Is the Decline of The Container Store an Opportunity to Buy?

The Container Store(TCS 2.40%) faces a tough road ahead against its competitors in the lifestyle products market. The Container Store competes with smaller companies such as Bed Bath & Beyond (BBBY) and also with larger ones like Target (TGT -0.36%) and Wal-Mart (WMT -1.75%). All of these retailers offer solutions to consumers who are looking to organize their bathrooms, kitchens, living rooms, or offices.

Growth slows and losses mount
The stiff competition that The Container Store faces was evident in its recent quarter as the company disappointed Wall Street. The company's same-store sales fell by 0.8% in its 2014 first quarter, while its total revenue rose by 8.6% -- fueled by new store openings. Still, The Container Store's total revenue of $173.4 million was short of analysts' estimate of $174.2 million. Moreover, the company missed its EPS estimate by a penny with a loss of $0.07 in the quarter .

The Container Store's management added to the disappointing results for the first quarter by lowering its own estimates for the company's EPS and sales growth for 2014. It lowered its EPS guidance to $0.49-$0.54 from previous guidance of $0.56-$0.61. Additionally, management now expects sales at stores open for at least a year to grow only 1.5%-2.5% after previously guiding for 3%-4%.

The decline continues
The 2014 first-quarter results combined with the muted retail environment and investors' worries about The Container Store's growth have led its stock to decline by almost 50% in 2014 alone:

TCS data by YCharts

However, if The Container Store can be profitable for the year and grow its sales in 2014 as management believes, then investors could potentially pick up a decent investment and take advantage of the stock's depreciation.

Is it worth it?

Data Source: Yahoo Finance & Morningstar

The Container Store has not been profitable over the last twelve months, which is evident in its nonexistent P/E, and its shares look expensive on a forward P/E basis. If the company grows its sales by a revised 1.5%-2.5%, its forward P/E of 35.5 is a substantial premium to pay for a company with that pace of growth. Even if The Container Store grew its sales by its management's previous estimate of 3%-4%, its forward P/E of 35.5 would still look expensive. Famed fund manager Peter Lynch believed you should buy a stock with a P/E commensurate with its growth, and The Container Store's projected growth of 1.5%-2.5% is not aligned with its stock's forward P/E of 35.5.

All the companies trade at discounts to the S&P 500 on a P/CF basis as the S&P 500's P/CF is currently 11. The Container Store has the lowest P/CF among them at 8.6, but its P/CF does not differ significantly from the other companies' P/CF multiples -- the opposite of what is occurring on a P/E and forward P/E basis. Therefore, the combined valuation shown by the ratios explored here should not lead an investor to conclude that The Container Store is a resounding buy. It is also important to note that The Container Store has a substantial debt load of over $300 million, which is not factored into the P/CF multiple as it only considers cash flow from operations .

More speculation than investment
The Container Store does not differentiate itself much on a cash flow basis and its stock commands a premium for the earnings the company is expected to generate over the next year. The recent quarter's results and management's quelled guidance do not give investors reason to believe the company will return to significant growth. Resultantly, an investment in The Container Store's stock is more of "a roll of the dice." Investors would most likely do better by investing in one of The Container Store's competitors with a similar cash flow valuation and a lower earnings valuation.