Image: Container Store.
Many long-term investors argue that Wall Street focuses too much on short-term thinking, and nowhere was that more evident in how shares of Container Store Group (TCS -0.56%) behaved on Monday afternoon following the company's fiscal second-quarter financial report. Coming into the report, investors had hoped that the organizational-goods retailer would be able to regain some of the positive momentum it had following its previous quarter's report, even though the stock had fallen to new all-time lows in the interim. Yet after results that missed expectations, traders punished the stock, even though some would argue that its long-term strategy remains intact. Let's look more closely at what Container Store Group said and whether it deserves the beating its shares took after hours on Monday.
Container Store still looks sluggish
The main problem that investors have had with Container Store lately is that it has looked nothing like the high-growth prospect that most have wanted to see. Revenue for the quarter was up just 1.2% to $195.5 million, and investors had expected roughly double that growth rate for sales. Similarly, net income fell by more than 60% to $2.67 million, and that produced earnings of $0.06 per share, a penny less than the consensus forecast and down by more than half from last year's $0.14 per share showing. Comparable store sales managed to reverse last quarter's declines with a tiny 0.1% gain, but that provided little solace for those looking for more solid growth.
As we saw last quarter, Container Store continued to face many of the same headwinds. Weakness in the Swedish krona compared to the U.S. dollar cost the company about two percentage points of growth, as the revenue from the company's Elfa International unit translated into fewer dollars. Sales gains of more than 7% in local-currency terms from Elfa were encouraging, but until the dollar stops advancing, it'll be hard for Elfa to make a dent in Container Store's overall results. Meanwhile, on the earnings front, Container Store characterized the current fiscal year as a "investment year for the company as it takes the necessary steps to properly and fully support employee training, customer service improvements, and marketing for its strategic initiatives." The idea is that 2015 will be a subpar year from a financial-results standpoint to set the company up for better times in 2016 and beyond.
CEO Kip Tindell tried to emphasize the incremental progress that Container Store is making toward its long-term goals. "I am proud of the solid execution across our entire organization during the ongoing rollout of our major strategic initiatives," Tindell said, calling out TCS Closets in particular in driving overall growth for the company. He also emphasized the need to keep investing in Container Store's future.
Can Container Store finally turn up?
Container Store is still counting on its expansion plans to help boost its overall results, with two more new locations and one relocation during the past quarter. With the expectation of opening 10 stores in total this fiscal year, Container Store hopes to boost its square footage by 12% networkwide.
What's becoming increasingly clear, though, is that the high-ticket sales available in Container Store's new focus areas will be instrumental in its future success. Average tickets in the TCS Closets segment are still well above the $10,000 mark, easily pushing Container Store into the luxury-retail category in that respect. At the same time, the Contained Home program is seeing average tickets of more than $2,500. Given that the ordinary retail customer spends an average of about $60 per visit, it's obvious that fostering these high-value businesses can pay off quickly in higher sales. The company expects to implement both new formats in a dozen new stores by the end of the fiscal year, further expanding its already impressive network.
For the most part, Container Store left its guidance alone, with expectations of $800 million to $815 million in revenue for the year. Yet the company guided comparable-store sales toward the higher end of its previous range, and even though it still expects comps of 0% to -1%, earnings of $0.30 to $0.38 per share are still in reach.
Nevertheless, Container Store shareholders were skeptical about the company's long-term story, with the stock plunging 12% in after-hours trading following the announcement. As compelling as some believe its strategic vision to be, Container Store still faces plenty of doubters, and until it can demonstrate its ability to grow, the company's stock could have difficulty rebounding convincingly.
