What's Going on With The Container Store?

The Container Store finds itself boxed in.

Jul 25, 2014 at 9:00AM

Animate Store
Source:  The Container Store

"Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'," stated Kip Tindell, chairman and CEO of The Container Store Group (NYSE:TCS) in the most recent earnings release. Unlike many other retailers and restaurant chains, The Container Store no longer blames calendar shifts or the weather for the challenging times.

Wrapping up the results
On July 8, The Container Store reported fiscal first-quarter results. Revenue did pop 8.6% to $173.4 million. The retail business alone gained 8.9% to $149.7 million. Same-store sales slipped 0.8%. The adjusted net loss widened 12.5% to $3.6 million, or $0.07 per adjusted diluted share.

As you can probably imagine, the holiday quarter at the end of the calendar year is far more meaningful than this first quarter in terms of sales and profitability.  As such, Tillman said, "We're disappointed with the first quarter, but the first quarter has very little impact on our full year earnings results."

Tindell stated that sales have been sluggish since November and that the company thought it was all because of cold, snow, storms, Easter, and every other excuse literally under the sun. However, now he says, "We've come to realize it's more than weather and [the] calendar."

Animate Store
Source:  The Container Store

Storing it up for later
The first quarter may not be all that important to The Container Store, but the surprise to the company regarding the hurting industry may make you question how reliable its guidance is. How can the company be sure that the "funk" it is now blaming won't worsen?

The Container Store is calling for a net sales gain of between 10% and 11% to between $820 million and $830 million. This is mostly due to the opening of new stores. The company also expects same-store sales gains of between 1.5% and 2.5% and full-year net income of between $0.49 and $0.54 per diluted share. If achieved, that would be an EPS gain of between 48% and 64% over last year.

At around $25 per share at the time of this writing, that puts the P/E somewhere in the neighborhood of 50 based on this fiscal year. With rapid earnings growth, it would seem a case for that level of P/E could be made, that it's actually fairly or even undervalued. However, long term that growth rate would have to be maintained for at least a few years to justify the value.

Given that there is reason enough to be skeptical of this year's guidance alone, and the same-store sales guidance of between 1.5% and 2.5% is nothing super exciting for a small and growing new chain, The Container Store seems far too speculative for my taste, at least at this stage and with the company only being public for less than a year. The reason that matters is because it hasn't built enough of a public track record in terms of guidance to evaluate one way or the other.

Animate Store
Source:  The Container Store

Final thoughts
Two possible scenarios can make me become a buyer. First, if the price itself drops enough -- barring any significant fundamental justification for that drop -- then the value itself could become enticing. Perhaps at the $15 level with a P/E of 30 compared to 2014 guidance would make the speculative long-term investment more tempting.

The other scenario would be if The Container Store ends up under-promising and outperforming on guidance; then it could quickly turn into an idea that needs an immediate closer look. Things to especially look for are same-store sales gains, as this is typically your best clue for brand strength, the roll out of new stores, and of course net income levels and gains. It should be an interesting story to watch in the coming quarters and years.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends 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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