive product categories are feeling the pinch.

Home-goods retailer The Container Store (NYSE:TCS) came up with some very disappointing numbers for its first-quarter report following a poor showing from larger competitor Bed Bath & Beyond (NASDAQ:BBBY). Let's take a closer look at the results, and some of the reasons why the company may be struggling. 

Retail funk
Whereas it was generally valid to blame poor results in the winter months on the poor weather, the excuse doesn't hold up quite as much for quarters ending on May 31. The Container Store, a relatively small company that sells home goods such as shelving and closets, reported first-quarter numbers that missed estimates, sending the stock plunging around 14% after hours.

Revenue rose a fairly healthy 8.6% year over year to reach $173.4 million, just shy of the $174.2 million consensus. However, same-store sales were a lot less impressive, down 0.8% for the period. While the quarterly loss narrowed to $3.6 million from $27 million a year ago, the loss per share of $0.07 missed the mark by some 17%. Guidance also disappointed, the company now expecting full-year 2014 earnings in the range of $0.49-$0.54, while analysts on average were projecting $0.57.

According to management, it is now becoming clear that poor retail results are not only due to calendar shifts and poor weather. Large swathes of the sector are under pressure, leading CEO Kip Tindell to say "we're not alone in this." A broader 'retail funk' seems to be dragging down many other retail chains, but the company is nevertheless expecting an improvement, especially toward the end of the fiscal year.

Beyond the weather
The Container Store isn't the only home-goods retailer struggling with weak sales at the moment. Bed Bath & Beyond, one of the largest chains in the industry, is also delivering weak results lately. For the same fiscal quarter, the company reported an anemic sales increase of 1.7%, while comp-store sales rose by only 0.4%. Again, poor weather cannot be blamed for these underwhelming numbers.

As earnings per share were flat for the first-quarter report, the company has approved a new $2 billion share-repurchase program in order to prop up the bottom line. It is unlikely that the move will have any meaningful impact on the company's position other than its effect on share dilution, but at least it won't be too expensive following a 19% drop in the company's share price over the last year.

So what's going on with retail at the moment? Looking at which product categories are doing well, mainly more expensive items, it seems as if an uneven recovery that has mainly benefited the wealthy hasn't left working- and middle-class consumers with much more money to spend. In this tepid consumer spending environment, retailers across a range of industries appear to be struggling to sustain growth, and we can no longer blame the weather.

The bottom line
The weather is no longer the one-size-fits-all excuse it used to be, as results are starting to stream in for financial quarters ended on May 31. As such, it is becoming clear that the problems affecting retail traffic and sales go beyond these factors and are in fact considerably more fundamental. The Container Store and competitor Bed, Bath & Beyond delivered some fairly disappointing results, amid a broader retail downturn. Clearly, consumer spending is not out of the woods yet. 

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and The Container Store Group. The Motley Fool owns shares of 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.

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